Takeover of an NBFC
The takeover of an NBFC is a strategic business move that requires considerable money and adherence to myriad compliances. Ever-tightening RBI norms have made life difficult for most NBFCs, often leading to temporary or permanent halts of business activities. When underperforming NBFCs decide to wrap up their business journey, they have only one option to sell their stakes and assets, resulting in a complete transfer of ownership to another firm.
While this is a tough decision for a struggling company, it presents an unprecedented growth opportunity for another firm. This is where the concept of an NBFC takeover comes into play. It refers to a strategic business move where an operational NBFC formally shares its intention with the acquiring firm regarding the takeover. An NBFC takeover can take weeks or even months to come into effect. With that being said, let’s delve into what is required to ensure a seamless takeover of an NBFC in India.
Pre-Approval of RBI for Ensuring the Takeover of an NBFC
An NBFC takeover is an extensive and delicate legal matter requiring in-depth field expertise and experience. It usually requires pre-approval from the RBI before coming into effect. Securing RBI approval becomes mandatory for ensuring the takeover of an NBFC only if:
- A change in the NBFC’s shareholding results in the acquisition or transfer of 26% of the paid-up capital, including gradual increases over time.
- 30 percent of the directors are subjected to change to streamline the management. Some actions should be publicly intimated via a notice 30 days prior.
Note: RBI pre-approval is not necessary under the following conditions:
- The shares’ buyback or capital reduction by securing the court’s consent makes shareholding soar past the 26% mark.
- The management has undergone changes by 30%, spanning independent directors or via directors’ rotation on the board.
Paperwork to Consider for the Takeover of an NBFC
The NBFC takeover requires filing an application with the RBI and submitting documents. Make sure to keep the following paperwork handy before application filing:
- A statement confirming that none of the proposed directors or shareholders have a criminal background or have been convicted under Section 138 of the Negotiable Instruments Act.
- Details about the proposed directors and shareholders.
- A declaration from all proposed directors and shareholders that they are not associated with any entity that accepts deposits.
- A report from the bankers concerning the proposed directors and shareholders.
- Information on the sources of funds that the proposed shareholders plan to use for acquiring shares in the NBFC.
- A declaration from all proposed directors and shareholders that they are not associated with any entity that has been denied a Certificate of Registration by the RBI.
Prior Public Notice and Further Steps Concerning the Takeover of an NBFC
Staying transparent with every business move, including takeovers or selling ownership, is a necessity for NBFCs. When going for a takeover or sale of assets, every entity must release a notice in a newspaper, in English or a regional dialect, reflecting the imminent strategic move and its details such as:
- Particulars of the transferee
- Intention regarding the sale or transfer of ownership/control
- Reasons concerning the sale or transfer of ownership/control
Once this happens, the following events come into play:
- A Share Purchase Agreement is drafted where required conditions are incorporated as per the parties’ requirements. The agreement encloses the parties’ signatures.
- Transfer of management is executed.
- The remaining consideration is paid off within a month of the public notice or as per conditions mutually agreed upon by the parties.
- The fulfillment of these conditions results in the transfer of takeover funds into the acquiree firm’s account. This amount shall undergo liquidation and liabilities will be addressed.
- Further, the acquirer will receive a clean balance in the company’s bank estimated based on the net worth as of the date of the business transaction.
Procedure Concerning the Takeover of an NBFC: 8-Step Guide
The NBFC takeover process primarily involves the following steps:
1. Memorandum of Understanding:
The first step involves signing the legal document, the Memorandum of Understanding, with the acquiree firm. It reinforces the intention and norms regarding this strategic business move, confirming that both parties are ready to delve into a transaction. It requires the signature of both parties and the transfer of token money from the acquirer’s account to the acquiree.
2. Convene Board Meeting:
After signing the MOU, both companies must convene a board meeting where the decision concerning the EGM shall be taken. The members will decide on the EGM’s date and time. The EGM will be where the company finalizes its decision for takeover and also responds to RBI’s queries, if any.
3. Public Notice:
After securing the RBI’s consent, the company will release a notice in the newspaper regarding its intention to take over. The notice shall remain active for 30 days to invite any objections from the public.
4. The signing of the Share Transfer Agreement:
If the notice attracts zero objections after the given timeline, both parties can proceed to sign the Share Transfer Agreement. When this happens, the acquirer firm pays the token money to the target NBFC. The remaining transaction cost will be paid based on the terms mutually agreed upon by both parties.
5. Securing NOC from Creditors:
This step requires the target company to secure the NOC from its creditors, reflecting debts and financial implications. The acquirer firm would need this document to advance in the process.
6. Transfer of Assets:
This step is critical as it reinforces the actual business transaction. Based on what is cited in the Share Transfer Agreement, the assets’ transfer shall take place.
7. Valuation of the Entity:
RBI norms shall be considered for the estimation of the company’s valuation. The most common method used for this purpose is known as the Discounted Cash Flow (DCF) Method. The method accurately represents the entity’s net present value. Post successful estimation, the CA must substantiate the method used for estimation in a certificate.
8. Notice to Regional Office:
The final step involves submitting an application to the Reserve Bank. The applicant firm must use a valid letterhead for this purpose. While filing an application, ensure to include the following particulars:
- A declaration from directors confirming no criminal proceedings have been initiated against them in the past or are currently pending in any court.
- Information about the sources of funds for the acquirer.
- A declaration by shareholders and directors regarding their association with any unincorporated entity that is accepting deposits.
Conclusion
While striving for the takeover of an NBFC, the applicant firm encounters various legal implications, including MoU signing, securing creditor NOC, drafting share transfer agreements, performing fund transfers, etc. As it appears, an NBFC takeover is a compliance-intensive process and hence requires a professional approach. Companies can’t afford to make a single error as it could lead to application cancellation. To avoid such a mishap, follow the above guide or connect with a professional firm like Adviso, a one-stop avenue for your regulations and licensing woes.
Read Our Article: A Comprehensive Guide To The NBFC Registration Process
