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NBFC

A non-banking financial company or NBFC is a company that gives financial facilities, they are not banks. NBFCs are specific entities that are not banks neither do they fit the legal definition of a bank.

A company registered under the Companies Act, 1956, or 2013, and are administered by the Reserve Bank of India (RBI). Such entities are involved in the business of loans and advances, purchase of shares of stock or bonds or securities. That allotted by a government or local authority or other securities of like marketable nature, leasing, hire-purchase, insurance business, and chit fund business. But they must not be involved in agriculture activity, industrial activity, sale/purchase/construction of an immovable property, as a major business.
NBFCs have been performing a significant role in the financial sector in India.

The transparency, convenience, versatility, performance, and quick assistance with financial elements have made NBFCs very popular among the common public, than banks. This reputation has been gained by their smart decisions, timely services, and expertise. NBFCs have fed to clients from untouched territories and segments. In fact, NBFCs have served to separate the rigidity of the country’s financial system by assisting those individuals and businesses who have been out of reach to the organized banking.
Generally, these institutions are not authorized to take public deposits that are repayable on demand. Due to these financial pressures, strict RBI regulations and other reasons, the business gets hard to maintain. And many are forced to sell their NBFC.

To Sell an NBFC

RBI has designated a guide in detail to be engaged in the sale of NBFC in India. Hence, there is no extent of any uncertainty about buying or selling.

The sale of NBFC will include 2 parties and includes a series of transactions among the seller and the buyer. According to RBI, an NBFC can only be traded to another NBFC or an incorporated company – not any other kind of entity. A sale transaction will join these 2 companies into one. The buyer or the Acquirer Company will procure either :

(i) the equity of the Seller NBFC to get the voting powers to be ready to choose the Board members, or

 (ii) at least 30% of the management. At the time of handing over an NBFC, its balance sheet has to reach null & void. And all assets & liabilities shifted to the Acquirer.

To sell your NBFC, you require a buyer or an Acquirer Company available to buy it.

And experts recommend to have all the agreements & specifications of the deal with the Acquirer in writing, to evade any confusion and uncertainty.

Procedure to Sell NBFC

To sell an NBFC and obtaining RBI approval for the change in its management takes about 2-3 months. Hence, it is recommended to check the credential of Acquirer Company and make sure that the agreement with it will hold big during this period.

  • The first step of selling an NBFC is to assure that this sale is allowed by the members, in a Board resolution. Of both, Target and the Acquirer companies.
  • When both the Boards have approved, you’ll have to share the necessary financial documents with the Acquirer Company. Once it verifies to proceed with the deal, you must sign an MOU (Memorandum of Understanding) with it. At this time, you must receive some token money from the Acquirer as evidence of buying.
  • To sell your NBFC, your KYC Documents should be available. And have Business Plan along with Projection prepared for the next 3-years for the new or replacing Directors of the Acquirer.
  • These documents are to be registered with the Regional Office of RBI under whose jurisdiction the registered office of your NBFC is located.
  • Coordinating with and solving any questions raised by RBI concerning the transaction.
  • When RBI approves of the deal, the public has to be informed, to invite objections, if any, from any interested parties. For this, a publication has to be issued in one daily national and one daily local newspaper, showing that a shift in management is about to take place, as per RBI guidelines.
  • Once 30 days of this newspaper notice are over and objections fixed, both parties can sign the Share Purchase Agreement. Or some other day of the handover can be fixed by both of you, for this idea. The management & administration must be handed over to the Acquirer. And you will get the balance consideration amount.
  • Moreover, as per RBI’s requirement, the assets as presented in your balance sheet are to be liquidated and liabilities are to be paid off. So that the Acquirer gets a clean bank balance in the name of the NBFC. The net worth of your NBFC is to be measured on the date of sale.

Is Former Approval from RBI Required?

Before selling your NBFC, first, you must verify whether the transaction requires prior approval from the RBI or not. Certain cases have been defined by RBI when the sale transaction requires its approval before the process is started.
The situations defined by RBI, where prior approval is necessary, are given below. And if proper documents are not submitted, the application must be deemed invalid and the transaction considered canceled.

  • Whenever an NBFC changes hands. Whenever it is traded/acquired/purchased/taken-over, whether any modifications in management occur or not.
  • The shareholding structure has improved, ending in at least a 26% difference in the ownership of the paid-up equity capital of NBFCs. This may have occurred over some time.
  • **Except when the capital being overcome or buyback of the shares has been supported by a judicial body.
  • The management structure has been changed, by replacing at least 30% of the Directors.
  • **This 30% eliminates Independent Directors. If the change has been due to a constant rotation of Directors, permission from RBI is not needed.

RBI Approval to Sell NBFC

As mentioned above, the sale/takeover/merger or some other modifications in the Board of Directors of an NBFC needs former approval from RBI. All documents to be submitted to RBI must be registered with an understanding of the Acquirer Company.

