NBFC - A Step by Step Takeover Process

Introduction

Off lately there has been an increasing demand for credit across corporate and industrial sectors. Unlike conventional institutions and banks, Non-Banking Financial Company ("NBFC") play a more laudable role in upholding this demand with easy credit facilitations. Many businesses plunge into the NBFC regime owing to tremendous growth opportunities but often fail due to stringent RBI processes and norms. Those who experience such inconvenience can leverage NBFC takeover, which signifies acquiring an already registered NBFC. The legal norms around NBFC takeover have been simplified by the Reserve Bank of India (RBI) in the past few years. This article covers a comprehensive NBFC takeover checklist, leading to seamless business transactions.

What is an NBFC Takeover?

The term "Takeover" refers to the process of gaining control over another company, typically by acquiring a majority of its shares or purchasing the entire company for a certain financial consideration. In financial terms, a takeover involves one business entity acquiring another. Specifically, an NBFC takeover is a common business strategy where one company, typically a financial institution, acquires an NBFC to expand its operations, enter new markets, or strengthen its portfolio of services. This type of acquisition is a strategic move often employed to achieve growth, market dominance, or diversification in the financial sector.

What are the types of NBFC Takeovers?

An NBFC takeover can take place via two methods viz., a friendly takeover and a hostile takeover.

Friendly Takeover

As the name suggests, in this arrangement, the acquiree firm sends a proposal to the acquirer firm, reflecting the intention of being acquired. If the proposal is accepted, a further process can come into effect to complete the transaction. Generally, a friendly takeover takes place when the target company is happy with the benefits that they have analysed.

Hostile Takeover

It is a non-harmonious type of takeover wherein the acquirer leverages different tactics, forcing another NBFC to accept the takeover proposal. Generally, this kind of takeover takes place when the management of the acquired company is unwilling to accept the offer of the takeover. Hostile takeover is where entities are involved in reaching out to shareholders by putting a tender offer and they don't think twice before indulging in proxy fight.

Pre-requisites for an NBFC Takeover

Before an NBFC Takeover takes place, there are certain pre-requisites that are to be checked:

Background Vetting: Before making any decision regarding a takeover, it is important to analyze the target company. Background vetting includes vital checking of the target company such as the capital structure, history of the target company, management efficiency etc. This will provide the acquirer with a broad overview of its target company and its market reputation.

Determining goals: It is important to pen down the very basic motive behind the takeover. The takeover might be a channel to expand the business operations or to establish a new vertical or a portfolio. The acquirer also needs to consider various financial parameters in order to consider the same.

Exploring the market: An NBFC is largely driven by external factors such as the prevailing condition of the financial sector. In case, the takeover happens during a time when the financial sector is going through a tough phase, the takeover may not result as it was anticipated. Hence, the acquirer company is expected to study the market condition before taking any decision for takeover. Such a decision can be taken by studying the performance of various other NBFCs in the market.

Knowing the financial position and stability: It is pertinent to figure out the financial stability of the acquirer company as well. How much cash flow is expected to go out, what will be the takeover amount, how will the amount be paid are some of the key factors to be determined.

Confirmation with RBI's prior approval conditions: Prior approval of RBI shall be required for any takeover or acquisition of control of an NBFC, which may or may not result in a change of management. However, prior approval shall not be required:

• in case of any shareholding going beyond 26% due to the buyback of shares/ reduction in capital where it has the approval of a competent Court. The same is, however required to be reported to the Reserve Bank not later than 1 month from its occurrence.
• any change in the management of the NBFC that involves changes of more than 30 percent of the directors inclusive of independent directors and directors who get re-elected on retirement by rotation.

Net Owned Funds Requirement: Every category of NBFC is required to maintain a certain amount of the Net Owned Funds to be eligible to get a Certificate of Registration (CoR) as an NBFC. The following table summarizes the NoF requirement:

Further, for NBFC-P2P, NBFC-AA, and NBFC not availing public funds and not having any customer interface, the NOF shall be ₹2 Crore. For NBFC-IFC and IDFNBFC, the NOF shall be ₹300 Crore.

