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Definition
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FAQ

NBFC


Non-Banking Financial Company or NBFC is an incorporated company that is a financial institution having primary business as loans and advances, acquisition of shares, stocks, bonds, and other marketable instruments, insurance business, or chit business, etc. These companies are known for introducing a wide range of products, hassle-free finances, and ease of access to the unbanked sector. Their decisions are quicker, involves much less paperwork, prompt disbursal of loans, broader reach, and the eligibility requirements are not as rigid as the organized banks. Due to all these reasons and personalized products, more customers prefer transacting with NBFC than banks.

All NBFCs are regular companies, registered under the Companies Act of 1956 or 2013. They must not be involved in any agricultural or industrial activities, or sale, purchase or construction of immovable property, etc.
In India, NBFCs have made finance accessible to rural and semi-urban parts of the country. Providing easier working loans and credit facilities, especially where most banks either do not finance due to their stringent rules or have absolutely no reach.

NBFC Takeover


You can own an NBFC in India by either

a) Get a New Registration with RBI, or
b) Take-over an existing one.

To make a new company and then an NBFC means building a customer base, marketing the new business, hiring employees and establishing cash flow. All from scratch. This takes time and extra effort.
Getting a new NBFC registered takes approximately 3-5 months in the registration process only.
Whereas acquiring an existing NBFC takes around 2-3 months. And the time required to design and formulate the framework of the organization is saved.
The term NBFC Takeover implies buying an existing NBFC by another company or another NBFC. The takeover can be undertaken only if both, the Target as well as the Acquirer, are already registered under the Companies Act.
However, it may be a case of a friendly takeover. That is when the seller has put his company on sale. The terms are based on mutual understanding.
Or it may be hostile. When the Acquirer deliberately plans to take control of the other entity. Acquires shareholding in the Target Company without its knowledge.
In both these situations, the balance sheet of the Target NBFC has to be nullified for its assets and liabilities to enable the Acquirer to take hold of its management.

Check if Prior Approval from RBI Required?


To Takeover an NBFC, check first whether prior approval from the RBI is required or not? Or is the transaction is exempt? Certain situations have been specified by RBI when this transaction needs its approval. For situations not matching these conditions, no such prior approval is needed.

Following are the situations of NBFCs arrangements that have been mentioned as requiring RBI’s approval before proceeding:

  • Whenever a takeover of NBFC takes place. Whether it involved changes in the management or not.
  • The shareholding structure has changed. With at least 26% of the paid-up equity capital of NBFC being acquired or transferred. Such a change may have happened over a period of time.

Except for cases when a competent court has approved the buyback of the shares or reduction in the capital.

  • The structure of the management has altered. By replacing over 30% of the Directors.
    This 30% is excluding Independent Directors or is part of a regular rotation of Directors.

What is Required to Apply for Prior Approval


If any of the above situations are being met for your NBFC takeover, then prior approval from RBI needs to be applied for. This application, along with the Declarations, needs to be made on the letterhead of the company. And the following documents are to be attached:

  1. Sources of funds that are used for acquiring shares of the Target NBFC by the Acquirer.
  2. Details about the proposed Directors/shareholders. Their ID proof, Address proof, Education, Qualifications and Experience proof.
  3. Declaration by all the proposed Directors/shareholders stating their non-association with any organization involved in financial activities but was denied a Certificate of Registration (CoR) by the RBI.
  4. Declaration by all the proposed Directors/shareholders, of not having a criminal background and Non-conviction u/s 138 of the Negotiable Instruments Act.
  5. Declaration affirming their non-association with any entity accepting deposits, by all the proposed Directors/shareholders.
  6. Banker’s Report on the proposed Directors/ shareholders.

This application is to be submitted to the Regional Office of the DNBS (Department of Non-Banking Supervision), under whose jurisdiction the Registered Office of the NBFC is located. RBI may send some queries or ask for clarifications and/or proofs for details mentioned in the application. All such queries must be answered, and well in time, so that your application with RBI doesn’t get backtracked and delayed. Generally, this approval takes about 1-3 months, differing according to the case.