  • An application and a cover letter, on Company’s letterhead, are to be submitted to the regional office of RBI having jurisdiction where your NBFC is located.
  • Specifications about the proposed Directors/shareholder members, their KYC, ID/address proof, education & qualification proofs are to be included with the application.
  • The sources from where the Acquirer is managing the funds required to buy your NBFC.
  • Statement by the stated Directors/shareholders stating that they have not been linked with any other entity which is involved in the business of loans and accepting deposits, but is not registered with RBI.
  • Declaration by the proposed Directors/members that they have not been linked with any such company, which was denied for a Certificate of Registration (CoR) by the RBI.
  • Statement by the stated Directors/shareholders that there is no criminal trial upon them, pending or convicted. Including an offense under Section 138 of the Negotiable Instruments Act.
  • Clean Banker’s Report on the slated Directors/members.
  • Financial Statements and Annual Reports since the registration of your NBFC or past 3 years, whichever is higher.
  • Apart from above, a public notice is to be provided, at least 30-days earlier to the planned date of the sale of, or substitution of the ownership by the sale of shares, or transfer of power, individually or together by the parties. This notice is to be written in at least one national daily and one vernacular daily newspaper.

Once the above documents are active, the application is to be filed with the Regional Office of the DNBS (Department of Non-Banking Supervision) of RBI, under whose jurisdiction your registered NBFC office comes. RBI may require some information or put up inquiries on points mentioned in the application and other documents. These need to be resolved, well in time, to evade any undue delay from RBI to process the application.

Requirements of Prior Public Notice about Changes

When you get RBI’s approval for the sale, a public notice is to be provided in one leading national daily. And added in a leading vernacular daily newspaper at least 30 days prior to the date when this transaction is going to take place. It shows clearly that such a sale of shares, or transfer of control so that the members of the public can raise objection if any. The requirements are:

  • Public notice is to be allotted at least 30-days before the planned date when the actual sale or transfer of the ownership by sale of shares, and/or transfer of control. Such public notice is to be provided by all the parties involved, after getting prior approval of the RBI. They may prefer to do this independently or mutually.
  • The plan to sell or transfer ownership/control of the NBFC, the details of the transferee, and the purposes for this transaction, must be shown clearly in the public notice.
  • The notice shall be published in at least one leading national daily newspaper and another leading daily newspaper in the local language of the place of the registered office of your NBFC.

How Selling gets Easy with NBFCLicenseIndia

The entire process required to sell NBFCs is under strict regulations by the RBI. All the compliances need to be duly satisfied. Which means, the Target Company is not to miss in giving any information to the Acquirer Company which is actually needed. Furthermore, all the compliances to complete the process successfully. With Ajayadvisors, you have an associate to take you by all steps – RBI regulations, accounting, and reporting. We also help to buy NBFC.
Work starts with a detailed telephonic consultation. This allows us to get an insight into your specifications and purposes. We tell you the details about the companies ready to buy your NBFC, in case you listed your company with us.

Frequently Asked Question

What is NBFC?

NBFC or Non-Banking Financial Company is established under the Companies Act in India. It is involved in the business of giving loans 
and advances to the public.

Who supervises NBFC in India?

The RBI i.e Reserve bank of India regulates NBFC

What is needed to get an NBFC license from RBI?

Any business ready to commence activities of non-banking financial nature as defined under Section 45-IA of the RBI Act, 1934 should comply with:
i. It must be a company included u/s 3 of the Companies Act, 1956 or 2013,
ii. It must have a least NOF of Rs. 2 crores. (The minimum NOF requirement for specific NBFCs like NBFC-MFIs, NBFC-
Factors and CICs differs).

What is the principal thing that I should check before investing in an NBFC?

The main thing to review before investing in an NBFC is that it has been registered with Reserve Bank of India.

How can a person or entity buy an NBFC in India from abroad?

A person or an entity located outside India can buy an NBFC in India under the full supervision of the RBI by following the process of inward remittances via the banking route.

Can any action be taken upon individuals/financial companies for making a false claim of being set by RBI?

Yes, action can be taken against anyone making such a claim as it is unlawful for a financial company or individuals to make such a claim of being under the regulation of RBI. 

If any financial company makes lending and making investments as its principal business but does not get a Certificate of Registration from the RBI, what action can be taken upon it?

If any company that is deemed to get registered as NBFC with RBI but does not do so, the RBI can levy penalty on such company or may even continue in the Court of Law. But, it must require to be proven that the company was originally leading the business of lending, deposit acceptance or investment, without having taken the Certificate of Registration from RBI.

What are the different kinds of NBFCs that can be invested in?

The different kinds of NBFCs are: 

  • Infrastructure Finance Company (IFC)
  • Systematically Important Core Investment Company (CIC-ND-SI) –
  • Non-Banking Financial Company-Factors (NBFC-Factors)
  • Mortgage Guarantee Company (MGC)