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NBFC Acquisition/ Takeover | NBFC Management Change

The Non-Banking Financial Companies (Approval of Acquisition or Transfer of Control) Directions, 2015 (hereinafter referred to as ‘Directions’) was revised by RBI on July 9, 2015 stating that every non-banking financial company whether accepting deposits or not will be covered within the scope of the above directions. The directions are more stringent as compared to the notification issued by the RBI in May 26,2014.

DOCUMENTS REQUIRED

Information and documents with respect to proposed Promoters and Directors
Due Diligence Report of the Companies
Source of Funds for acquisition
Financial Statements for last Three Years
Statutory documents of the Company
Such other details as may be required.

PROCEDURE FOR NBFC ACQUISITION/TAKEOVER

Requirement for obtaining prior approval of RBI:

Prior written permission of the Reserve Bank shall be required for

Any takeover or acquisition of control of an NBFC, which may or may not result in change of management;
Any change in the shareholding of an NBFC, including progressive increase over time, which would result in acquisition/transfer of shareholding of 26 percent or more of the paid-up equity capital of the NBFC. Prior approval would, however, not be required in case of any shareholding going beyond 26% due to buyback of shares/reduction in capital where it has approval of a competent court. The same is not required to be reported to the Reserve Bank not later than one month from its occurrence;
Any change in the management of the NBFC which would result in change in more than 30 % of the directors, excluding independent directors. Prior approval would not be required for those directors who get re-elected on retirement by rotation.

Notwithstanding clause (i), NBFCs shall continue to inform the Reserve Bank regarding any change in their directors/management as required in Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions ,1988, Non-Systematically Important Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2015 and Systematically Important Non-Banking Financial (Non-Deposit Accepting Holding) Companies Prudential Norms (Reserve Bank) Directions, 2015.

Application for Prior Approval

NBFCs shall submit an application, on the company’s letter head, for obtaining prior approval of the Bank under paragraph 2, along with the following documents:

Information about the proposed directors/shareholders as per the Annex;
Sources of funds of the proposed shareholders acquiring the shares in the NBFC;
Declaration by the proposed directors/ shareholders that they are not associated with any unincorporated body that is accepting deposits;
Declaration by the proposed directors/ shareholders that they are not associated with any company, the application for Certificate of Registration (CoR) of which has been rejected by the Reserve Bank;
Declaration by the proposed directors/ shareholders that there is no criminal case, including for offence under Section 138 of the Negotiable Instruments Act against them;
Banker’s Report on the proposed directors/shareholders

Applications in this regard may be submitted to the Regional Office of the Department of Non-Banking Supervision in whose jurisdiction the Registered Office of the NBFC is located.

Requirement of Prior Public Notice about change in control/management

A public notice of at least 30 days shall be given before effecting the sale of, or transfer of the ownership by sale of shares, or transfer of control, whether with or without sale of shares. Such public notice shall be given by the NBFCs and also by the other party or jointly by the parties concerned, after obtaining the prior permission of the Reserve Bank.
The public notice shall indicate the intention to sell or transfer ownership/control, the particulars of transferee and the reasons for such sale or transfer of ownership/control. The notice shall be published in at least one leading national and in one leading local (covering the place of registered office) vernacular newspaper.

The directions contained above are applicable with immediate effect i.e the same will apply on any takeover or acquisition of control, any change in the shareholding or any change in the management occurring after the date of this circular.

Any violation of the aforementioned directions would result in adverse regulatory action including cancellation of CoR.

Notification No. DNBR.(PD) 029/CGM(CDS)-2015 dated July 09,2015 can be viewed at the RBI Website.

The entire procedure of NBFC Takeover is covered in the following steps

Sr. No.	PARTICULARS	PROCEDURE

1.	MEMORANDUM OF UNDERSTANDING	The foremost step is the signing of the Memorandum of Understanding (MOU) with the proposed company. The MOU signifies that both the companies have agreed to the takeover. The directors of both- the acquirer company and the target company, sign the MOU. The requirements and the responsibilities of both the companies are mentioned in the MOU specifically. At the time of signing the MOU, the acquirer company gives the token money to the target company.