Just note that in case any required document is missing while applying, the application shall be considered null and void.


Prior Public Notice About Changes


On getting the approval from RBI for the takeover, the general public has to be notified by publishing the planned takeover. In at least one leading national and one leading local newspaper, at least 30 days before such sale of shares, or transfer of control, is planned to take place. Whether the shares are being transferred or not. The terms laid out for such publications are:

Process of NBFC Takeover


Peer to Peer Lending can be classified into following types:

  • MOU (Memorandum of Understanding):  For buying an NBFC, at first, an MOU is to be signed with the Target Company. This specifies that both parties are entering into a takeover transaction. It is to be signed by the Directors of both the companies i.e. Acquirer Company and Target Company. And at the time of signing MOU, token money is to be handed to the Target Company by the Acquirer, confirming the transaction. MOU defines the responsibilities and requirements of each party.
  • Convening Board Meeting: After the MOU has been signed, a Board Meeting is to be convened in both the companies to address the following issues;
    1. Date, timing, place of assembling Extra-Ordinary General Meeting (EGM).
    2. During which the required resolutions to take over an NBFC will get passed.
    3. Assigning the task and responsibility of replying to the queries from RBI about the takeover scheme. This person shall be mentioned while applying with RBI.
  • Public Notice: After prior approval for takeover has been taken from the RBI, the public has to be notified, to invite any objection of the public on the transaction. This notice is to be published in two leading newspapers within 30 days of approval from RBI.
  • Share Transfer Agreement: Once 31 days are over of the publication in the newspapers, the Share Transfer Agreement shall be signed and the remaining consideration to be paid by the Acquirer.
  • NOC from Creditors: An NOC (No Objection Certificate) from all the creditors of the Target Company shall be taken before the transfer of business can take place.
  • Assets Transfer: If no objections have been received from the public or creditors, and the RBI’s approval for the takeover has been received. Then the assets shall be transferred. But the transfer should not violate any clause of the agreement.
  • Evaluation: Target Company gets evaluated, in accordance with the rules specified by RBI. The stipulated technique for evaluation is DCF i.e. Discounted Cash Flow Method. This calculates the net present value of the entity. Later, a certificate shall be taken by a certified and practicing Chartered Accountant briefing the method adopted for valuation.
  • Notice to Regional Office: Nest step is to submit an application to the Regional Office of RBI. It must be on the letterhead of the company. RBI must also be intimated of all the changes in the management structure of the Target NBFC after the takeover, continuously. The application mentions:
    1. ID-proof, address-proof, and qualifications of the proposed directors and shareholders.
    2. Shareholders acquiring the NBFC and their source of funds.
    3. Declaration by the Directors and the shareholders that they are not associated with any unregistered entity which is accepting public deposits.
    4. Declaration by the Directors that no criminal proceedings have been initiated against them in the past or are pending against them in any court of law.

Benefits of NBFC Takeover


Buying an existing NBFC saves you time that is essentially required for setting up any new business when compared to getting a new one registered. Besides avoiding the troubles faced in starting a business fresh, below are a few more advantages of an NBFC takeover:

  1. 1. Increase in profitability.
  2. 2. Reduction in competition.
  3. 3. Rise in sales/revenue.
  4. 4. Business expansion with more distribution network and customer base.
  5. 5. A newly set-up business may not have a positive cash flow for two years.
  6. 6. If you buy an existing business, you are buying the history of the business. There are staff, equipment, and premises already in place.
  7. 7. There will be economies of scale, of handling two or more companies together.


