NBFC Takeover: Know the Pros and Cons, Procedure and RBI Guidelines

NBFC Takeover means acquisition of shares, merger or amalgamation of one NBFC by another NBFC. The takeover brings market expansions, diversifies business activities and helps in covering large customers of the market. Overall, NBFC takeover involves the transfer of ownership and control of non-banking financial institution from one entity to another. It plays significant role in shaping and foster the growth of financial sector. In this article, we will learn the Pros and Cons, Procedures and RBI Guidelines for NBFC takeover.

Meaning 

Non-Banking Financial Institutions are the alternates for traditional banks. Though, poor management, non-compliance or insufficient capital may lead to financial uncertainties. Consequently, arises the option of NBFC takeover. The Reserve Bank of India has developed the protocols for the takeover of NBFCs to eliminate biases or vagueness. Further in this article, you will learn the Pros and cons and various guidelines of RBI for the takeover of NBFC.

Reasons for NBFC Takeover

• To grow the business operations of the takeover NBFC.
• To approach new markets or customers.
• To diversify the product and business activities.
• To improve operational efficiency by adding specialized skills, and technology.

Pros and Cons of NBFC Takeover

Following are the Pros of the Takeover of NBFC

• Helps in raising profitability and reduces risk by diversifying business and product portfolio.
• The market share of acquiring NBFC expands by targeting a large customer base.
• Helps in shrinking costs and improves efficiency.
• Takeover multiples the expertise, technology and resources of the company.

Following are the Cons of the Takeover of NBFC

• The takeover process may take a large time and resources for the company.
• There may be conflicts between the two groups of both companies.
• Takeover lead to further regulatory requirement, causing an increase in compliance costs.
• The takeover carries veiled liabilities of the targeted NBFC.

The failed NBFC takeover highlights the importance of proper financial and legal compliance and stakeholder engagement.

RBI’s Green light: Approval Granted for NBFC Takeover

The following are the conditions for which RBI approval required for NBFC takeover:

• Any takeover or acquisition of control of NBFC, may or may not result in a change of management
• Any Changes in the shareholding, resulting in a 26 % acquisition or transfer of the paid-up equity capital of NBFCs.
• Change in more than 30 % of the directors, excluding independent directors, of the NBFC.

NBFC Takeover Scenario Exempt from RBI Approval

There are several circumstances where you do not need to take the prior consent of the RBI:

• If there is a change of 26% in the share capital of the company due to buyback of shares or reduction in the capital by the authorisation of a competent Court, or
• If there is a change of 30% in the administration due to change in the Independent Directors or by rotation of the directors in the Board.

Procedure for NBFC Takeover

Let’s be familiar with the procedure for NBFC takeover

• Assess the financial position, operation, management or regulatory compliances of the targeted NBFC.
• Negotiate with the terms and conditions and purchase price.
• Obtain approval from RBI and other regulatory authorities.
• Complete the transaction with transferring of ownership, assets and liabilities of the targeted NBFC to the takeover NBFC.
• Restructure and integrate the teams of both NBFCs.

Documents Requirement for Takeover of NBFC

• Memorandum of Undertaking (MOU): The document stating the intention of acquiring NBFC to take over the targeted NBFC.
• Purchase Agreement: A legally binding agreement specifies the terms and conditions of the takeover such as purchase price or Mode of payment.
• Due diligence report: This includes an analysis of the financial statement, licenses, Regulatory compliances, and any risk, liability or contracts of the targeted company.
• Board Resolutions and Shareholder Resolutions: To approve the takeover, a Resolution is to be passed by both companies.
• Audited Financial Statements: The Audited financial statements of the acquiring as well as the targeted company is to be required for demonstration of financial feasibility.
• Tax Clearance Certificate: Proof of tax compliance such as income tax return, or any other tax-related document.
• Non-Objection Certificate: To indicate the consent, Non-Objection Certificate from the existing lender of the targeted NBFC.
• Other statutory documents: Copies of Certificate of Incorporation, registration certificate, Memorandum and Articles of Association of targeted NBFC.

It is advisable to consult with the experts of Legal Window to ensure compliance. To get in touch with us Contact us at 072407-51000 or email admin@legalwindow.in.

The Reserve Bank may ask for clarifications on various points mentioned in the application for sanction. To avoid undue obstruction, the applicant has to answer all the queries on time. Around two to three months are required for getting the approval.

RBI Guidelines on NBFC Takeover

• The Takeover NBFC must have a minimum of Rs. 2000 crore of net-owned funds.
• The takeover NBFC timely takes approval from RBI before the completion of a transaction.
• The takeover NBFC must assure the applicability of regulation related to takeover, Money Laundering or Know Your Customer.
• Without prior regulatory approval, The Takeover NBFC can make no change in management and control of the targeted NBFC.

It is important to note that the guidelines are subject to change and advisable to review the guidelines periodically.

Takeaway

The takeover of an NBFC avails both opportunities and constraints. It offers diversification, expansion, increases customer base and interaction between both companies. On the other hand, it also entails risks including complexities, cultural differences and financial liabilities. But the well–planned and executed takeover can lead to business growth.