NBFC Weekly Digest – Edition 2

Acquisition of NBFCs

“With newer business models, there have been many changes in the operations, management, and regulations of NBFCs. As mergers and acquisitions are happening around the world across the corporate sector, the NBFCs have also come under the impact of these arrangements. Thus, India too witnesses increase in growth and acquisitions of NBFCs”
-Divya Gupta (Market Analyst, MUDS Management Pvt Ltd)

How does Acquisitions of NBFCs happen ?

Acquisition of NBFCs require prior approval of RBI. Keeping in view the representations submitted by the industry, the RBI has laid down the procedure for the acquisitions of NBFCs.

Conditions for Prior Approval of RBI

Acquisition or any significant change in the management of NBFCs has to go through a procedure prescribed by the RBI. The following conditions make it necessary to take prior approval of the RBI:

Condition #1: Any takeover or acquisition of control, that may or may not lead to a change in management,
Condition #2: Any change in the shareholding of NBFCs, resulting in 26% acquisition/ transfer of the paid-up equity capital, including progressive increases over time,
Condition #3: Any change in the NBFC management by more than 30% of the directors.

Documents Checklist for Application Submission

If the entity comes under the criteria of the above requirement for prior approval, the subsequent step necessary is to submit an application, on the letterhead of the company, for the grant of the aforesaid RBI approval.

The application is to be made along with the necessary documents which are as below:

Information on the proposed directors/shareholders;
Sources of funds necessary for acquiring shares by the proposed shareholders;
Declaration by the proposed shareholders/ directors which states their non-association with any entity taking deposits;
Declaration by the proposed directors/shareholders shareholders/ directors which states their non-association with an entity to which a Certificate of Registration by the RBI has been denied;
Statement of non-criminal background and non-conviction under section 138 of the Negotiable Instruments Act by the proposed directors/shareholders;
Bankers’ Report about the proposed directors/ shareholders.

“The application for approval is to be submitted to the Regional Office of the Department of Non-Banking Supervision under whose jurisdiction NBFC’s Registered Office is located. All the queries by the RBI on the acquisition shall be replied in a timely manner in order to avoid any delay in the approval. In the normal course of business, the processing time of these applications for acquisition of NBFCs is 3 to 4 months.”
– Isha Malik (Company Secretary, MUDS Management Pvt Ltd)

Requirement of Prior Public Notice

In the situation of the transfer of the ownership of NBFCs, it is necessary to give a public notice in a leading national and a leading local newspaper at least 30 days before such transfer comes into effect.

The public notice shall indicate:

the intention to transfer or sell the ownership/ control;
the details of the transferee; and
the reasons for such transfer or sell the ownership/ control

“Once the above conditions are met, the Share Purchase Agreement is prepared and signed, and the management is handed over. If any consideration is remaining, it shall be paid off either within 31 days of the public notice or as per the mutual agreement of the concerned parties. Subsequently, the assets of the target entity as mentioned in the balance sheet will be liquidated, and liabilities will be paid off. The acquirer will be given a clean bank balance in the name of a company that will be calculated as per the net worth as on the date of the acquisition”