Non-Banking Financial Company as the name itself suggests they are financial companies but not banks. NBFC stands for Non Banking Financial Companies. NBFCs are businesses which are registered under either Companies Act of 1956 or 2013. NBFCs are specialized in imparting loans and different types of financial support that is provided under the section 45(IA) of the RBI Act of 1934. In order to implement an NBFC in India there are two ways which include fresh NBFC registration and NBFC takeover.

In place of going through the registration of NBFC from the start, this idea of purchasing an operating RBI registered NBFC is called the NBFC takeover. Takeovers are mostly easier and smoother than starting an entire new NBFC. For both ways one needs to take RBI approval. Without getting the RBI approval one can neither start a new NBFC nor he or she can do takeover of the NBFC.

Although takeover of NBFC is easier than registering a new NBFC, NBFC registering is not simple. This is because takeover is a multiple stage long process which must be done through an entity like Whizseed who are having experience with the same.

What Business Could you Pursue After the NBFC Takeover?

Once an NBFC is takeover it can be involved in the following businesses:

• Asset Financing: Provide funds for purchasing vehicles, machinery, and equipment.
• Acquisition of Shares: Invest in shares of the companies for portfolio diversification.
• Debentures: Issue debentures to raise long-term capital from the market.
• Securities: Trade in government securities, corporate bonds, and debentures.
• Bonds: Invest in bonds which are issued by governments or we can say corporations for fixed returns.
• Stocks: Trade stocks listed on exchanges to generate investment returns.
• Loans and Advances: Offer credit, including working capital and term loans.
• Commercial Securities: Invest in commercial papers and short-term securities.
• Financial Instruments: Engage in mutual funds, derivatives, and structured products.
• Risk Management: Provide risk mitigation through hedging and derivatives.
• Derivative Transactions: in order to hedge the market risk they can enter into derivative transactions.

How is NBFC Takeover Going to Work?

The entire process of the takeover of the NBFC depends on the two forms of the company which are called Targeted company and acquirer company.

• Targeted Company

“To be a purchased company” is called the targeted company. In the process of takeover one firm purchases the another firm, just like that in the NBFC takeover process one NBFC is acquired either by another NBFC or group. So in this process, the company which is going to be purchased is called the targeted company.

• Acquirer Company

As explained above, NBFC takeover means purchasing one NBFC either by another NBFC or group which means the process includes two parties. This is being acquired and the second is going to be the one who is going to purchase the same. The company which is able to do the acquiring of the targeted company is called the acquirer company. 

In order to complete the takeover process of NBFC smoothly follow the steps given below:

• Perform Proper Due Diligence

The very first step is to check all the things related to finance, operation, legal aspects and management of the non-banking financial entity through the process of due diligence. Different professionals do different due diligence like financial due diligence is done by the CA or CS, legal due diligence must be done with the help of a lawyer and just like that other due diligence related to operations and management team must be performed. This makes sure that all the compliances related to the different regulatory bodies are complete and there are no unknown liabilities on the NBFC.

• Check the Suitability

The Acquirer company must pay attention towards the things which will help it out to check if the targeted company is suitable or fulfilling the requirements due to which acquirer company wants to take over the same. This is important to check in the beginning of the takeover process so that there will be no further confusion with respect to the same. Suitability cannot be checked just by analyzing the company through naked eyes. It needs thorough review of the documents of the companies which can be done only with the help of a qualified professional.

• Check the Financial Health of the Targeted Company

It is really important or critical for the acquirer company to check and ensure about the financial health of the targeted company. This is because the entire business depends on the financial stability of the company. Hence it is important for the acquirer company to make sure that the company they are taking over is financially strong. This can be easily determined by the finance professionals through the financial due diligence process.

• Obtain Approval of the BODs

In order to do anything related to the business in a company approval from the BODs is necessary, so in order to do takeover of NBFCr in India one needs to get BOD's approval for the same. This approval means consent of the company to do the takeover of the Non Banking Financial entity. It's a formality without which one cannot move forward with the process of the takeover of the NBFC. thus one must get this.

Classification of NBFC Takeover in India

The Non Banking Financial Companies categorization in India is of two types:

• Hostile Takeover

When a company tries to take over another company that's not a bank, it's called a hostile Non Banking Financial Company takeover. The managers and BOD of the company being targeted usually fight against this. The process involves buying a lot of the target company's shares, to buy more, and having tough negotiations. Before it can happen, it needs approval from regulators. There are lots of things to think about, like how the managers of the target company resist, how the shareholders react, and how hard it is to combine the two companies.

• Friendly Takeover

When one financial entity wants to buy another one in a friendly way, it's called a friendly takeover. The ways entail speaking and negotiating, doing careful research, making advice to buy for the opposite employer, and then getting approval from the shareholders. It's crucial to ensure the whole lot follows the policies set through the system.

What are the Key Benefits of NBFC Takeover in India?

Some of the key benefits of NBFC takeover in India are:

• Instant Market Access: Acquiring an NBFC means immediate access to the market which can help you to get success easily.
• Market Expansion: Gain more customers quickly because NBFC is having its presence already in the market. Increase market share which helps the business to grow with double speed.
• Widens Scope: Offer more services instantly which helps the enterprise to get diversification.
• Expertise Access: Access experienced staff and specialized knowledge which is the intrinsic part of success of a new type of entity or business in the market.
• Regulatory Ease: Simplified regulatory processes which saves you against many kinds of fines and penalties.
• Boost Profitability: Save on operational costs which results in cost saving and that amount can be used in many other ways for the growth of the business.
• Brand Boost: Instant brand recognition comes with the NBFC takeover because people already know about it.
• Expand Revenue and Sales: Streamlined operations for better performance which makes the management of the entity easy and simple which boosts the revenue and sales.
• Strategic Upliftment: Accelerated growth and strategic functioning of the group in the market place relative to its competitors.

