In India NBFC takeover is regulated by Reserve bank of India as is their registration. In present scenario, there has been a major evolution happening and new business models are developing and growing day by day. These structural changes happening on large scale have also affected the NBFCs. RBI has introduced many changes to ensure ease of doing business for NBFCs.
Procedure of NBFC Takeover
RBI has segregated different NBFCs on the basis of their size and operation level in following two categories:
- Non-systematically NBFC/ Smaller NBFC
- Systematically NBFC/ Larger NBFC
RBI regulations relating to Non-systematically important are quite liberal to help them grow. However, on the other hand systemically important, larger NBFCs are required to follow various rules to make sure that they are operating on par with the global standards.
NBFC takeover provisions do not cover minor changes in the management or control in their purview. But to incorporate any significant change, prior RBI approval is mandated.
When is Prior Approval required?
We just discussed that NBFCs are mandated for prior approval. Let us list out the circumstances where this prior approval becomes mandatory, failing which every change is considered null and void.
- Any Takeover of NBFC or acquisition of control, which may or may not results in a change in management.
- Any change in the shareholding of an NBFC, resulting in 26% acquisition or transfer of the paid-up equity capital.
- If there is change in more than 30% of the directors of the NBFC which results in change in the management.
Exceptions from prior approval Requirement
There are some exceptions to the above stated mandatory prior approval. They are:
- If the reason behind change in shareholding beyond 26% is buyback of shares/ reduction in capital by the prior approval of a competent court.
- If the change in the management by 30 % is:
- inclusive of Independent Directors or
- due to rotation of the directors in the Board.
Prescriber procedure of NBFC Takeover
- Before initiating any takeover proceedings the acquirer should go through the documents of the Target Company. After due satisfaction a Memorandum of Understanding should be signed between the parties.
- If the prior approval is required, then application for the same is to be submitted along with the following documents:
- Proposed directors/shareholders list with information
- Sources of funds for takeover
- A declaration by all the proposed directors/shareholders stating their non-association with any entity accepting deposits
- A 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;
- A statement of non-criminal background as well as non-conviction under section 138 of the Negotiable Instruments Act by all the proposed directors/shareholders
- Bankers’ Report with regard to proposed directors/ shareholders
- After due scrutiny if RBI is satisfied, it will issue a letter of approval.
- A public notice is required to be issued in two newspapers for 30 days indicating such changes and inviting any objections if any.
- After expiry of the above mention 30 days Share Purchase Agreement is to be signed, change in management is to be incorporated and remaining payments are to be done.
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