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
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:
It is a type of company which is being targeted to be acquired by the other 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:
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.
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
Cons of NBFC takeover
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:
RBI Regulations in relation to NBFC takeover:
RBI has specified following norms which are required to be followed by NBFC’s:
Prior approval of Reserve Bank of India is not required under the following conditions:
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:
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:
After the fulfillment of all the above-given conditions
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
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.
After signing of MOU, Board Meeting shall be convened in both the companies to discuss following matters:
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.
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.
Target Company shall obtain NOC from its creditors before the transfer of business from Target Company to Acquirer Company.
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 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.
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:
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