Step-by-Step Guide to the Takeover of NBFC in India

 Introduction

The takeover of an NBFC refers to the acquisition of a controlling interest (either through shareholding or management control) in a registered NBFC by another entity. This process is strictly regulated by the Reserve Bank of India (RBI) to ensure transparency, financial stability, and protection of stakeholders’ interests.

Key Regulatory Framework

• Reserve Bank of India (RBI) Guidelines: RBI is the primary regulatory authority overseeing the takeover of NBFCs in India. Any change in control, management, or shareholding beyond prescribed limits requires prior approval from the RBI.
• Companies Act, 2013: Governs corporate actions, board meetings, and documentation.
• Ministry of Corporate Affairs (MCA): Compliance for changes in company structure, directors, and shareholders.

Step-by-Step Process for the Takeover of NBFC

Signing the Memorandum of Understanding (MoU)

• Both the acquirer and target NBFC sign an MoU, outlining intent, responsibilities, and initial terms.
• The acquirer typically pays a token amount to the target company at this stage.

Convening Board Meetings

• Both companies hold separate board meetings to approve the takeover proposal and authorize further actions.
• The board also sets the date for an Extraordinary General Meeting (EGM) to seek shareholder approval.

Due Diligence and Valuation

• Comprehensive due diligence is conducted on the target NBFC, covering financials, compliance, assets, and liabilities.
• Valuation is performed using methods like the Discounted Cash Flow (DCF) to determine the fair price.

Share Transfer Agreement

• Upon satisfactory due diligence, a formal Share Purchase/Transfer Agreement is executed between the parties.
• The remaining consideration is paid in accordance with the agreement.

Application to RBI for Prior Approval

• A detailed application is filed with the RBI’s regional office, seeking approval for the proposed takeover of the NBFC.
• The application includes all supporting documents, agreements, and compliance certificates.

No Objection Certificate (NOC) from Creditors

• The target NBFC obtains a No Objection Certificate (NOC) from its creditors, confirming that they have no objections to the proposed takeover.

RBI Review and Approval

• RBI scrutinizes the application and may raise queries. Prompt and complete responses are crucial.
• Only after receiving the RBI’s No Objection Certificate (NOC) can the process proceed.

Public Notice

• Within 30 days of RBI approval, a public notice must be published in two newspapers (one English and one regional language), inviting objections from the public.

Transfer of Assets and Liabilities

• The acquirer transfers the agreed funds to the target NBFC’s account.
• Assets and liabilities are transferred as per the agreement, and the takeover is executed.

Statutory Filings and Compliance

• File necessary forms with the Ministry of Corporate Affairs (MCA) for any changes in company name, directors, or shareholding.
• Intimate RBI and other regulators about post-takeover changes.

RBI Approval: The Cornerstone of the Takeover of NBFC

• When is RBI Approval Required?
• Change in shareholding of 26% or more.
• Change in management of 30% or more.
• Sale or transfer of NBFC.
• Key RBI Conditions:
• Minimum net owned funds of INR 2 crores.
• Clean track record: No defaults or disputes in the last 24 months.
• Submission of the previous three years’ income tax returns.
• Minimum CIBIL score of 700+.

Documentation Required

• Memorandum of Association (MOA) and Articles of Association (AOA)
• Certificate of Incorporation
• Board and Shareholder Resolutions
• MoU and Share Purchase Agreement
• No Objection Certificate from Creditors
• Valuation Report by a Chartered Accountant
• RBI Application and supporting documents

Post-Takeover Compliance and Reporting

• Update statutory registers and records.
• File post-takeover returns with RBI and MCA.
• Ensure continued compliance with RBI’s prudential norms and reporting requirements.
• Regularly inform the RBI of any subsequent changes in management or shareholding.

Common Challenges and Solutions

• Regulatory Delays: Proactively respond to RBI queries and provide complete documentation to avoid delays.
• Due Diligence Issues: Conduct thorough due diligence to uncover hidden liabilities or compliance gaps.
• Stakeholder Objections: Transparent communication with creditors and the publication of public notices helps mitigate objections.

Conclusion

The takeover of NBFCs in India is a complex yet rewarding process that requires meticulous planning, strict regulatory compliance, and strategic execution. By following the step-by-step process outlined above, acquirers can ensure a smooth transition, safeguard stakeholder interests, and unlock new growth opportunities in the dynamic non-banking financial company (NBFC) sector.

Key Takeaways:

• Always prioritize RBI compliance for a successful takeover of an NBFC.
• Thorough due diligence and transparent communication are critical.
• Engage professionals for legal, financial, and regulatory guidance throughout the process.

By adhering to these best practices, stakeholders can navigate the takeover of NBFC with confidence and achieve sustainable business growth.