Important Points


Before the process of taking over an NBFC is initiated, you must:

  • Ensure that all the documents that are to be submitted to the RBI and other authorities are legally genuine.
  • Examine all previous records, such as liabilities, past financial statements, cases pending against the company (if any), court cases pending against the company (if any), etc. And all other details that may affect the decision of NBFC takeover.
  • Review all the important documents such as Certificate of Incorporation (COI), PAN, GST, and other registrations taken during the ongoing tenure of the company.
  • Check the KYC of the Directors, investors, promoters, currently working with the Target NBFC.

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Frequently Asked Questions


A Non-Banking Financial Company is that kind of financial institution which facilitates financial services but does not require a banking license. An NBFC is:

  • a financial entity which has been incorporated as a company.
  • a non-banking institution that is a company with a principal business of advances & loans, receiving deposits in some form, etc.
  • such other organization which is registered under RBI as an NBFC.

NBFCs, majorly, serve customers from rural and semi-urban sectors. That are, generally, not financed by the more organized banking sector, that have more stringent rules for financing. The stipulations demanded by NBFCs for extending loans are much more flexible and convenient. NBFCs may cater specifically to a certain sector and develop an advantage in the area of data.

  • First, choose the NBFC to acquire.
  • Do the due diligence of the Targeted Company.
  • Choose whether you want to buy the NBFC by taking over its management or its shareholding.
  • Publication of the planned transaction in at least 2 leading newspapers.
  • Apply to RBI for approval, with the application & the required documents.
  • Publish again in at least 2 leading newspapers.
  • Resolve & dispose of the queries or objections, if any.

The convenient option would be to get registered with LegalRaasta. Let us help you out with carrying RBI’s instructions to the letter.

Before buying an NBFC, first, check whether prior approval from RBI is required for this transaction. Or is the deal exempt from this requirement. RBI clearly mentions certain conditions when its approval is required, before initiating the process. They are as following:
    • Whenever an NBFC changes hands. Whether any changes in the management structure have been made or not.
    • Shareholding structure has changed. When more than 26% of the paid-up equity capital of NBFC has been bought or transferred. This may have happened over some time.

    (Except if the buyback of the shares or reduction in the capital has the approval of a competent court.)

    • The management structure has been changed. By changing at least 1/3rd or 30% of the Directors.
      (30% is excluding Independent Directors, and approval from RBI is not required if the change is the result of a rotation of Directors.)

The application to RBI for the proposed transaction of purchasing an NBFC is to be made on the letterhead of the company to Regional Office of the DNBS (Department of Non-Banking Supervision), under whose jurisdiction, the registered office of the NBFC is located. Along with the below documents:
1. Sources of funds that are to be used in acquiring shares of the Target NBFC.
2. Details about the proposed Directors/shareholders/members. Their ID/Address proof, Education, Qualifications and Experience proof.
3. Declaration by the proposed Directors/shareholders/members about their non-association with any organization, involved in financial activities, that was earlier denied a CoR by the RBI.
4. Declaration of not having a criminal background and Non-conviction u/s 138 of the Negotiable Instruments Act by the proposed Directors/shareholders/members,
5. Declaration by the proposed Directors/shareholders/members declaring they have not been associated with any unregistered entity accepting deposits,
6. Banker’s Report of all the proposed Directors/ shareholders.Or you can get in touch with LegalRaasta. Allow us to take-over the reins of your planned NBFC takeover. We’ll plan the step-by-step approach for this transaction to take place without facing any unrequited hassles.

No, all NBFCs are not allowed to accept public deposits. Only those NBFCs which are permitted by RBI to hold or accept public deposits, can. To apply with RBI to be allowed to hold public deposits, they must have an investment-grade rating of up to 1.5 times of its NOF.

Section 45-IB of the RBI Act, 1934 requires the minimum ratio of liquid assets, outstanding as on the last working day of the second previous quarter, must be 15% of public deposits. This 15% mean at least 10% has been invested in approved securities by the NBFC. And the balance 5% could have been invested in unencumbered term deposits with a scheduled commercial bank. The liquid assets may include government securities, bonds, or term deposits with any scheduled commercial bank.

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