With newer business models in this fast-changing competitive environment, there have been many changes in the operations, management, and regulations of NBFCs. As mergers and acquisitions are happening around the world throughout the corporate sector, the NBFCs have also come under the impact of these arrangements. With the growth of the NBFC sector in India in the last few years, there has been a big increase in the NBFC acquisition.
“For any major change in NBFCs, prior approval of the Reserve Bank of India (RBI) has been a requirement. In response to the representations submitted by the industry, the RBI has laid down certain procedures for the acquisitions of NBFCs.”
—Divya Gupta (Market Analyst, MUDS Management Pvt. Ltd)
Requirement of Prior Approval
Acquisition or any significant change in the management of NBFCs have to go through a procedure prescribed by the RBI. The following conditions make it necessary to take prior approval of the RBI:
- Any takeover or acquisition of control, that may or may not lead to a change in management,
- Any change in the shareholding of NBFCs, resulting in 26% acquisition/ transfer of the paid-up equity capital, including progressive increases over time,
- Any change in the NBFC management by more than 30% of the directors.
Application for Prior Approval
If the entity comes under the criteria of the above requirement for prior approval, the subsequent step necessary is to submit an application, on the letterhead of the company, for the grant of the aforesaid RBI approval.
The application is to be made along with the necessary documents which are as below:
- Information on the proposed directors/shareholders;
- Sources of funds necessary for acquiring shares by the proposed shareholders;
- Declaration by the proposed shareholders/ directors which states their non-association with any entity taking deposits;
- Declaration by the proposed directors/shareholders/ directors which states their non-association with an entity to which a Certificate of Registration by the RBI has been denied;
- Statement of non-criminal background and non-conviction under section 138 of the Negotiable Instruments Act by the proposed directors/shareholders;
- Bankers’ Report about the proposed directors/ shareholders.
The application for approval is to be submitted to the Regional Office of the Department of Non-Banking Supervision under whose jurisdiction NBFC’s Registered Office is located. All the queries by the RBI on the acquisition shall be replied in a timely manner in order to avoid any delay in the approval. In the normal course of business, the processing time of these applications for acquisition of NBFCs is three to four months.
Requirement of Prior Public Notice
“Whenever there is a situation of transfer of the ownership of NBFCs, it is necessary to give a public notice in a leading national and also a leading local newspaper minimum 30 days before such transfers come into effect.”
— Isha Malik (Company Secretary, MUDS Management Pvt. Ltd.)
The public notice shall indicate:
- the intention to transfer or sell the ownership/ control;
- the details of the transferee; and
- the reasons for such transfer or sell the ownership/ control
Once the above conditions are met, the Share Purchase Agreement is prepared and signed, and the management is handed over. If any consideration is remaining, it shall be paid off either within 31 days of the public notice or as per the mutual agreement of the concerned parties.
“Afterwards, the assets of the target entity, which is mentioned in the balance sheet, will be liquidated, and liabilities will be paid off. A clean bank balance in the name of a company will be given to the acquirer, and that will be calculated as per the net worth as on the date of the acquisition.”
—Shweta Gupta, Founder and CEO, MUDS