What Is NBFC

NBFC the term NBFC stands for Non-Banking Financial Company registered under the Companies Act. Its main business activity is giving loans and advances, assets financing, investing in shares, debentures and other marketable securities. It also provides working capital loans and credit facilities but doesn’t include any institution whose principle business is of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any sale/ purchase/ construction and services of immovable property.

NBFC work is regulated by the Reserve Bank and work under the framework of RBI. Before starting working as NBFC they have to take certificate of registration form RBI for which they have to comply with the following conditions as discussed below:

  1. it should be registered under Section 3 of the companies Act, 1956
  2. It should have a minimum net owned fund of two crore.

In terms of its function they can lend and also make investment and moreover their activities are similar to that of bank but still there are few differences which make their identity different from each other as explained below:

  1. They cannot accept deposit
  2. They do not form part of the payment and settlement system because they cannot issue cheques drawn on itself;
  3. They cannot provide deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation to its depositors, unlike in case of banks.

Basically NBFC are of two types

  1. Deposit accepting NBFC: It means those NBFC’S which accept deposit from the public. It includes loan companies , assets finance companies, investment companies etc
  2. Non- Deposit Accepting NBFC: It means those NBFCwhich only lend but cannot accept deposit from public other than paying back of borrowed money.

As one of its type deposit accepting NBFC which accept deposit from public in this case at the time of depositing money depositor keep these things under consideration

  1. NBFC should be registered and specifically authorized by the RBI to accept deposits.
  2. NBFCs have to display the Certificate of Registration (CoR) issued by the Reserve Bank on its website and which should reflect that it has been specifically authorized by RBI to accept deposits.
  • The maximum interest rate should not exceed 12.5% which an NBFC should pay to a depositor
  1. The depositor must insist for a proper receipt whichshould be duly signed by an officer authorized by the company for every amount of deposit placed with the company.
  2. If there is any brokers/agents which are involved in collecting public deposits on theirbehalf, it is the duty of depositors should satisfy themselves that the brokers/agents are duly authorized by the NBFC.
  3. The depositor must bear in mind that public deposits are unsecured and Deposit Insurance facility is not available to depositors of NBFCs.
  • Reserve Bank of India would not be   responsibleor give guarantee regarding the present position in regard of the financial soundness of the company or for the correctness of any of the statements or representations made or opinions expressed by the company and for repayment of deposits/discharge of the liabilities by the company.

As RBI has laid down norms for certificate of registration of NBFC similarly they have also laid down the guidelines for takeover of them also because in these days in the whole corporate scenario around the world mergers and takeovers are strongly taking place so NBFCs, also being considered as near substitute to the conventional banks are also coming under the impact of these compromises and arrangements.

The term takeover means the purchase of one business entity by another. In this two kinds of entities are involved: a) Target Company means a company which is being targeted to be acquired by the other company b) Acquirer   company means a company which is acquiring the target company. In terms of NBFC’s takeover we mean purchase of one NBFC by the other company. Only registered NBFC under the Act shall undertake to acquire the control of another NBFC.

There are two different ways of NBFC takeover as explained below:

Friendly Takeover: It is a type of takeoverwhich take place between the companies with their mutual consent

Hostile Takeover: It is a type of takeover whereinacquirer Company secretly tries to acquire the acquired company.

For NBFC takeover following functions to be performed:

Firstly the Memorandum of understanding is signed with the proposed company which signifies that both the company’s i.e acquirer and Target Company are ready to enter into the agreement of takeover.

After the signing of MOU both the companies convened a board meeting in their respective companies to take up the following matters:

  1. Deciding of date, time and Place of EGM
  2. For passing resolution which is required in EGM
  3. Replying to any query of RBI in relation to takeover scheme

Following conditions are required to be satisfied for obtaining the prior written permission of RBI for acquisition or transfer of control of NBFCs:

In context of prior approval we understand that when there is significant changes in the management or acquisition of control of NBFC whereas minor is kept outside the purview

  1. Takeover of NBFC or acquisition of control, which may or may not results in the change in management

Control means

  1. the right to appoint majority of the directors or
  2. to control the management or
  3. policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner:
  4. B) There is acquisition or transfer of more than 26% shareholding in the NBFC’s paid-up equity capital however it would not be required in case of any shareholding going beyond 26% due to buyback of shares/ reduction in capital where it has approval of a competent court,”
  5. c) Change in the management by way of change in more than 30% of the directors of the NBFC but if there is change due to change in independent director or by rotation of directors in the board no approval is required.

When these conditions are satisfied then we have to make application to RBI for the approval on the letter head of the company along with the following documents:

  1. Information of Proposed directors/shareholders;
  2. Details regarding sources of funds of the proposed shareholders required for acquiring shares in the NBFC;
  3. A statement by all the proposed directors/shareholders stating  their non-association with any entity accepting deposits
  4. A statement by all the proposed directors/shareholders stating  their non-association with any entity which has been denied of Certificate of Registration  by the RBI;
  5. A statement by all the proposed directors/shareholders , specifying their non-criminal background as well as non-conviction under section 138 of the Negotiable Instruments Act;
  6. Bankers’ Report of all proposed directors/ shareholders

Application shall be submitted to the regional office of the Department of Non-Banking Supervision in whose control the Registered Office of the NBFC is located for obtaining the prior approval before undertaking such arrangements. Approximately around two to three months is required for getting the approval depending upon case to case basis.

After getting approval from RBI in  accordance with step-2  if there is change in management/ control a public notice shall be given in one leading national and one leading local newspaper at least 30 days prior to such sale of shares, or transfer of control, whether with or without share transfer.

Following are the indications of the public notice:

  • Intention to sell or transfer ownership/control
  • Particulars of the transferee
  • Reasons for such sale or transfer of ownership/ control

After the public notice of takeover the shareholding agreement is made between the acquirer and transferor, the management of the transferor company is handed over to the acquirer and if any consideration remaining shall be paid off within 31 days of the public notice in the newspaper as mutually agreed by all the parties. After signing agreement the assets of Transferor Company present in balance sheet will be discharged and liabilities will be paid off and acquirer will just receive a clean balance in the bank on the name of company which will be calculated on the basis of net worth as on the date of the takeover.