Overview of NBFC Takeover
A Non-Banking Financial Company (NBFC) is a type of company that is registered under the Companies Act 1956 or the Companies Act 2013. NBFCs are companies that specialize in financial lending and other financial services. Section 45-IA of the RBI Act of 1934 defines them. In order to conduct financial business, such organizations must get a Certificate of Registration (COR) from RBI. This procedure is also known as NBFC registration or RBI NBFC licence application. Another option is to go through the NBFC Takeover procedure to start such a business.
The process of acquiring a working RBI-registered NBFC rather than going through the NBFC registration procedure from the start is known as NBFC takeover. Takeover of an NBFC is a viable option, but it is a lengthy process.
This procedure is appropriate for people or businesses who wish to ensure that their financial operations run smoothly.
This is a complicated process that goes through several stages and necessitates the greatest level of professionalism and hard work. We have 150+ individuals at BIZ who are experts in RBI registrations and NBFC takeover procedures, including CAs, CSs, CMAs, and Lawyers.
What business activities would you be able to pursue following the NBFC takeover?
Asset financing, acquisition of shares, debentures, securities, bonds, and stocks, giving loans and advances, and investing in various commercial securities are all services provided by NBFCs.
NBFCs offer more than just the above listed services; they also offer credit and working capital loans.
How does NBFC Takeover works?
The Takeover of a Non-Banking Financial Company revolves around two entities.
Company that is being targeted.
An acquirer firm is keeping an eye on the Target Corporation, which is a 'to be purchased' company.
Acquirer is a company that buys things.
Acquirer Company refers to a company that has the ability to acquire the target company.
The acquirer company buys the target company, and existing shareholders' shares are transferred to the proposed shareholders or entity after the proper procedures are followed. The acquiring company benefits from the target company's pre-existing RBI registration as well as its market position.
The Steps Involved in the Process Flow are as Follows:
Before buying a firm, do a lot of research and background checks. It's a good idea to make a list of the things that need to be looked at. Make business goals and determine whether or not the target organization can achieve them.
Take a look at the suitability
An acquirer must analyze the list of prospective prospects before making an acquisition offer to any company. A firm will find candidates who are a good fit for their company and meet the acquirer's primary purpose during the process.
Examine your Financial Situation
The financial health of the company you want to buy must be thoroughly examined. Calculate the maximum amount that can be paid for the takeover, as well as cash flows, and choose the best financing option.
Types of NBFC Takeover
There are two types of NBFC Takeovers.
The term "hostile takeover" comes from the term "hostile takeover." A hostile takeover is one in which the acquirer or acquiring business uses various strategies to seize ownership of the target company without the approval of the target company's board of directors.
During such takeovers, companies engage in outreach to shareholders by putting a tender offer on the table, and they don't hesitate to engage in a proxy struggle to replace management in order to get the deal approved. The support and permission of the target company's board of directors are irrelevant to acquirers.
A friendly takeover is a scenario that illustrates the story of a target NBFC company being acquired by another company in a peaceful manner, with the support and agreement of the management and board of directors. The target company's shareholders will only agree to the deal if they believe the price per share is better than the current market price.
The advantages of a favorable takeover are not confined to a lower per-share price; they go well beyond that. The target businesses are given opportunity to expand their operations. Furthermore, they have the ability to investigate several market segments. In a nutshell, a friendly takeover is based on mutual agreement.
Benefits Associated with NBFC Takeover
The following benefits are reserved when NBFCs are taken over: -
- It increases the company's profitability.
- Reduce the level of competitiveness.
- It has the ability to increase revenue and sales.
- It helps the distribution market to expand.
- It has the potential to widen the economy's scope.
Approval from the RBI
In the following scenario, RBI approval is required.
Because the RBI is in charge of the NBFC's governance and control, its approval is critical in the instances listed below.
- Approval is required at the start of the NBFC Takeover procedure.
- When management changes, resulting in a 30 percent shift in the overall number of directors.
- When the shareholding pattern is altered by becoming liable for the transfer of 26% or more of the corporation's paid-up capital to others.
The RBI Approval Requirement Is Exceeded.
- The RBI has no role in capital declines or share buybacks because they are handled by a competent court.
- If the board of directors, including independent directors, rotates, there will be a change in management.
When prior RBI approval is required, follow this procedure.
