Non-Banking Financial Company (NBFC) is one of India’s most well-known types of financial organisations. The NBFC sector contributes significantly to the GDP of the country’s economy. The RBI and other associated agencies establish rules and regulations, which are subject to change as a result of changing requirements and circumstances. It is critical for NBFC management to understand what to do and how to do it, and there is a strong requirement to stay current. It is also critical for NBFC owners to follow up with the NBFC yearly compliance checklist. If any NBFC is found to be in violation, they will face severe fines. It might potentially result in the termination of the NBFC license and the company’s liquidation. As you may have observed, on November 16, 2018, the RBI cancelled the registration of 65 NBFCs owing to non-compliance.

As financial institutions, NBFCs relate to a system of laws and regulations that are always evolving in response to shifting demands and circumstances. It is critical for NBFC management to understand what to do and how to accomplish it, and there is an urgent need to stay up with the current dynamic times.”

What is Merger?

A merger is a corporate strategy in which two or more firms join to form a single legal entity. Typically, firms that decide to join are of comparable size and scale of activities.

A merger unites two existing firms into one new company. There are several types of mergers, and organisations may opt to combine for a variety of reasons. Mergers are done to increase the size of a company, expand into new areas, or acquire market share.

Let’s take a look at the post-merger compliances.

What are post-merger compliances?

The following are concise descriptions of the key compliances that must be completed following the merger:

1. ROC Compliances (e-forms INC-28, SH-7, PAS-3)

• Both the transferor and the transferee firms must file the INC-28 within 30 days of obtaining the certified copy.
• INC 28 should be accompanied by a copy of the order as well as a declaration of permitted capital.
• The transferor businesses will be dissolved after the form is authorised.
• SH-7 must be filed within 30 days of obtaining the certified copy.
• There is no need for a general meeting, and a copy of the order should be attached to SH 7 in place of the members’ resolution.
• Once the authorised capital has been increased, a board resolution must be approved to consider allocation.

2. Intimations to/ Compliances under Regulatory Authorities like RBI etc.

• Income tax: Transferor enterprises must notify the relevant officials of the mergers by submitting a copy of the order. They should request that the file be transferred to the officials of the transferee company by the appropriate officers. Furthermore, transferor firms should relinquish their PAN cards and notify the TDS officers, as well as apply for the deletion of the TAN number and the transfer of TDS.

The transferee company must notify the relevant officer of the merger by filing a copy of the order. If the amalgamating company has unabsorbed loss or cumulated business loss, the transferee company must meet the requirements set out in Sections 2(1)(b) and 72A of the Income Tax Act of 1961 in order to profit from it.

• GST: It should be emphasised that the transferor and transferee firms will continue to exist as distinct entities until the NCLT issues its ruling. In addition, transferor firms must apply for the surrender of their registration certificates as well as the transfer of the unutilized cenvat credit to the Transferee Company.

• RBI: If the Transferor Company, Transferee Company, or both are NBFCs, a copy of the order will be served.
• Treasury under the Stamp Act: In the case of the transfer of immovable property/ies from the Transferor Company to the Transferee Company, a stamp duty of 0.05 percent is levied.

3. Aspects related to Accounting

The following are examples of post-merger accounting compliances:

1. Changing the immovable properties;
2. Assets are transferred into the name of the Transferee Company.
3. The transferor firms’ bank accounts should be transferred to the transferee company.
4. Debtors must be informed of the merger.
5. Changes to the arrangements entered into by the transferor firms, such as leases, rental agreements, and so on;
6. Depositories must be informed when shares, securities, or mutual funds are transferred in the name of the Transferee Company.
7. After contacting the government authorities, transfer any licenses to the Transferee Company.
8. In terms of obligations, loan financiers and creditors should be notified of the merger. Maintain a record of any pending lawsuit, as well as any contingent obligations.
9. Please keep in mind that the assets and liabilities of the Transferor Companies will be transferred in the books of accounts as of the designated date, necessitating a restatement of the Transferee Company’s financial statements. Adjustments will be made in the Transferee Company’s books to account for any differences in the accounting policies used by the Transferor Companies and the Transferee Company. It is recommended that the transferee corporation submit an amended Income Tax Return.

Conclusion

Post-merger compliance is critical in order to achieve the intended results following the merging of two firms. You should guarantee that such compliances are carried out on schedule and with sufficient care so that the combined business achieves the intended objectives. As stated at the outset of this article, firms may merge for a variety of reasons, including achieving economies of scale, increasing market share, gaining technological expertise, and so on. If the merger procedure and subsequent compliances are not carried out in a planned manner, the merger’s goal may be failed.

Since then, the RBI has used a stringent enough procedure to evaluate the financial stability of amalgamating/merging organisations like private banking firms, public-sector banks, and NBFCs (unlisted or listed). In light of the current cases and instances in the Indian financial sector, the RBI has already decided to operationalize ‘unified departments for supervision and regulation’ of commercial banks, urban co-operative banks (UCBs), and non-banking financial companies (NBFCs), which will take effect on November 1, 2019.