• Fit and Proper Criteria: Every NBFC is required to put in place a board approved policy ascertaining the 'Fit and Proper' Criteria for its Directors at the time of appointment and on a continuing basis. It shall also furnish a quarterly statement on the same within 15 days of the close of every quarter with the Regional Office of the Department of Supervision of the RBI. For the quarter ending 31st March, the certificate shall additionally be certified by the auditors.
• Capital Adequacy requirement: NBFCs are required to maintain a capital adequacy ratio consisting of Tier 1 and Tier 2 capital which shall not be less than 15% of its aggregate risk weighted assets of on-balance sheet and of risk adjusted value of off-balance sheet items. The total of Tier 2 capital at any point of time, shall not exceed 100% of Tier 1 capital.
• Liquidity Risk Management (LRM) framework: All NBFCs with asset size of Rs. 100 Crore or above, CICs and all deposit taking NBFCs are required to put in place a LRM framework. The NBFC shall frame such a framework which ensures that it maintains sufficient liquidity, including a cushion of unencumbered, high quality liquid assets to withstand a range of stress events, including those involving the loss or impairment of both unsecured and secured funding sources. Some of the key elements include governance of LRM, Board of Directors, Asset-Liability Management Committee (ALCO), Asset-Liability Management (ALM) Support Group.

Documentation required for an NBFC Takeover

There are certain documents which are required to be submitted alongwith the application form for prior approval of RBI:

1. Board resolution passed by the company's board of directors approving the application for NBFC takeover
2. A detailed business plan outlining the proposed operations of the NBFC, including the financial services to be offered, target market, growth strategy, and projected financial statements.
3. Proof that the applicant complies with the regulations set out by the RBI for NBFCs, such as NOF, PBC, maintaining statutory liquidity ratio (SLR), adhering to prudent norms, ensuring compliance with AML and KYC guidelines etc.
4. Details about the acquirer's group companies and their regulatory status.
5. Information about the proposed directors/ shareholders;
6. Sources of funds of the proposed shareholders acquiring the shares in the target NBFC;
7. Declaration by the proposed directors/ shareholders that they are not associated with any unincorporated body that is accepting deposits;
8. 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 RBI;
9. 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
10. Bankers' Report on the proposed directors/ shareholders.

Further, the application form is required to be submitted to the Regional Office of the Department of Non-Banking Supervision in whose jurisdiction the Registered Office of the NBFC is located. The application can be submitted online on the Platform for Regulatory Application, Validation and Authorisation (PRAVAAH) Portal followed by an offline submission at the Department.

A Step-by-Step Guide for undertaking the Takeover

The following steps are required to be undertaken for carrying out the takeover process:

• Signing of the Memorandum of Understanding: Firstly, both the acquirer and acquiree are required to sign a Memorandum of Understanding (MoU) agreeing on the takeover. Post the signing; the acquirer is required to transfer certain amount to the acquirees' account as a part of compliance.
• Convene a Board Meeting: The acquirer shall hold a board meeting in order to consider and approve the matter of takeover. Also, the said board meeting shall also consider and approve a mutually agreed day, date and time for convening a general meeting. Simultaneously, the acquiree shall also convene a board meeting to discuss, consider and approve the matter of being acquired.
• Application to RBI for prior approval: An application must be duly filed with the RBI to obtain approval on its letterhead. The RBI approval must be acquired mandatorily. All the queries raised by the RBI must be answered in a timely manner to receive the no-objection reply required for the takeover of an NBFC.
• Execution of the share transfer agreement: At the general meeting of the acquirer, both the parties will sign and execute the share transfer agreement and move ahead with the takeover process.
• NoC from creditors: Before taking any such decision which may impact the interest of the creditors of the company, it is necessary to take the NoC from them. Hence, the acquiree shall take the NoC and share it with the acquirer.
• Transferring of the assets: After receiving the NoC from the acquiree, the process of transfer of asset shall come into effect. The acquirer shall transfer takeover funds into the account of the acquiree as per the terms mentioned in the agreement.
• Company valuation: The Company being acquired needs to be valued in order to determine the net present value by way of Discounted Cash Flow Method.
• Notice to the Regional Office: Finally, once the aforesaid is done, the NBFC must file an application with RBI's regional office. Any changes incurred after the takeover must also be intimated to RBI as a matter of compliance.

Conclusion

While an NBFC takeover can offer growth opportunities and access to new markets, it also involves managing financial, operational, and regulatory risks. For both the acquirer and the target company, it is crucial to navigate the process with careful planning, clear communication, and adherence to legal requirements. In the end, a well-executed takeover can strengthen the financial position and competitive edge of the acquiring entity in the increasingly dynamic financial sector.

There is no denying the fact that NBFC takeover is a delicate and compliance-incentive process involving various steps as mentioned before. For a seamless business transaction, it is vital to follow the above norms and abide by RBI's guidelines.