Overview of NBFC Takeover

The takeover of NBFC is where a company takes over by acquiring an already established NBFC accredited by the Reserve Bank of India. However, unlike starting a new NBFC, a takeover provides a quicker and simpler entry into the banking system. This entails the purchase of a running NBFC, along with all its operations, assets, liabilities, and customer base. The RBI guides the process of NBFC acquisition and has several phases and criteria that must be achieved. This entails seeking approval as well as adherence to legal policies and documentation. Corporates and individuals usually pursue NBFC takeovers when planning fast-tracked entry into the finance industry, expansion of their present ventures, etc. They will grow faster by purchasing a well-established NBFC that already has an infrastructural base, licenses, and a network of clients. The takeover of NBFC, on the other hand, is a highly technical procedure involving examining legal requirements, financial analysis, and regulatory guidelines. There should be experienced persons like lawyers and consultants who know how to handle the complexities involved in NBFC acquisitions. This write-up explores the information on the takeover process that requires documentation about a takeover, why NBFCs are taken over, and benefits for a buyer. To get specific legal and financial advice and remain in line with pertinent rules governing NBFC acquisition, one should seek consultation from relevant professionals

Types of NBFC Takeover

There are two distinct types of takeovers, which are as follows:

• Hostile takeover - In this type of takeover, the acquired uses several methods to gain ownership of the Company, which is to be achieved without the consent of the board of directors associated with the target company. During a hostile takeover, the businesses reach out to the Company's shareholders and give a tender offer to replace the management of the target company. In a hostile takeover, the consent of the board of directors does not matter.

• Friendly takeover - This kind of takeover is done peacefully, with the consent and support of the detectors. In this kind of takeover, the takeover will take place only if the target company's shareholder consents to the deal after agreeing that the price per share is better offered compared to the current market price. The friendly takeover has several benefits, including a better price per share and a better opportunity for business growth.

Requirements of NBFC Takeover

The requirements for the takeover of NBFC are mentioned by the Reserve Bank of India, which are to be followed under the conditions stated as follows:

• The NBFC takeover will not result in the management alteration.
• In the case of shareholding variation, which will result in 26% of the acquisition of the paid capital, including all the progressive income over a period.
• If there is a change in management, which is more than 30% of the NBFC directors.

The NBFC regulations requirements for the takeover are as follows:

• The approval of The Reserve Bank of India must be taken irrespective of whether there is a change of management or not.
• The Minimum Net Owned Fund should be 10 cr (By March 31, 2027)
• The approval must be applied to the RBI in a written format.
• Approval from the Reserve Bank of India will be required for a shareholding of more than 10% for acquisition or transfer.
• RBI approval shall not be required if there is a shareholding pattern for more than 26% of the buyback, but the respective authority must have approved it.
• If there is a change in the director of a company, which is more than 30%, then written approval must be given.
• Prior public notice must be given at least 30 days before the announcement of the change of the direction of the Company.

Role of NBFC Takeover

There are several roles of a takeover for individuals and corporates who aim for a quick operation of their business as follows:

1. Faster Entry: Entering the field of finance through an NBFC takeover is much quicker than setting up a new NBFC. Therefore, the acquiring entity may obtain an existing Non-Banking Financial Company (NBFC) to skip through initial regulatory steps like getting a license, registering, and setting up the infrastructure.
2. Established Operations: An NBFC with operation experience and a pre-defined framework is acquired through a takeover approach by the acquiring entity. These encompass old systems, procedures, people, and customers who can be utilized to facilitate the expansion of business.
3. Regulatory Compliance: The acquisition of an entity currently registered and regulated by the RBA is one of the benefits of an NBFC takeover. Additionally, this translates into the fact that the acquirer may use the already existing licenses, permits, and regulatory approvals of the target, avoiding further compliance procedures.
4. Customer Base: This also involves buying an NBFC, which allows tapping into the existing customer base. This ensures ready clients, trust, and goodwill, which could help grow the business and sell more financial goods and services.
5. Synergies and Consolidation: The acquisition of NBFC facilitates synergies and consolidations within the financial sectors. Thus, combining operations undertaken by the acquiring entity can lead to consolidation or diversification of business. It will result in improved operational efficiency, a broader market penetration, and strengthened competition.
6. Expertise and Knowledge: The acquiring entity will gain a lot through the NBFC takeover with the knowledge, skills, and experiences of the management and staff of the acquired Company. It may assist regarding the industry issues and ways of managing the risks and offer new businesses in this context.