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It is mandatory to obtain an NBFC Registration Certificate or NBFC License from the RBI (Reserve Bank of India) since no NBFC may conduct business in India without the certificate. It must be registered or established under the Companies Act of 1956 or 2013 and have a NOF of at least Rs. 20 million for a systemically important one. In contrast, for non-deposit taking non-banking financial companies that do not accept/hold public deposits, the RBI consents to a NOF of $5 billion or more based on their current audited balance sheet. In this article, we will go over the NBFC merger procedure as outlined in the Companies Act of 2013.

What are Non-banking finance companies?

Before we go into the process of NBFC Merger, let’s first define NBFC. An NBFC, or Non-Banking Financial Company, is a finance-related company registered under the Companies Act 1956 or 2013 that makes loans and advances, acquires shares/bonds/debentures/stocks/securities issued by local authorities or the government, or other marketable securities of a similar nature, hire-purchase, chit business, leasing, and so on.

However, it does not include any organisation whose primary business is agricultural, industrial activity, the sale/purchase of any commodity other than securities, the provision of any services, or the purchase/construction/sale of immovable property.

A brief note on NBFC Merger

A merger is the union of two firms that results in the formation of a new company. A merger is a corporate strategy in which two firms or two Non-Banking Financial Companies join to form a new one in order to strengthen both organisations’ financial and operational capabilities. The acquiring business can make the most of target companies’ equity shares, or the other acquired company might give up the majority of its shares to the acquiring company. According to the RBI (Reserve Bank of India), only Non-Banking Financial Companies (NBFCs) that have been registered under the Companies Act, 2013 can engage in NBFC Takeover.

Mergers Come in a Variety of Forms

• Vertical Merger: A merger of firms that operate in the same supply chain. This sort of merger involves the combining of firms as well as a company’s distribution and manufacturing processes. The reasons for this combination include improved information flow and supply chain management, increased quality control, and merger synergies. In the year 2000, Time Warner and America Online completed a substantial vertical merger. Because of the various operations of each business in the supply chain, the merger was classified as a vertical merger.
• Horizontal Merger: It is a merger of firms that are in direct competition with one another. These mergers are done to acquire market power, i.e., market share, to take advantage of economies of scale, and to capitalise on merger synergies. One of the most well-known examples of this type of merger was that between Compaq and HP in 2011. The successful merger of these two entities or corporations generated a global technology leader worth more than 87 billion US dollars.
• Market-Extension Merger: It is a merger of firms that provide comparable products or services but operate in different markets. This combination intends to get access to a massive market and, as a result, a massive client base. For example, RBC Centura’s 2002 merger with Eagle Bancshares Inc. was a market-extension transaction that benefited RBC’s increasing operations in the North American market. Tucker Federal Bank, one of Atlanta’s major banks with over 250 employees and 1.1 billion dollars in assets, was owned by Eagle Bancshares.
• Product-Extension Mergers: This is a merger of firms that sell comparable goods or services and operate in the same market. The combined firm may group its goods together and get access to more clients by utilising a product-extension merger. It is critical to understand that the commodities and services provided by both businesses are not similar, yet they are linked. The objective is that they share distribution channels and common/related manufacturing processes or supply chains. The combination of Broadcom and Mobilink Telecom Inc., for example, is a product-extension merger. Two firms operate in the electronic industry, and the ensuing merger allowed them to combine technology. The acquisition allowed Mobilink’s 2G and 2.5G technologies to be combined with Broadcom’s 802.11, Bluetooth, and DSP solutions. As a result, two firms or entities can sell items or things that balance each other out.
• Conglomerate Merger: This is a merger of two completely unconnected corporations or entities. 

Conglomerate Mergers are classified into two types:

1. Pure Conglomerate Merger: This type of merger combines firms that are unconnected and operate in separate marketplaces.
2. Mixed Conglomerate Merger: This type of merger comprises firms who want to expand their product lines or target markets.

The most important risk in this merger is the instant shift in company operations that will occur as a result of the merger because the two organisations or firms operate in completely separate markets and supply unrelated goods or services. The merging of ABC (American Broadcasting Company) with The Walt Disney Company, for example, was a Conglomerate Merger. ABC is a commercial broadcast television network in the United States (News & Media Company), whereas Walt Disney Company is an entertainment company.

What are the advantages and disadvantages of NBFC Merger?

The following are some advantages and disadvantages of NBFC merger in India:

Advantages

1. It serves to provide economies of scale, aids in the development, and competes with government and multi-national banks in order for them to apply for bank licenses later on.
2. NBFC Merger saves time and money that would otherwise be necessary to start an NBFC on its own.
3. They also provide tax advantages.
4. They assist in providing adequate fuel to compete with traditional banks; they assist in gaining market share, expanding goodwill, and lowering NPAs (Non-Performing Assets).

Disadvantages

1. Because of the massive scale of NBFC firms, there are functional changes.
2. They may generate conflicts among personnel as a result of an organisational merger;
3. there is always an operational risk, and management issues cannot be disregarded.

