Pros and Cons of NBFC Takeover
Pros and Cons of NBFC Takeover– An NBFC (Non-Banking Financial Company) takeover refers to a strategic business move carried out by one NBFC to acquire another via share purchase. By leveraging the NBFC takeover, the acquiring company can access various benefits such as elevated customer reach, amplified brand presence, and access to a new customer base. However, an NBFC takeover does not always offer such benefits as there are some potential disadvantages as well. Let’s take a walkthrough of the pros and cons linked to the NBFC takeover.
Underlining Pros and Cons of NBFC Takeover
NBFC takeover comes with potential advantages and disadvantages as mentioned below:
Pros of NBFC takeover
Market Expansion:
The move to acquire an NBFC can enable the acquiring company to expand its market presence, thereby increasing its customer base.
Diversification:
Acquiring an NBFC can help with portfolio diversification and the addition of new products and services. Diversification can diminish the risk across different sectors and segments, potentially elevating resilience and stability.
Customer Base:
Acquiring an NBFC can enable the acquiring company to have immediate access to a new customer base. This helps them reinforce new revenue streams and cross-selling opportunities for other financial products and services.
Regulatory Compliance:
NBFCs attract a slew of rigorous compliances, be it a matter of incorporation or acquisition. However, when it comes to acquisition, the compliance threshold tends to become moderate since it saves the acquiring company from reinforcing the regulatory compliance framework from the ground up, resulting in substantial savings of time and resources.
Talent Acquisition:
Acquiring an NBFC opens the doorway to experienced professionals with profound knowledge in different subject matter. This can save substantial money required to train the employees or hire a fresh batch of aspirants. This immediate access to knowledgeable personnel solidifies your talent base, resulting in refined and quick decision-making.
Cons linked with NBFC takeover
Integration Challenges
From operation integration to understanding cultures, NBFC takeover is not all about acquiring a company. To ensure success, the acquiring company must get attuned to the operation, system, and culture of the proposed company that they wish to acquire. Skipping this requirement can lead to inefficiencies and disruptions in business operations.
Regulatory Risks
The compliance realm of NBFC is not stagnant and hence any non-conformity can incur harsh penalties and reputational damage. NBFC takeover often leads to the transfer of regulatory obligations and risks, which requires undue attention and costly management.
Financial Risks
Acquiring an underperforming NBFC can open the doorway to excessive financial risks and potential liabilities linked with the acquired entity’s assets, loans, and investments. This may serve as a backfire for an acquiring company seeking to augment its presence through takeover.
Brand Reputation
If the acquired NBFC has garnered a poor reputation or a history of regulatory violations, it can spoil the acquiring company’s reputation. Rebuilding trust with end-users, stakeholders, and regulators may require significant effort and resources.
Competition
Not all acquisition efforts bore fruit; hence, you cannot rely on a takeover to do wonders for your business. Owing to a competitive market, the rivals will play their part to outrank your business no matter the scope of operation or market presence. Unless your acquisition move is sound and based on a well-thought-out strategy, you cannot expect your business to flush out the competition.
Legalities around the NBFC takeover
Acquiring an NBFC requires adherence to a slew of compliances and regulatory requirements set forth by the RBI. Let’s take a closer look at them so that you can proceed confidently.
Regulatory Approval
The acquisition of an NBFC cannot happen without RBI’s approval. The acquiring company must inform the Reserve Bank via the application and mandatory documents, including rationale, financial details, and plans for the acquired NBFC.
Fit and Proper Criteria
The RBI leverages the “fit and proper” criteria to determine the suitability of the acquiring entity and its directors. Following these criteria involves evaluating the firm’s qualification in terms of financial soundness, integrity, and past regulatory compliance.
Due Diligence
Conducting comprehensive due diligence is vital to pinpoint any loopholes from legal, financial, or operational standpoints, This involves inspecting the fiscal paperwork, regulatory compliance, contracts, and litigation history.
Shareholder Approval
Apart from the authority’s approval, the consent from the shareholders of either company also plays a vital role in the NBFC takeover. How the consent will be secured, either via voting or any other mode, differs structure-wise.
Documentation
The NBFC takeover attracts several documents such as an acquisition agreement, share purchase agreement, and any other ancillary agreements that will bring transactions into effect.
Compliance with Regulations
The acquiring entity should stay in line with underlying norms and guidelines concerning NBFCs and mergers and acquisitions. This involves complying with norms relating to capital adequacy, lending undertakings, exposure norms, and other regulatory norms.
Transition and Integration
Once the takeover is done, the acquiring entity should ensure the seamless transition and syncing of the acquired NBFC into its operations. This involves catering to legal, operational, and cultural differences to achieve cohesiveness and maximize the benefits of the acquisition.
Reporting and Disclosure
The acquiring entity must comply with reporting and disclosure obligations imposed by regulatory authorities. This includes providing regular updates to the RBI and other stakeholders regarding the progress and outcomes of the NBFC takeover.
Conclusion – Pros and Cons of NBFC Takeover
The Pros and Cons of NBFC takeover is a delicate and compliance-intensive business move that should be fueled by field experts. Approaching without a well-thought strategy for an NBFC takeover can backfire severely and thus open the doorways to endless liabilities and risks.
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Read Our Article: How To Get NBFC License In India?
