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To Buy an NBFC

You can have your own NBFC business in India in two ways:

  • Getting a New Registration with RBI
  • Buy an existing NBFC

Out of these, the buying of NBFC requires much less time and you avoid the hassle of the initial complex groundwork. Buying an NBFC takes between 2-3 months only.

The takeover in NBFC terms means purchasing an existing NBFC by another company or NBFC. It may be a case where the seller has put his company on sale. Or when the acquirer entity deliberately plans and acquires the control of the other entity. Working without the knowledge of the seller. In both the conditions, the balance sheet of the NBFC on sale stands null after all its assets and liabilities are taken over by the acquirer.

The RBI has provided step-by-step provisions to buy an NBFC so any ambiguity has been eliminated.

If it is a case of a mutually agreed buying, the first step required is that the Board of Directors of both the companies approve of this takeover. Once the Board has consented, an MOU with the proposed company has to be signed, to execute the acquisition. Generally, the MOU is signed with some advance money. And then RBI’s approval for the subject is to be sought.

Just extra precautions and scrutiny must be necessarily conducted by the buyer. Due diligence must be undertaken while examining the financials of the target company.

Is Prior Approval from RBI Required

Before you proceed to buy an NBFC, first, check whether you need prior approval from the RBI to buy the NBFC selected by you or you can proceed without it. Certain cases have been mentioned when the acquirer needs approval from the RBI, before initiating the process of buying an NBFC. Whereas, in a few other cases, no such prior approval is required.

It is necessary to take prior approval in the following situations of NBFCs arrangements. When proper documents have not been submitted, the application shall be considered null and void. The situations are:

  • Whenever an NBFC is acquired/bought/taken-over, whether any management changes occur or not.
  • The shareholding has changed, resulting in a 26% acquisition or transfer of the paid-up equity capital of NBFCs. This may have happened over time. **Except when the buyback of the shares or reduction in the capital has been approved by a competent court.
  • An amendment in the management, by changing more than 30% of the Directors. **The number of Directors is excluding Independent Directors. If the change is due to a rotation of Directors, approval from RBI is not required.

Requirements while Applying for Prior Approval

If the buying of the target NBFC is falling under any of the above circumstances, and you are to apply to RBI for its approval. You need to apply on the letterhead of the company and attach the following:
  1. Details about the proposed Directors/shareholders. ID proof, Address proof, Education, Qualifications and Experience proof,
  2. Sources of funds used for acquiring shares in the NBFC by the proposed shareholders,
  3. Declaration by all the proposed Directors/shareholders stating their non-association with any entity which has been denied a Certificate of Registration by the RBI,
  4. Declaration of having Non-criminal background as well as Non-conviction u/s 138 of the Negotiable Instruments Act by all the proposed Directors/shareholders,
  5. Declaration by all the proposed Directors/shareholders stating their non-association with any entity accepting deposits,
  6. Banker’s Report for proposed Directors/ shareholders.

Once the above documents are ready, the application shall be submitted to the Regional Office of the Department of Non-Banking Supervision (DNBS), under whose region the Registered Office of the NBFC is situated. RBI may put up some queries or ask for clarifications on some points mentioned in the application for approval. All such queries must be answered, well in time, to cause no undue delay for RBI to process your application.

 

Approval from RBI takes an approximate 2-3 months, depending on the case.

Requirements of Prior Public Notice About Changes

After getting RBI’s approval for the concerned takeover, a public notice is to be given in one leading national and one leading local newspaper at least 30 days before such sale of shares, or transfer of control, is to take place. Whether with or without share transfer.

The conditions laid down are:

  1. At least 30 days before effecting the sale of, or transfer of the ownership by sale of shares, or transfer of control (whether with or without the sale of shares), a public notice is to be issued. Such public notice shall be given by the NBFCs and also by all other parties concerned, after obtaining the prior permission of the RBI.
  2. The intention of selling or transferring ownership or control, the particulars of transferee and the reasons for such sale or transfer of ownership or control, must be indicated clearly in the public notice.
  3. The notice shall be published in at least one leading national newspaper and another leading newspaper in the local language of the place of registered office.

Benefits of Buying an NBFC

To buy an NBFC instead of getting a new one registered, will save you on time which is required for setting up any new business. Though the process of getting the legalities completed is similar, still, it takes much less time if you buy an NBFC than establish a new one.

Besides avoiding the teething problems faced while making a business work, below are a few more advantages of NBFC buying:

  • The increase in profitability of both, the Acquirer and the Target Company..
  • Decrease in competition.
  • Increase in sales/revenue.
  • Expansion of distribution network and customer base.
  • Economies of scale.

Important Points You Should Know to Buy an NBFC

Before the NBFC takeover procedure is initiated, do comply with the following:
  1. Check that all the documents to be submitted to the RBI and other authorities are genuine legally.
  2. Examine all previous records, such as indebtedness (if any), last 3-years financial statements, cases pending against the company (if any), legal suit pending against the company (if any), etc. and any such other details which may impact the decision of buying the NBFC.
  3. Inspect all the important documents such as Certificate of Incorporation, PAN, GST, and other such registrations availed during the ongoing tenure of the company.
  4. Check the KYC about the Directors, promoters, investors presently associated with the company.

While gathering and verifying the information about the company, you can also proceed and execute a formal MOU agreement, and get it signed along with a certain token of money.