NBFC Takeover Process and RBI Compliance

The takeover process shall primarily involve a thorough review of the target NBFC's documentation by the Acquirer. Upon the Acquirer's approval of the acquisition, a Memorandum of Understanding (MoU) will be executed, accompanied by a token consideration.

As part of the regulatory and compliance procedures, Know Your Customer (KYC) documents, a detailed business plan, and a three-year financial projection shall be prepared, reflecting the inputs and profiles of the incoming directors as recommended by the Acquirer.

In this article, we will also cover the relevant RBI regulations governing NBFC takeovers.

The requisite documents will then be submitted to the Regional Office of the Reserve Bank of India (RBI) where the NBFC is registered. The process includes coordinating with the RBI and responding to any queries or clarifications raised in relation to the proposed takeover.

Upon receipt of RBI's in-principle approval, a public notice must be published in two newspapers for a period of 30 days, in accordance with the RBI guidelines. This notice serves to inform the public of the change in management and invites any objections or representations from concerned parties.

Following the 30-day notice period-or on a mutually agreed date-final steps including the signing of the Share Purchase Agreement (SPA), transfer of management, and payment of the remaining consideration shall be executed.

1. Requirement for Prior Approval of RBI in Acquisition / Transfer of Control of NBFCs

The Reserve Bank of India (RBI), under its regulatory framework for Non-Banking Financial Companies (NBFCs), mandates prior written approval for any acquisition or transfer of control, whether direct or indirect, of an NBFC.

This requirement is outlined under the Master Direction - Non-Banking Financial Company - Non-Systemically Important Non-Deposit taking Company (Reserve Bank) Directions, 2016 and other relevant RBI notifications. The objective is to ensure transparency, fit-and-proper management, and to safeguard the financial ecosystem from potential misuse or fraud.

2. Circumstances Requiring Prior Approval of RBI in NBFC Acquisitions and Control Changes

As per RBI regulations, prior written approval from the Reserve Bank is mandatory in the following cases:

Takeover or Acquisition of Control

• Any takeover of an NBFC or acquisition of control, whether or not it results in a change in management, requires prior RBI approval.
• "Control" includes the right to appoint majority directors or influence management decisions, directly or indirectly.

Change in Shareholding Pattern

• Any acquisition or transfer of 26% or more of the paid-up equity capital of an NBFC requires prior approval from RBI.
• However, prior approval is not required if the shareholding crosses 26% due to buyback of shares or reduction of capital sanctioned by a competent court or tribunal.
• In such cases, the change must still be reported to the RBI within one month from the date of occurrence.

Change in the Composition of the Board

• Any change in the composition of the Board of Directors of the NBFC that results in more than 30% of the directors being changed (excluding independent directors), also requires prior approval.
• This includes both new appointments and resignations that cumulatively cross the threshold.

3. Application Process

The NBFC or the acquiring party must submit an application for prior approval to the Regional Office of the RBI where the NBFC is registered. The application must include:

• Details of the proposed transaction.
• Information about the acquirer(s) including KYC documents.
• Business plan and financial projections.
• Declaration of fit and proper status of new promoters/directors.
• Board resolution and relevant agreements (drafts if applicable)

4. RBI's Review and Approval

RBI evaluates:

• Financial soundness and background of the acquirer.
• Compliance history and management integrity.
• Impact on the NBFC's operations, customers, and public interest.

The process can take several weeks, and RBI may seek clarifications or additional documents during the review.

5. Post-Approval Requirements

Once approval is granted, the NBFC must:

• Issue public notice (in case of change in control) in two newspapers (One National and One leading local newspaper in vernacular language) at least 30 days prior to effecting the proposed transaction.
• Execute Share Purchase Agreements or relevant documents.
• Report the completion of the transaction to RBI.

Failure to obtain prior approval in applicable cases can lead to penalties, cancellation of NBFC registration, or other regulatory action.

Disclaimer: This article provides general information existing at the time of preparation and we take no responsibility to update it with the subsequent changes in the law. The article is intended as a news update and Affluence Advisory neither assumes nor accepts any responsibility for any loss arising to any person acting or refraining from acting as a result of any material contained in this article. It is recommended that professional advice be taken based on specific facts and circumstances. This article does not substitute the need to refer to the original pronouncement.