Complete Overview of NBFC Takeover Procedure in India

NBFC is the financial institution that is registered under The Companies Act,2013 and regulated by RBI Act,1934. Before commencement of these financial activities business entity, they have to get a certificate of registration from RBI. Financial Activity includes loans, advances, asset financing shares, debentures and other market securities. Therefore, the NBFC takeover procedure is a process of acquiring the business activity that is already registered under RBI guidelines.

Merits and Demerits of NBFC takeover procedure

Merits:

• It will increase the profit of the target company.
• Decrease in competition in the market.
• Increase in revenue and sale.
• The economic scale will increase.

Demerits:

• Generally, the amount paid during the takeover process is less than the actual price.
• There can be a conflict between the management of the company i.e, a cultural clash.
• Cultural clash can lead to employee turnover and the morale of the employees also reduce.
• The liability will be on the acquiring company.

Types of NBFC takeover

There are two types of takeover i.e. a) Friendly Takeover b) Hostile Takeover :

1. Friendly Takeover: Generally, these are the takeover which is done with the mutual consent of both the parties i.e acquiring company and target company. This type of takeover leads to an increase in the business sphere which leads to the growth of the business.
2. Hostile Takeover: generally, this type of takeover is done by the acquiring by using different types of tactics by directly going to the shareholders or proxy fight to change the management. These are the takeovers that are without the mutual consent of the target company.

Parties involved in NBFC Takeover Procedure

Generally, there are two parties involved in the takeover procedure i.e. acquiring company and target company.

• Acquiring Company: Generally, these are the company that aquires the other company by buying all the assets and liabilities of the company and become the new owner of that company.
• Target Company: Generally, these are the companies whose assets and liabilities are been acquired by the acquiring company

Procedure of NBFC Takeover

• Prior approval is required: Before the transfer/acquiring control of NBFC prior approval of RBI is required.
• Prior approval application: NBFCs have to submit an application to the bank, on the letterhead of the company to obtain approval. With the following documents:
  • • Information of directors/ shareholders.
    • Source of funds of proposed shareholder acquiring a share in NBFC.
    • Declaration of the directors that they are not associated with any company that is accepting deposits.
    • Declaration of the directors that they are not associated with any company whose certificate of registration is rejected by RBI.
    • Declaration of proposed shareholders/directors that they don’t have any criminal background and have done any offence under section 138 of Negotiable Instrument Act.
    • Bankers report of the proposed directors/Shareholders.

Application is to be submitted to the regional office of the department of non-banking supervision under whose jurisdiction the registered office of NBFC is located.

• Public Notice: A public notice of at least 30 days before the transfer of control with or without the sale of share should be provided to the shareholders or the management of the company and should be given in the local or the regional newspaper where the company is located
• Memorandum of Understanding: After the approval of the RBI, the proposed company will sign a Memorandum of Understanding which states that both the company agreed mutually and entered into the agreement of takeover. It will be signed by both the acquiring company and the target company. MOU provides roles, responsibilities and requirements of each company. After signing MOU the token amount will be paid by the acquiring company to the target company.
• Call a Board Meeting: Then the company will call a meeting for the approval of MOU and the schemes related to the takeover.
• Sending scheme to the transferor company: After the approval of the scheme will be sent to the transferor company for consideration.
• Share transfer agreement will be signed: Share transfer agreement will be signed and the acquiring company will pay the remaining amount to the target company.
• NOC from Creditors: The target company will obtain NOC from the creditors and provide the certificate to the target company.
• Transfer of assets and liabilities: After obtaining NOC the transfer of assets and liabilities will take place and should not contravene any clause of the agreement.
• Valuation of entity: The cost assessment will be done with the technique of Discounted Cash Flow Method which is designed. The net present value of the entity will be evaluated. The CA will obtain a certificate briefing the method which is adopted for the valuation of the entity.
• Notice to dissenting shareholders: If acquiring company has 75% share under the scheme or contract they have the right to squeeze out minority shareholders. A notice will be given to minority shareholders to transfer the shares to acquiring company in form CAA 14.

The consideration will be paid to the minority shareholders upon transfer within one month.

Procedure for change in name after takeover

The aqurirer company needs to obtain a name avaibality certificate from the Ministry of Corporate Affairs. The company will take notice of the default from RBI. After the notice of default is obtained than company can proceed to change the name.

Conclusion

Generally, the NBFC takeover procedure is simpler than the registration of NBFC.. Although, the takeover procedure is at starting stage in India. RBI has made the procedure systematic and easy. The aquirer company should provide detailed information to the transferor company so, that the process of takeover doesn’t get delayed. With the change in scenario, RBI has given liberty in the compliance and governance of takeover procedure.