Submit an application to the Non-Banking Supervision Department's zonal office in the state where the NBFC's registered office is located. It's critical to attach certain valid documents in the form of attachments to the application engraved on the company's letterhead. The NBFC takeover must be approved in this application
As Attachment Parts Attachments, the following documents are attached to the application.
- Information about the proposed board of directors and shareholders.
- Information on the necessity for a source of capital to purchase NBFC shares by the potential shareholders.
Declaration stating whether you are a member of an association or not.
Information about proposed shareholders/directors who are connected to any incorporated or unincorporated body that is responsible for accepting deposits, as well as minute details of an application for a Certificate of Registration (COR) that has been rejected by RBI.
A Banker's Report is required.
In the case of proposed shareholders and directors, the Bankers' Report is required.
No criminal case is stated in this declaration.
Under section 138 of the Negotiable Instruments Act, the potential shareholders and directors shall come forward and sign a declaration stating their non-conviction, as well as a non-criminal background and case.
For the previous three years' financial records.
Annual reports with financial accounts from the previous three years must be attached.
NBFC Takeover Procedure in India
The procedure for acquiring an NBFC is as follows.
The Memorandum of Understanding (MOU)
The procedure for acquiring a non-banking financial organization begins with the signing of a Memorandum of Understanding (MOU) with the potential company.
It indicates that both companies are prepared to enter a takeover agreement. The target company's director and the acquirer company's director both come on board and sign the MOU.
The Memorandum of Understanding covers all of the firms' needs and responsibilities. When the MOU is accepted, the acquirer business pays the target company the token money.
Prior Approval from RBI
Prior Approval Requirement of RBI is the Most Crucial Step if Required.
Publish the public notice bilingually
Two regional languages should be included in the public notification. The first language should be English, and the second should be released within 30 days of gaining RBI approval in a regional language.
Step into the Formal Contract
From here, two interested parties can consider forming a formal agreement, and they can now purchase shares/transfer of administration/transfer of shares/or the previously indicated concerns for takeover.
Second Public Notice should be published
The second public notice must be published in two different regional languages. The first language should be English, with the second being published in a regional language. For the purchase of a share/transfer of authority/transfer of shares or before-divulged worries for takeover, a public notice shall be posted before 30 days.
Things to be included in Public Notice
- Intention to sell or transfer ownership or direction.
- The transferee's specifics are to the point.
- The reason for the sale or transfer of authority or ownership.
The Liquidation Process Begins.
This step entails the liquidation of all of the target company's assets. Furthermore, all liabilities are likely to be paid off.
The purchaser will be able to see a reasonable bank balance in the company's name. This section's calculations use net worth as the starting point, as it was on the day of the takeover.
Obtain a letter of authorization from the creditors.
The Target Company must obtain NOC from the creditors prior to the transfer of business.
Assets are transferred
The transfer of assets would take place once the scheme has been approved by the Reserve Bank of India without any objections.
Valuation of an entity in accordance with RBI guidelines.
Because the RBI has established a set of norms and regulations, the entity's valuation can be carried out in accordance with them. The discounted cash flow (DCF) approach is a valuation tool that aids in the process. It's a well-known approach for displaying an entity's net present value.
Formalities for NBFC takeover after RBI approval.
Following the consent of the Reserve Bank, take the following steps: -
Make a public announcement
The first step necessitates the publication of a public notice. The public notification should be made available in two regional languages, English and vernacular language, to the broader public. Following the RBI's clearance, the notification should be distributed to the general public within thirty days.
The second stage of the procedure requires an acquirer to engage into a formal agreement with the target firm in order to assure complete ownership of the shares and management transfer.
Another Public Notice should be issued
When the company is nearing the end of the thirty-day agreement period, a second notice should be made available to the general public. It goes without saying that the aforementioned notification should be issued in the same recommended languages as the first.
NBFC Takeover Approval is Granted
The Non-banking Supervision Department's regional office is responsible for issuing the NBFC Takeover Non-Objection Certificate (NOC). If the department is not pleased with the preliminary screening of the application, it may ask questions.
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Frequently Asked Questions
In layman's terms, NBFC Takeover refers to a business entity purchasing another NBFC business entity.
Yes, RBI registration is required for NBFCs established under section 45-IA of the RBI Act, 1934.