Objectives of NBFC Takeover

The objectives of the NBFC takeover can be outlined as follows:

1. Streamlined Market Entry: Thus, it does not require one to set up an NBFC, which takes a lot of time. The process enables business people to skip the early phases and begin executing their projects.

2. Operational Readiness: The acquiring entity also purchases an already-started operating NBFC ready for business operation. It also allows the new players in the market to avoid the obstacles of establishing their structures as they can buy NBFCs already equipped with all necessary procedures and other facilities.

3. Risk Mitigation: An existing NBFC reduces the risk of starting a new one. Such an integration is helpful as it helps avoid problems arising from differences in the experience, systems, and compliance procedures adopted by the acquired Company.

4. Utilization of Existing Infrastructure: In this regard, NBFC can provide a platform for the acquisition process to benefit the acquiring entity and utilize the existing structure of the contracted institution. Other operational resources, such as human resources and established clientele, also form part of this consideration. The utilization is made towards cost reduction and efficient resource management.

5. Market Expansion and Diversification: Businesses can increase their reach into the market by using the NBFC for takeovers, thereby broadening their operations. The acquiring entity gains access to new geographic areas, fresh customer segments, and various financial items by acquiring existing NBFC.

6. Brand and Reputation: The acquiring entity may find it profitable to purchase a well-branded NBFC, which will be used as an investment. It creates an advantage and is reassuring for both present and prospective buyers.

Advantages Of NBFC Takeover

The advantages of a takeover of NBFC are as follows:

• It helps in the trade that is involved in the Money market instruments
• It enables the offered loan as well as certain credit facilities
• It serves as the Last Resort for borrowing financial help
• It allows for the quick operation of the NBFC in a speedy and diligent manner
• It helps quickly and efficiently enter the financial market without the time-consuming process of establishing a new NBFC.
• Acquiring an existing and operational NBFC ensures that there is operational readiness. It benefits businesses looking to avoid the challenges and uncertainty generally associated with a business's initial stages.
• It helps mitigate the risks that are associated with the operation of a new NBFC.

Documents required for NBFC Takeover

The documents that are needed for the takeover of a NBFC are as follows:

1. Memorandum of Understanding (MoU)
2. Share Purchase Agreement (SPA)
3. Board Resolution approving the takeover
4. Due Diligence Report
5. Financial Statements for Target NBFC.
6. Details of the Acquisition Proposal.
7. Any scheme of amalgamation or arrangement (if there was any).
8. Letters of consent by the incumbent directors and shareholders of the takeover NBFC.
9. Approval of NOC from lenders, creditors, and regulating authorities
10. Report on valuation for the acquisition of selected NBFC.
11. Acquiring entity and its directors, board representatives
12. The required regulatory approvals and clearance thereof (if any) by/from RBI & others.
13. Documents such as bank statements are used as proof of purchase.
14. The NBFC must obtain consent or get an NOC from its existing customers as demanded.
15. Any other required documentation under law or regulatory guidelines.

Process of Acquiring NBFC Takeover

The procedure for obtaining a takeover is as follows:

• The Memorandum of Understanding must be signed with the target company, indicating that both companies agree to a takeover agreement. The responsibilities of the companies should be stated in the Memorandum of Understanding. Once the MOU gets approved, the acquiring Company must pay the token to the targeted Company.
• The approval of the RBI must be taken if it falls under the requirement that the authorization is mandatory.
• The public notice must be published within 30 days of receiving the clearance from the RBI. The information must be posted bilingually in English and a second regional language.
• The formal agreement then must be drafted with the relevant parties regarding the purchase share or transfer of Administration.
• The second public notice must be published 30 days before the purchase or transfer of authority or share and done in different regional languages.
• Then, the liquidation process will commence, and all the liabilities will be paid off.
• In the next step, the NOC from the creditors must be obtained.
• Approval of the scheme from the Reserve Bank of India, the assets will be transferred without any objection.
• Then, the valuation will be done per the RBI rules regarding the NBFC.
• As the final step, the RBI will grant the NBFC takeover approval after all the requirements have been fulfilled.

Why Adviso?

The process of NBFC Takeover involves a wide range of requirements, document preparation, and pre- and post-compliance obligations. It is essential to comply with the specific terms of the NBFC Takeover. The incorporation of a NBFC Takeover can be a tedious process without professional support. That’s where Adviso comes in. At Adviso, we provide expert services for NBFC takeover online approval under the RBI. Our Lawyers, CA, and CS experts guide you through every step of the journey to ensure your Company lists smoothly and efficiently. With Adviso's expertise and assistance, you can easily navigate the complexities of NBFC Takeover, saving time and ensuring compliance with all necessary regulations.