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What is the procedure for NBFC Takeover in India?

 

NBFC discusses the nonbanking financial Company that is engaged in the business of commercial activity. The economic activity refers to activities relating to the loans and advances and also involved in the acquisition of shares or stocks or bonds or debentures or securities which are allotted by the Government or any local authority or other securities like leasing, hire-purchase, insurance business, chit business. In simple words, it refers to the companies engaged in banking services like accepting deposits, giving cash advances, intermediation, leasing, hire purchase, and much more.NBFC Takeover is a method which involves taking over any existing NBFC and forming a new NBFC.

 

How can you define NBFC Takeover?

NBFC is the abbreviation for Non-Banking Financial Company, which is registered under the Companies Act. The primary purpose of any NBFC includes business activities like assets financing, giving loans and advances, investing in shares, debentures, and other marketable security. Moreover, it also provides working capital loans and credit facilities to any person or Company.

While retaining the essential compliance requirement, RBI is simultaneously making the business of NBFCs to function smoothly. Smaller the NBFCs have been opened with the help of RBI regulations, while larger the NBFCs have been continuously observed and strengthened to bring them on a par with the global standard.

 

What is the need for NBFC Takeover?

In the whole commercial scenario around the world, mergers and takeovers are actively making its occurrence. NBFCs are being considered as an addition to the concerned bank, are also coming under the impact of these negotiations and provisions. For this, Reserve Bank of India has laid down the procedure for the takeover of NBFCs. The acquisition of NBFC means the purchase of NBFC by another company. Only registered NBFC can undertake to acquire the control of any other NBFC.

 

What are the ways for NBFC Takeover?

There are two ways for NBFC takeover, and they are as follows-

  1. Friendly takeover

This is the type of acquisition that takes place between the companies with their mutual agreement. Acquiring Company offers the target company for being acquired, which is then being accepted by the target corporation.

 

  1. Hostile takeover

Acquiring Company secretly or forcefully tries to acquire the corporation. Generally, this kind of takeover takes place when the management of the acquired Company is unwilling to accept the offer of the acquisition.

 

What are the Benefits and drawbacks of taking over an NBFC? 

NBFC Takeover has its benefits and drawbacks for the acquiring as well as the target corporation. They are as follows-

Benefits of NBFC takeover

  • Increase in profit of Target corporation .
  • There is decrease in competition.
  • Increase in sales or revenue generation.
  • Economies of scale.
  • Expansion of a distribution network.

 Drawbacks of NBFC takeover

  • Conflict in new management.
  • The Amount paid for generosity is often less as compared to the actual price.
  • Cultural clashes in two companies.
  • Hidden liabilities of Target Company.
  • Reduce employee’s morale.

 

What are the documents compulsory for NBFC Takeover?

Consent from the Reserve Bank of India to take over any prevailing NBFC is mandatory. The documents necessary for takeover are as follows-

  • Material regarding sources of funds of the proposed shareholders required for acquiring shares in the NBFC;
  • Material about the Proposed directors or shareholders;
  • A declaration from every proposed directors or shareholder stating their non-association with any entity which has been denied by the RBI;
  • A report from all the proposed directors or shareholders affirming their non-association with any entity which accepts deposit;
  • Moreover, a report by all the proposed shareholders or directors, qualifying their non-criminal background as well as non-convicting background under section 138 of the Negotiable Instruments Act;
  • Bankers’ Report of all proposed directors/ shareholders

 

Why is it necessary to take prior approval from the RBI?

for NBFC takeover, first you need to check out approval for Takeover of NBFC from RBI? Or you can proceed directly. The support from RBI in some occasions are obligatory to be taken before you pledge the process for NBFC takeover, and in other cases, no such prior approval is compulsory.

Prior consensus from the Reserve Bank of India has to be taken in the following conditions -

  • Whichever takeover or acquisition of control of NBFC, may or may not result in a change of management;
  • Additionally, any deviation in the shareholding, resulting in 26 percent acquisition or transfer of the paid-up capital of NBFCs, With any progressive surges over time;
  • Any change in the management is more than 30 percent of the directors, excluding independent directors of the NBFC.

 

What are the cases where you do not need prior approval from the RBI?

Various situations wherever you do not need to take the previous consent of the RBI-

  • If there is a change of 26% in the share capital of the Company, resultant from buyback of shares or decrease in the money by the consent of a proficient Court
  • Or if there is a change of 30% in the administration due to the difference in the Autonomous Directors or by rotation of the directors in the Board.

What is the Procedure for NBFC Takeover?

The process to takeover an NBFC after getting the approval from the Reserve Bank of India

Step 1

Frame the Share Purchase Agreement and get it duly signed and implement the terms as enumerated in the contract.

Step 2

The supervision is essential to be handed over to the new corporation.

Step 3

The remaining consideration has to be paid, if there is any, it should be paid off in 31 days of the public notice in the newspaper or as mutually agreed upon by both the corporation.

Step 4

The assets of the target corporation appearing in the balance sheet are essential to be liquidated, and liabilities should be paid.

Step 5

Calculation of the net worth of the Corporation as on the date of the NBFC  takeover for the new beginning.

Conclusion

NBFC Takeover is a method which involves taking over any existing NBFC and forming a new NBFC. Besides, similar to the structure, the new NBFC needs RBI’s approval. NBFC takeover needs the consent from RBI unless it is exempted from the Government end. Though, you can opt for NBFC Registration rather than NBFC Takeover for better results.In case of any query, contact Corpbiz.

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