NBFC stands for Non-Banking Financial Company registered under the Companies Act. Its main business activity is giving loans and advances, assets financing, investing in shares, debentures and other marketable securities. It also provides working capital loans and credit facilities.
While retaining the basic compliance requirement, RBI is simultaneously making the business of NBFCs smoother. Smaller NBFCs have been liberalized from the RBI regulations whereas larger NBFCs have been continuously monitored and strengthened to bring them on a par with the global standards.
Merits and Demerits of NBFC takeover procedure
Merits:
- It will increase the profit of the target company.
- Decrease in competition in the market.
- Increase in revenue and sale.
- The economic scale will increase.
Demerits:
- Generally, the amount paid during the takeover process is less than the actual price.
- There can be a conflict between the management of the company i.e, a cultural clash.
- Cultural clash can lead to employee turnover and the morale of the employees also reduce.
- The liability will be on the acquiring company.
Types of NBFCs
- Deposit accepting NBFC.
- Non-Deposit accepting NBFC.
In the whole corporate scenario around the world mergers and takeovers are strongly making its presence. NBFCs are also coming under the impact of these compromises and arrangements. For this, Reserve Bank of India lays down the procedure for the takeover of NBFCs.
Takeover of NBFC implies purchase of one NBFC by the other company. Only registered NBFC under the Act shall undertake to acquire the control of another NBFC.
Types of NBFC takeover
- Friendly Takeover: Generally, these are the takeover which is done with the mutual consent of both the parties i.e acquiring company and target company. This type of takeover leads to an increase in the business sphere which leads to the growth of the business.
- Hostile Takeover: generally, this type of takeover is done by the acquiring by using different types of tactics by directly going to the shareholders or proxy fight to change the management. These are the takeovers that are without the mutual consent of the target company.
Parties involved in NBFC Takeover Procedure
- Acquiring Company: Generally, these are the company that aquires the other company by buying all the assets and liabilities of the company and become the new owner of that company.
- Target Company: Generally, these are the companies whose assets and liabilities are been acquired by the acquiring company
Procedure of NBFC Takeover
- Prior approval is required: Before the transfer/acquiring control of NBFC prior approval of RBI is required.
- Prior approval application: NBFCs have to submit an application to the bank, on the letterhead of the company to obtain approval. With the following documents:
- Information of directors/ shareholders.
- Source of funds of proposed shareholder acquiring a share in NBFC.
- Declaration of the directors that they are not associated with any company that is accepting deposits.
- Declaration of the directors that they are not associated with any company whose certificate of registration is rejected by RBI.
- Declaration of proposed shareholders/directors that they don’t have any criminal background and have done any offence under section 138 of Negotiable Instrument Act.
- Bankers report of the proposed directors/Shareholders.
Application is to be submitted to the regional office of the department of non-banking supervision under whose jurisdiction the registered office of NBFC is located.
- Public Notice: A public notice of at least 30 days before the transfer of control with or without the sale of share should be provided to the shareholders or the management of the company and should be given in the local or the regional newspaper where the company is located
- Memorandum of Understanding: After the approval of the RBI, the proposed company will sign a Memorandum of Understanding which states that both the company agreed mutually and entered into the agreement of takeover. It will be signed by both the acquiring company and the target company. MOU provides roles, responsibilities and requirements of each company. After signing MOU the token amount will be paid by the acquiring company to the target company.
- Call a Board Meeting: Then the company will call a meeting for the approval of MOU and the schemes related to the takeover.
- Sending scheme to the transferor company: After the approval of the scheme will be sent to the transferor company for consideration.
- Share transfer agreement will be signed: Share transfer agreement will be signed and the acquiring company will pay the remaining amount to the target company.
- NOC from Creditors: The target company will obtain NOC from the creditors and provide the certificate to the target company.
- Transfer of assets and liabilities: After obtaining NOC the transfer of assets and liabilities will take place and should not contravene any clause of the agreement.
- Valuation of entity: The cost assessment will be done with the technique of Discounted Cash Flow Method which is designed. The net present value of the entity will be evaluated. The CA will obtain a certificate briefing the method which is adopted for the valuation of the entity.
- Notice to dissenting shareholders: If acquiring company has 75% share under the scheme or contract they have the right to squeeze out minority shareholders. A notice will be given to minority shareholders to transfer the shares to acquiring company in form CAA 14.
FAQs
Is it necessary for NBFCs to be registered with the RBI?
Yes, RBI registration is required for NBFCs established under section 45-IA of the RBI Act, 1934.
What are the functions of a Non-Banking Financial Corporation (NBFC)?
Infrastructure development, wealth creation, customised credit solutions, job creation, and financial support to India’s vulnerable groups are all priorities.