Non-Banking Financial Companies have emerged as an essential component of the Indian financial environment, offering various financial services such as loans, asset management, and investment advice. With the growing complexity and competition of the financial market, mergers and acquisitions involving NBFCs have become more common. A good takeover can lead to an increased market position, diverse product offers, and better business savings.

However, managing the complex world of NBFC takeovers requires a thorough knowledge of legal requirements, due diligence, and strategy planning. This blog presents a detailed plan for the takeover of an NBFC in India, ensuring that potential acquirers are well-prepared for the process.

Understanding NBFC Takeover

An NBFC takeover is the purchase by another business of a major interest or control of an existing NBFC. One may do this through share, asset, or liability acquisition methods, as well as others. Takeovers generally come in two flavours:

• When the target and acquiring corporations both agree on the purchase conditions, a friendly takeover results. Usually, the procedure is more straightforward as both sides cooperate to guarantee a flawless change.
• Under a hostile takeover, the acquiring firm aims to take over the target NBFC without management’s permission. Purchasing shares from current open-market owners typically involves open-market friction and legal hurdles.

Understanding the nature of these takeovers is crucial for any organisation considering a purchase, as it sets the tone for talks and strategy planning.

Checklist for NBFC Takeover

1. Pre-Takeover Considerations

Before starting the buyout process, conducting thorough research on the target NBFC is important. This involves several key steps:

• Background Verification: Investigate the past, image, and operating success of the target NBFC. This includes reviewing its financial records, credit scores, and compliance with legal rules. Understanding the target’s market situation and competition environment is also important.
• Setting Financial Goals: Clearly describe the financial goals of the takeover. Are you trying to grow your market share, broaden your product offers, or improve business efficiencies? Having clear goals will lead your approach and decision-making throughout the process.
• Market Exploration: Assess different market choices. This could involve finding other possible acquisition targets or exploring internal growth plans. A thorough market study can provide insights into the best course of action.
• Assessing Financial Stability: Evaluate the financial health of the target NBFC. Analyse key financial measures such as revenue, cash, and stability. This review will help determine the business’s fair value and guide your bargaining approach.

3. Regulatory Requirements

The main regulator of NBFCs in India is the Reserve Bank of India. Maintaining the integrity of the financial system depends on the RBI’s first-hand approval of any buyout of an NBFC. The following are some important regulatory factors:

• RBI Approval Conditions: Before approving an acquisition, the RBI reviews many criteria, including the acquiring business’s financial health, the buyout’s effect on the operations of the target NBFC, and the general consequences for the financial sector. The RBI wants to ensure the acquisition doesn’t compromise depositor interests or the financial system’s stability.
• Situations Not Requiring RBI permission: RBI permission can not be required in certain situations. For example, the procedure could be simplified if the purchasing business already owns more than half of the target NBFC shares or if the purchase is undertaken via a bank. Still, verifying the particular legal criteria relevant to your condition is important.

4. Essential Documentation

To start the takeover process, several important papers must be made and filed to the RBI. These papers ease the approval process and serve as legal protections for both parties. The necessary paperwork includes:

1. Memorandum of Understanding: This is a legally binding deal between the acquiring business and the target NBFC, describing the terms and conditions of the takeover. The MOU should outline the purchasing price, payment terms, and any complications.
2. Board Resolutions: The acquiring company and the target NBFC must pass board resolutions supporting the takeover. This formalises the choice and shows that the boards have fully considered the deal’s effects.
3. Share Transfer Agreement: This agreement specifies how the target NBFCs current share owners are transferred to the purchasing business. It should include details on the purchase price, share count being transferred, and any guarantees or assurances sellers provide.
4. No Objection Certificate from Creditors: Acquiring a No Objection Certificate from the target NBFCs creditors is vital. According to this paper, the creditors approve of the acquisition and will not pursue legal action against the acquired business.
5. Asset Movement Process: Documentation must be made regarding the movement of assets from the target NBFC to the purchasing business. This includes information on the value of goods and any necessary legal steps.

5. NBFC Takeover Process

To ensure a structured approach to the takeover process, here is a step-by-step checklist:

1. Memorandum of Understanding: Get and sign an MOU between the target NBFC and the acquiring firm. The main parameters of the takeover should be described in this paper, along with the acquisition price, payment schedule, and any priority conditions.
2. Board Meeting for Extraordinary General Meeting: Call a board meeting of both firms to approve resolutions authorising the acquisition and demand an Extraordinary General Meeting (EGM) of shareholders. This stage is crucial for getting shareholder approval for the deal.
3. Share Transfer Agreement: Draft and sign a share transfer agreement. This paper should explain the transfer of shares from the current owners to the purchasing company, including any guarantees or statements made by the buyers.
4. NOC from Creditors: Obtain a No Objection Certificate from the target NBFCs creditors. This paper is important for ensuring the takeover does not cause legal fights or problems.
5. Asset Transfer Process: Initiate moving assets from the target NBFC to the purchasing business. This includes creating relevant paperwork and ensuring compliance with legal and regulatory requirements.
6. Company appraisal: Conduct a full appraisal of the target NBFC using accepted accounting principles and methods. This assessment will guide your negotiation strategy and help ensure you pay a fair price for the sale.
7. Submission of Application to RBI: Prepare and send the full application form and all necessary papers to the RBI for approval. Ensure all paperwork is correct and full to avoid delays in the approval process.

Conclusion

The takeover of an NBFC in India is a complicated process that requires careful planning, thorough due research, and compliance with legal requirements. By following the thorough plan described in this blog, potential acquirers can handle the complexity of the takeover process more effectively. It is also wise to seek professional advice from law and financial experts to ensure an easy and proper exchange.

In an ever-evolving financial environment, the ability to change and take chances through smart purchases can greatly improve an entity’s marketplace and practical skills. With the right planning and knowledge of the legal environment, businesses can successfully attempt the takeover of an NBFC, eventually adding to the growth and security of the financial sector in India.

Related Services

• NBFC Annual Compliance
• NBFC Account Aggregator License