What is NBFC takeover?

NBFC stands for Non-Banking Financial Company registered under the Companies Act. Its main business activity is giving loans and advances, assets financing, investing in shares, debentures and other marketable securities. It also provides working capital loans and credit facilities.

Types of NBFCs

• Deposit accepting NBFC.
• Non-Deposit accepting NBFC.

In the whole corporate scenario around the world mergers and takeovers are strongly making its presence. NBFCs are also coming under the impact of these compromises and arrangements. For this,  lays down the procedure for the takeover of NBFCs.

Takeover of NBFC implies purchase of one NBFC by the other company. Only registered NBFC under the Act shall undertake to acquire the control of another NBFC.

Under this process mainly two companies are involved:

• Target Company

It is a type of company which is being targeted to be acquired by the other company.

• Acquirer Company

It is a type of company which is acquiring the target company.

NBFC takeover can be done in two different ways:

Friendly Takeover- this form of takeover is based on the mutual consent of both the acquirer and target companies. During a friendly acquisition, an acquirer company simply offers the target company for being acquired, and the later willingly accepts its offer.

Hostile Takeover- under hostile takeover, an acquirer company tries to purchase the target company secretly. Generally, this type of NBFC takeover happens when the board of directors of a company shows resistant to accept the offer of the takeover.

Requirement of Prior Approval of RBI in of NBFC takeover

Minor changes in the management or control are outside the purview of the takeovers whereas, in case of significant changes, it is required to obtain prior approval of the RBI.

Prior approval of Reserve Bank of India is required under the following conditions:

• A company requires RBI approval if there may or may not be a change in management after the acquisition.
• Secondly, it applies to a scenario in which any variance in the shareholding of an NBFC turns into 26% acquisition of the paid-up equity capital.
• Further, while taking over a listed NBFC, an acquirer must procure RBI approval.
• Get approval from RBI if the NBFC takeover tends to change management of about 30% of the number of directors.

RBI Regulations in relation to NBFC takeover:

RBI has specified following norms which are required to be followed by NBFC’s:

• Takeover or acquisition of an NBFC requires a prior approval of RBI whether there is a change in management or not.
• Approval should be a written approval.
• Prior approval of RBI will be required in case of acquisition or transfer of shareholding for more than 10%.
• No RBI approval will be required in case there is a change in shareholding for more than 26% for the reason of buyback/reduction in share capital but this reduction/buyback should have been approved by the competent authority.
• In case of a change in the directors of the company more than 30% than the prior written approval shall be required.
• Change in direction of the company requires a prior public notice at least 30 days prior to the announcement of such change.

Prior approval of Reserve Bank of India is not required under the following conditions:

• In case shareholding goes beyond 26% due to the buyback of shares or reduction in capital by obtaining the approval of a competent court.
• Change in the management by 30 % inclusive of Independent Directors or by rotation of the directors in Board.

Application for Prior Approval of RBI

If you fall into the category of prior approval, then an application must be made to the RBI containing the following details:-

• Information on Proposed directors and shareholders.
• Also, give information about the sources of funds which your company’s proposed shareholders will utilize to acquire shares in an NBFC;
• Bankers’ Report for proposed shareholders/ directors;
• A declaration which specifies non-association of your company with any other entity that has denied a Certificate of Registration by RBI.
• Further affix a statement, declaration, and affidavit of non-criminal background. As well as provide non-conviction proof under section 138 of the Negotiable Instruments Act by all the proposed directors/shareholders.

NBFC Takeover Procedure

• Signing Of The Memorandum of Understanding
• Convene Board Meeting
•  Board Meeting shall be convened in both the companies to discuss following matters:
  • To fix day, date, time and place of convening Extra Ordinary General Meeting.
  • For passing a resolution in EGM.
  • In relation to takeover scheme, reply to the query of RBI.

• After obtaining the RBI approval, public notice shall be made to invite any objection of the public which is taking place due to take over in two newspaper within 30 days of such approval.
• Signing of Share Transfer agreement
• NOC from Creditors
• Transfer of Assets
• Valuation the entity
• Notice to Regional Office
• After the process of valuation and approval of the takeover scheme, NBFC shall submit an application to the Regional Office of RBI.