What is NBFC takeover?
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.
While retaining the basic compliance requirement, RBI is simultaneously making the business of NBFCs smoother. Smaller NBFCs have been liberalized from the RBI regulations whereas larger NBFCs have been continuously monitored and strengthened to bring them on a par with the global standards.
Types of NBFCs
- Deposit accepting NBFC.
- Non-Deposit accepting NBFC.
In the whole corporate scenario around the world mergers and takeovers are strongly making its presence. NBFCs are also coming under the impact of these compromises and arrangements. For this, Reserve Bank of India lays down the procedure for the takeover of NBFCs.
Takeover of NBFC implies purchase of one NBFC by the other company. Only registered NBFC under the Act shall undertake to acquire the control of another NBFC.
Under this process mainly two companies are involved:
Target Company
It is a type of company which is being targeted to be acquired by the other company.
Acquirer Company
It is a type of company which is acquiring the target company.
It is advisable for an acquirer to gather all the necessary information with respect to the transferee Company so as to avoid any ambiguity in the future.
NBFC takeover can be done in two different ways:
Friendly takeover
It is a type of takeover which takes place between the companies with their mutual consent. Acquirer Company offers the target company for being acquired and the same offer is being accepted by the target company.
Hostile takeover
Under this, Acquirer Company secretly tries to acquire the acquired company. Usually, this kind of takeover takes place when the management of the acquired company is unwilling to accept the offer of the takeover.
Pros and Cons of NBFC Takeover
Pros of NBFC takeover
- Increase in profitability of Target Company.
- The decrease in competition.
- Increase in sales/revenue.
- Expansion of a distribution network.
- Economies of scale.
Cons of NBFC takeover
- Amount paid for goodwill is often less as compared to its actual price.
- Conflict in new management.
- Cultural clashes in two companies.
- Reduce employee’s morale.
- Hidden liabilities of Target Company.
Requirement of Prior Approval of RBI in of NBFC takeover
Minor changes in the management or control are outside the purview of the takeovers whereas, in case of significant changes, it is required to obtain prior approval of the RBI.
Prior approval of Reserve Bank of India is required under the following conditions:
- Takeover of NBFC or acquisition of control, which may or may not results in the change in management.
- Variation in the shareholding of an NBFC, which is resulting in 26% acquisition or transfer of the paid-up capital including progressive increases over the period of time.
- Change in the management by way of change in more than 30% of the directors of the NBFC.
RBI Regulations in relation to NBFC takeover:
RBI has specified following norms which are required to be followed by NBFC’s:
- Takeover or acquisition of an NBFC requires a prior approval of RBI whether there is a change in management or not.
- Approval should be a written approval.
- Prior approval of RBI will be required in case of acquisition or transfer of shareholding for more than 10%.
- No RBI approval will be required in case there is a change in shareholding for more than 26% for the reason of buyback/reduction in share capital but this reduction/buyback should have been approved by the competent authority.
- In case of a change in the directors of the company more than 30% than the prior written approval shall be required.
- Change in direction of the company requires a prior public notice at least 30 days prior to the announcement of such change.
Prior approval of Reserve Bank of India is not required under the following conditions:
- In case shareholding goes beyond 26% due to the buyback of shares or reduction in capital by obtaining the approval of a competent court.
- Change in the management by 30 % inclusive of Independent Directors or by rotation of the directors in Board.
Application for Prior Approval of RBI
The next step is to make an application to the RBI for the approval on the letterhead of the company along with the following required documents:
- Information on Proposed directors and shareholders.
- Information regarding sources of funds required for acquiring shares in the NBFC by the proposed shareholders.
- Declaration by all the proposed directors and shareholders stating their non-association with any entity accepting deposits.
- Declaration by all the proposed directors and shareholders stating their non-association with any entity to whom Certificate of Registration is denied by the RBI.
- Statement regarding non-criminal background as well as non-conviction under section 138 of the Negotiable Instruments Act by all the proposed directors as well as shareholders.
- Bankers’ Report with regard to proposed directors and shareholders.
An 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. All the queries raised by the RBI shall be timely answered in respect of the takeover so as to avoid any unforeseen delay in the approval. Usually, an application for NBFC takeover goes through a processing time of three to four months in the normal course of business.
Requirement of Prior Public Notice in Case of Change in Management/Control
Public notice shall be given in one leading national and one local newspaper in case of transfer of ownership or control by the sale of shares or whether with or without transfer of shares, it shall be given at least 30 days prior to effecting such sale or 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 fulfillment of all the above-given conditions
- Share Purchase Agreement is prepared and signed.
- Management is handed over, and
- In case of remaining consideration, it shall be paid off within 31 days of the public notice in the newspaper or as mutually agreed upon by all the parties.
Subsequently, all the assets of the target company as shown in the balance sheet will be liquidated and liabilities will be paid off and the acquirer will 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.
NBFC Takeover Procedure
Memorandum of Understanding
The first step is signing of the MOU i.e. Memorandum of Understanding with the proposed company, it specifies that both the companies agree to enter into an agreement of takeover. It is signed by both the directors of the Acquirer Company and Target Company. While the signing of MOU, token money is given by Acquirer Company to the target company. It shall also specify the responsibilities and requirement of each company.
Convene Board Meeting
After signing of MOU, Board Meeting shall be convened in both the companies to discuss following matters:
- To fix day, date, time and place of convening Extra Ordinary General Meeting.
- For passing a resolution in EGM.
- In relation to takeover scheme, reply to the query of RBI.
Public Notice
After obtaining the RBI approval, public notice shall be made to invite any objection of the public which is taking place due to take over in two newspaper within 30 days of such approval.
Signing of Share Transfer agreement
After the expiry of the 31st day of the notice in the newspaper, share transfer agreement shall be signed and remaining consideration shall be paid by the acquired company.
NOC from Creditors
Target Company shall obtain NOC from its creditors before the transfer of business from Target Company to Acquirer Company.
Transfer of Assets
After this, transfer of assets shall take place in case no objections have been received and RBI approved the scheme. But the transfer should not contravene any clause of the agreement.
Valuation the entity
Valuation shall be done in accordance with the rules provided by the RBI. The technique adopted for valuation shall be Discounted Cash Flow (DCF) Method, this will represent the net present value of the entity. After the evaluation, a certificate shall be obtained by the Chartered Accountant briefing the method adopted for valuation.
Notice to Regional Office
After the process of valuation and approval of the takeover scheme, NBFC shall submit an application to the Regional Office of RBI. The application shall be on the letterhead of the company. Any change in management of the NBFC after the takeover should also be intimated on a continuous basis to RBI.
Application made to the Regional Office shall contain following details:
- Information of the proposed directors and shareholders.
- Sources of funds of Acquirer.
- Declaration by the shareholders and directors regarding their association with any unincorporated entity which is accepting deposit.
- Declaration by the directors regarding no criminal proceedings have been initiated against them in past or are pending against them in any court of law.