Role of RBI in the NBFC Takeover Process in India

NBFCs are governed by the RBI and anything related to them is part of RBI’s day to day business. If you are thinking about doing a takeover of NBFC then make sure to get Reserve Bank of India’s regulatory approval for the same because without this approval you cannot move forward with the process of NBFC takeover in India. In both the takeover of Non Banking Financial Institutions RBI plays a crucial role. Some of the key roles of the RBI are discussed below:

• To provide for the regulatory operations and guidelines.
• To further process and approve.
• To do all the inspection and verification.
• To grant the Certificate of Registration.
• Supervise ongoing compliance.
• To review with guidelines.
• To provide impact assessment.

When to Obtain RBI’S Approval

In the following cases only one needs to get RBI’s approval:

• NBFC Takeover Initiation: RBI approval is necessary at the beginning of the NBFC takeover process.
• Management Change: Approval is required if there is a change in management that results in a 30% or more shift in the total number of directors.
• Change in Shareholding Pattern: RBI approval is necessary if the transfer of 26% or more of the NBFC's paid-up capital results in an alteration of the shareholding pattern to other entities.

RBI Approval Needs Exceeded

• Capital Declines and Share Buybacks: Capital declines and share buybacks are not under the purview of the RBI; these matters are managed by competent courts.
• Change in Board of Directors: If there is a rotation of the BODs, including independent directors, it constitutes a change in management.

Process of Obtaining RBI’s Approval

When the prior permission of RBI is necessary for the takeover of the NBFC, follow the steps given below in order to get the same:

• Submission of Application: Submit an application to the zonal office of the Non-Banking Supervision Department in the state where the NBFC's registered office is located.
• Required Documents: Attach certain valid documents engraved on the company's letterhead with the application. These documents may include information of the proposed BODs and shareholders, source of capital for purchasing NBFC shares by potential shareholders etc.
• Declaration of Membership: Declaration of membership in any entity, knowledge about proposed shareholders/directors associated with entities handling deposits, and details if any application for a Certificate of Registration (COR) was rejected by the RBI must be provided.
• Banker's Report: Bankers Report for proposed shareholders and directors must be attached with the application for the RBI’s approval.
• Declaration of Non-Criminal Record: Potential shareholders and directors must declare their non-conviction under section 138 of the Negotiable Instruments Act and provide a background of non-involvement in criminal cases.
• Financial Records: Attach annual reports with financial statements from the past three years.
• Examination of the Application: Once all the above information has been provided to the RBI in order to get its approval, now the Reserve Bank of India will check the information and if everything is found as per the need of the RBI it will approve the same.

Understanding of NBFC Takeover Process in India

The takeover of NBFC Process in India involves the following steps:

• Memorandum of Understanding

The very first step is to sign the MOU that is the Memorandum of Understanding. This is with respect to both the parties entering into a takeover agreement. In this MOU both the parties put all those terms and conditions on which they agree to do NBFC takeover. This is a formal document of takeover between both the acquirer and targeted company. Only after entering into this MOU acquirer company should pay a token amount to the targeted company.

• Approval from RBI

If your NBFC takeover falls within the conditions where it is mandatory to get RBI’s approval for the takeover then you have to acquire such approval. One can acquire such approval by following the process explained above.

• Public Notice

Public notice with respect to the takeover of the Non Banking Financial Company should be released mainly in two languages which includes english and the one regional language. Two public notices have been released. First is in the English language and second is related after getting the RBI’s approval. The second notice has been published within 30 days of getting the RBI approval in the regional language.

• Formal Contract

After completing all the steps given above now both the parties are on the stage where they can enter into a formal takeover agreement. This agreement is important to be well written and must include all the terms, conditions and responsibilities of both the parties without any confusion. Make sure to be well informed with the agreement properly before singing the same.

• Second Public Notice

After officially signing the document above now it's time for the second public notice. Just like the first public notice this second one needs to be in two regional languages. The first one is English and the second should be regional languages like Gujaartati in Gujarat, Punjabi in Punjab etc. 

• Beginning of the Liquidation Process

In the beginning of liquidation following an NBFC takeover, the BOD decides and passes a resolution to commence liquidation. A liquidator is appointed to manage the process, and a public notification is issued to inform stakeholders. The NBFC's properties and liabilities are examined, ensuring compliance with regulatory duties. This marks the beginning steps towards orderly dissolution and distribution of properties in accordance with legal requirements.

• Get Letter of Authorization

It is the duty of the target company that it should get the letter of authority and NOC from the creditors in order to transfer the business. It is necessary to get it because it is the intrinsic part of the takeover process without which one cannot complete the NBFC takeover in India.

• Transfer of Assets

After the above steps of the non-banking financial institutions takeover process, now the properties of the targeted company can be transferred. But for the transfer of the properties of the targeted company it is important that the scheme is approved by the RBI without any sort of objection.

• Entity Valuation

Because the RBI has developed a set of norms and regulations, the entity's valuation can be conducted in compliance with them. The discounted cash flow process is a valuation tool that helps with the process. It's a method of displaying an entity's net present value.

What are the Formalities after Obtaining RBI Approval?

After getting the approval from the RBI one needs to do the following things:

• Public Notices: Issue two public notices: first in English and second in a regional language, after getting authorization from the RBI within 30 days.
• Takeover Agreement: Draft a clear and comprehensive agreement which includes all terms, conditions, and responsibilities of both parties.
• Second Notice in Regional Languages: Publish the second notice in two regional languages: English and a local language relevant to the NBFC's operational location (e.g., Gujarati in Gujarat, Punjabi in Punjab).