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.

Advantages

1. Economy of scale – Increases loan size of the NBFC, and can reduce the administrative cost.
2. Mergers of NBFC can help in growing and competing with the government and MNC Banks and later can move forward with a Bank License.
3. 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.
4. Accomplish tax-free status for both parties.
5. The merger of NBFC can also help to compete with the Banks.
6. Increase in Market share.
7. Increase goodwill and reduce NPA.

Disadvantages

1. The larger scale of merged NBFC business may create challenges in operational management.
2. Merger could create distress amongst the employees of each NBFC
3. It may increase the amount of NPA & operating Risk.
4. Management challenges- Managers need to decide as to who will be in charge after they join forces.

Merger Steps and Procedure

1. Sign the MOU and get approval from Board of Directors.
2. Seek Consent from Bank concerned for the proposed merger/ amalgamation.
3. Prepare KYC Documents of Directors & Companies.
4. Business Plan and Projection.
5. Seek RBI Approval for proposed Merger of NBFCs.
6. Issue Public notice after RBI Approval.
7. 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:

1. 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;
2. 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;
3. 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;
4. 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).