NBFCs – Mergers and Demergers
A Non-Banking Financial Company (NBFC) is a company which is registered under the Companies Act, 1956 /2013. An NBFC is engaged in the business of loans and advances, investment share, assets financing, debenture or other marketable securities, leasing, hire-purchase and insurance business.
NBFCs provide working capital loan and credit facilities to invest in properties.
– Isha Malik (Company Secretary, MUDS Management Pvt Ltd)
The following paragraphs explain about the aspects of merger and demerger of NBFCs.
MERGER of NBFCs—
- A merger is a deal to combine or unite two or more existing companies into a new NBFC.
- Merger is a corporate strategy to enhance the operational and financial strengths of the merging NBFCs.
- Acquiring company is a single existing company that purchases the majority of equity shares of one or more companies.
- Acquired companies are those companies that surrender the majority of their equity shares to an acquiring company.
- Economy of scale – Increases loan size of the NBFC, and can reduce the administrative cost.
- Mergers of NBFC can help in growing and competing with the government and MNC Banks and later can move forward with a Bank License.
- The merger of NBFCs allows the acquirer to avoid many of the costly as well as time-consuming aspects of asset purchases, software development, such as the assignment of leases and bulk-sales notifications.
- Accomplish tax-free status for both parties.
- The merger of NBFC can also help to compete with the Banks.
- Increase in Market share.
- Increase goodwill and reduce NPA.
- The larger scale of merged NBFC business may create challenges in operational management.
- Merger could create distress amongst the employees of each NBFC
- It may increase the amount of NPA & operating Risk.
- Management challenges- Managers need to decide as to who will be in charge after they join forces.
Merger Steps and Procedure
- Sign the MOU and get approval from Board of Directors.
- Seek Consent from Bank concerned for the proposed merger/ amalgamation.
- Prepare KYC Documents of Directors & Companies.
- Business Plan and Projection.
- Seek RBI Approval for proposed Merger of NBFCs.
- Issue Public notice after RBI Approval.
- File an Application to National Company Law Tribunal under Section 230-233 of Companies Act, 2013 seeking the order for mergers or amalgamations with other companies or NBFCs.
DEMERGER of NBFCs—
Section 2(19AA) of the Income-tax Act defines demerger as under:
‘Demerger’ in relation to companies means the transfer, pursuant to a scheme of arrangement under section 391 to 394 of the Companies Act, 1956 by a demerged company of its one or more undertakings to the resulting company in such a manner that:
- All the property of the undertaking, being transferred by the demerged company, immediately before the demerger, becomes the property of the resulting company by virtue of demerger;
- All the liabilities relatable to the undertaking, being transferred by the demerged company, immediately before the demerger, become the liabilities of the resulting company by virtue of the demerger;
- The property and the liabilities of the undertaking or undertakings, being transferred by the demerged company are transferred at values appearing in its books of account immediately before the demerger;
- The resulting company issues, in consideration of the demerger, its shares to the shareholders of the demerged company on a proportionate basis (except where the resulting company itself is a shareholder of the demerged company).
The shareholders holding not less than 3/4th in value of shares in the demerged company (other than shares already held therein immediately before the demerger, or by a nominee for, the resulting company or, its subsidiary) become shareholders of the resulting company or companies by virtue of the demerger; otherwise than as a result of the acquisition of the property or assets of the demerged or any undertaking thereof by the resulting company.
– Shweta Gupta (Founder and CEO, MUDS Management Pvt Ltd)
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