Things to Keep in mind Before an NBFC Merger Under the Companies Act of 2013.

Before embarking on the process of NBFC merger, keep the following factors in mind:

• A takeover of an NBFC is a critical strategy to expand the business. It is fantastic to get through for those companies who do not register Non-Banking Financial Companies; nevertheless, caution must be used before beginning takeovers.
• Due Diligence is required to do a thorough investigation into the backgrounds of target businesses.
• Before acquiring a business, it is important to verify by creating a good checklist of many elements that demand a comprehensive examination for greater alignment with the key goals for this Takeover and evaluate whether this new target company would help in reaching those objectives.
• It is critical to estimate the financial position of the company that the acquiring firm wishes to acquire and to cautiously assess and evaluate the maximum amount of payment that would be required for Takeover based on cash flows & verify the ideal payment mode as the company will reject the offer below market value, so it is preferable to approximate the correct pricing before offering the deal.

What is the Process of NBFC Merger as per Companies Act 2013

According to the Companies Act of 2013, the following is the procedure of NBFC Merger:

1. Sign the Memorandum of Understanding and Get BOD Approval

• When both firms sign the MOU, the NBFC Merger procedure begins (Memorandum of Understanding). It states that both firms are prepared to enter into a Takeover Agreement. The directors of the Target Company and the Acquiring Company sign them jointly. The MOU outlines each company’s requirements and obligations, and after the MOU is accepted, the Acquiring Company pays the Target Company the amount of token to finalise the transaction.
• The combination has been approved by the bank.
• Prepare all director paperwork in businesses for KYC.
• Establish a business strategy.

2. RBI Approval

• If a company’s management changes after the acquisition, RBI must approve the change. For example, if a Non-Banking Financial Company’s ownership differs by more than 26 percent (after the Acquisition) of the paid-up equity capital.
• If an NBFC is taken over, the management of around 30% of the number of directors is likely to change.
• If the shareholding change is due to a repurchase offer or the rotation of directors, RBI approval is not required.

3. Submit Document to RBI

• Particulars about the prospective directors or shareholders.
• Information about the funding sources.
• Bankers’ reports for directors or shareholders
• Affidavit and declaration of non-criminal history.
• Financial history during the previous three years.

4. Received RBI Approval

• Hold a board meeting to consider the public notification, date, and time of the EGM.
• After thirty days following RBI clearance, publish a public notice in two languages (English is required) inviting any objections to the proposed arrangement. Before taking over, the following tasks must be completed:

1. Obtain a No-Objection Certificate (NOC) from your creditors.
2. Enters into a formal agreement for the purchase of a share, a management transfer, or the transfer of shares or an interest in an NBFC.
3. The RBI’s regional office has been notified.
4. Company valuation in accordance with Reserve Bank of India guidelines.
5. Asset transfer; they are in accordance with contractual agreements.

• After 30 days or a month from the signing of the official agreement, publish a second public notice in two languages; the notice should include the following information:
  1. a desire to transfer or sell ownership or control;
  2. All pertinent information on the transferee;
  3. Reasons for NBFC Takeover Agreements/transfers of ownership or control

5. NCLT Approval:

Submit an application to NCLT for approval of a merger or amalgamation scheme under Sections 230-233 of the Companies Act 2013.

 The following records should be submitted to NCLT for approval:

1. Application to the NCLT for the holding of the general meeting.
2. The Tribunal will issue an order calling a shareholder meeting.
3. The business will convene shareholder meetings to seek approval for the merger.
4. Submit a certified copy of the most recent audited balance sheet and profit and loss statement.
5. SEBI permission, in the case of a listed firm.
6. Prepare a descriptive statement for the merging strategy.
7. Creditors are listed in order of their outstanding debts.
8. The liquidator’s report has been authorised.
9. Obtain a value report.
10. Notification of statutory procedures initiated by or against the firm.

In the application, NCLT may check for the following observations:

1. They have the right to ask questions on the material statements in the bank’s most recent financial status auditor report, as well as any other observation.
2. Those who attended the meeting fairly represented the creditor/member or any class of them.
3. If at all feasible, the programme should be in the public interest.
4. The programme is in the best interests of the firm, its members, and its creditors.

Conclusion

NBFCs play an important role in the financial industry by filling the gap created by the traditional banking system. By utilising cutting-edge technology, these Non-Banking Financial Companies are completely altering the banking experience. The increasing use of technology has made the entire experience of NBFCs for its consumers extremely simple. NBFCs’ many features, including variable duration and interest rates, use of financial technology, and so on, enable them to establish a significant client base.

Takeovers and mergers are on the rise and are critical drivers of exponential growth. It has quickly become one of the most important sources of corporate expansion. NBFC Takeover provides a ray of hope for those companies that are unable to establish their own NBFC.

Furthermore, with adequate advice, the whole formation of an NBFC becomes quite straightforward for corporations seeking NBFC registration. If you want to set up an NBFC, our team of professionals at MUDS will walk you through the whole procedure. Please contact Muds Management if you have any questions about NBFC incorporation or any other NBFC-related subject.

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