2.	BOARD MEETING	Once the MOU has been signed, both the companies shall convene Board Meeting to discuss the following matter: · Reply to any query of RBI that may be raised in relation to the approval application · Fixing the date, time and place for convening the Extra Ordinary General Meeting (EGM) · Passing the resolution of EGM

3.	PUBLIC NOTICE	Once approval has been obtained from the RBI, a public notice shall be made in two newspapers within 30 days in order to invite any objection of the public with respect to the takeover

4.	SHARE TRANSFER AGREEMENT	At the expiration of the 31^st day of publishing the notice in the newspaper, both the companies shall sign the share transfer agreement. At the time of signing, the balance consideration shall be paid by the acquirer company to the target company.

5.	NO OBJECTION CERTIFICATE FROM CREDITORS	Prior to transferring the business to the acquirer company, the target company shall obtain NOC from its creditors.

6.	TRANSFER OF ASSETS	Once NOC has been obtained from the creditors and no creditor has raised any objection in regard to the takeover, the assets of the target company will be transferred to the acquirer company, as approved by the RBI. The transfer, however, should not be in contravention to any clause of the company.

7.	EVALUATION OF THE ENTITY	The evaluation of the entity post-takeover shall be done in accordance with the rules provided by the RBI. Post evaluation, a certificate starting the method for valuation shall be obtained from a Chartered Accountant

8.	NOTICE TO THE REGIONAL OFFICE	Once the valuation is done and approval has been taken, the NBFC shall submit an application on the letterhead of the company to the Regional Office. Post takeover, any changes in the management should be continuously intimated to the RBI. The contents of the application made to the Regional Office of the RBI shall be as follows: · Acquirer company’s sources of funds · Information regarding proposed shareholders and directors · Declaration by all the proposed directors and shareholders in regards to their non-association with any entity that accepts deposits · Statement by all the proposed directors and shareholders that no criminal proceedings have been initiated against them in the past or are pending in any court of law.

9.	TRANSFER OF THE UNDERTAKING	Subsequent to the above-mentioned procedure, all the assets as shown in the balance sheet of the target company shall be liquidated and the liabilities would be paid off. The acquirer company will then receive the balance in the bank account in the name of the target company. The balance will be as calculated on the basis of net worth, as on the date of the takeover.

FEATURES OF NBFC ACQUISITION

Increase in profitability
Boosting the revenue
Wider market reach
Product/ Service diversification
Business growth
Cost Reduction

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Frequently Asked Questions

What is the meaning of NBFC Takeover?

It means

any takeover or acquisition of control of an NBFC, which may or may not result in change of management,
any change in the shareholding of an NBFC, including progressive increases over time, which would result in acquisition/ transfer of shareholding of 26 per cent or more of the paid-up equity capital of the NBFC,
any change in the management of the NBFC which would result in change in more than 30 per cent of the directors, excluding independent directors

Which RBI Direction is applicable to NBFC Takeover?

Non-Banking Financial Companies (Approval of Acquisition or Transfer of Control) Directions, 2015’ shall be applicable to every non-banking financial company whether accepting deposits or not, except Primary Dealers.

What are the documents to be submitted to the RBI for obtaining prior approval along with the application?

NBFCs shall submit an application, in the company letter head, for obtaining prior approval of the Bank, along with the following documents:

Information about the proposed directors/ shareholders as per the Annex;
Sources of funds of the proposed shareholders acquiring the shares in the NBFC;
Declaration by the proposed directors/ shareholders that they are not associated with any unincorporated body that is accepting deposits;
Declaration by the proposed directors/ shareholders that they are not associated with any company, the application for Certificate of Registration (CoR) of which has been rejected by the Reserve Bank;
Declaration by the proposed directors/ shareholders that there is no criminal case, including for offence under section 138 of the Negotiable Instruments Act, against them; and
Bankers’ Report on the proposed directors/ shareholders.

Applications in this regard may be submitted to the Regional Office of the Department of Non-Banking Supervision in whose jurisdiction the Registered Office of the NBFC is located.

What does control mean in these Directions?

"Control" shall have the same meaning as is assigned to it under clause (e) of sub-regulation (1) of regulation 2 of Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.

What is the requirement of prior public notice about change in control/management?

Before effecting the sale of, or transfer of the ownership by sale of shares, or transfer of control, whether with or without sale of shares, a public notice of atleast 30 days shall be given shall be given by the NBFCs and also by the other party or jointly by the parties concerned, after obtaining the prior permission of the Reserve Bank. It shall indicate the intention to sell or transfer ownership/control, the particulars of transferee and the reasons for such sale or transfer of ownership/control.