Buy a “Non-banking financial company”

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A Non-Banking Financial Company (NBFC) is a specific type of company which is established either under the Companies Act of 1956 or 2013. NBFCs have been playing a vital role in the advancement of Indian economy by bringing convenience, accessibility, diversity, and efficiency into the financial sector.
Their principal business is “Providing loans and advances, acquisition of shares, stocks, bonds, insurance business, or chit business, etc”.

Though these companies do not possess a banking license, yet are involved in various financial services. People find transacting with these entities easier because of their hassle-free terms & conditions, quick decisions, prompt services and expertise in niche segments. Moreover, NBFCs have removed the rigidity of the country’s financial system by serving in regions where banks do not reach.
Because they provide financial services, these companies also have to mandatorily get an NBFC License by the Reserve Bank of India, RBI.

Buy an NBFC

You can have your own NBFC business in India by either:

  • Getting a new company formed and registered with RBI, or
  • Buy an existing NBFC.

Out of these, the process of buying of an NBFC is quicker than establishing one. Moreover, the hassle of going through the initial complex groundwork is avoided. Buying an NBFC takes between 2-3 months only, whereas getting a company registered with the RBI as an NBFC can take anywhere from 3-6 months.

The purchase of an existing NBFC by “another company or another NBFC” may be a case where an NBFC has been put on sale. Or when the Acquirer or Buyer deliberately plans and acquires the control of another entity. This is done without the knowledge of the seller. In both situations, the balance sheet of the NBFC on sale would need to be reduced to stand at null. With all it’s assets and liabilities handed over to the Acquirer.

The RBI has provided step-by-step provisions for buying NBFCs so any ambiguity has been eliminated.
If the transaction of sale and purchase of the NBFC is a mutually agreed one, then the first step to be taken is to get the planned deal approved by the Board of Directors in a general meeting. Once the members have consented, an MOU with the proposed NBFC on sale has to be signed, to execute the acquisition. Generally, the MOU is signed and some advance token money is paid to the seller. And then RBI’s approval for this deal is sought.
Some precautions and scrutiny must necessarily be conducted by the buyer. The due diligence process must be undertaken while reviewing the financials of the target company.

Check if Prior Approval from RBI Required

Before buying an NBFC, first, check whether you need prior approval from the RBI for buying your target NBFC or can you proceed without it. The Acquirer needs approval from the RBI in certain cases, before initiating the transaction. Some other cases, however, do not require any such prior approval.

The situations where it is necessary to take prior approval from RBI are:

  1. Whenever an NBFC is acquired or bought or taken-over, whether any changes have been made in the management or not.
  2. The structure of shareholding has changed, resulting in a 26% acquisition or transfer of the paid-up equity share capital of NBFCs. This may have happened over a period of time.
    • Except when the buyback of the shares or reduction in the capital amount has been approved by a competent court.
  3. 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.

When proper documents have not been submitted, all applications would be considered null and void by RBI.

What is Required to Take RBI’s Prior Approval

If the buying deal of the target NBFC is falling under any of the above situations, then you need to apply to RBI for prior approval. And your application, on the letterhead of the company, needs to be accompanied by the following documents:

  • Details about the proposed Directors/shareholders/members. Their ID proof, Address proof.
  • Education, Qualifications and Experience proof of the proposed Directors.
  • Sources from where the funds that were used for acquiring shares in the target NBFC, have been received, by the proposed shareholders.
  • Declaration by all the proposed Directors/shareholders stating that they are not associated with any entity which was denied a Certificate of Registration by the RBI.
  • Declaration of not having a criminal background as well as Non-conviction u/s 138 of the Negotiable Instruments Act by all the proposed Directors/shareholders.
  • Declaration by all the proposed Directors/shareholders/members confirming their Non-association with any entity accepting deposits,
  • Banker’s Report on proposed Directors/ shareholders.

Once the above documents are ready, you are to submit the application to the Regional Office of the Department of Non-Banking Supervision (DNBS) of RBI, under whose region the Registered Office of the NBFC is situated. RBI may need answers to some queries or clarifications on some points mentioned in the application. All such communications must be answered, well in time, to avoid any undue delay or cancellations from RBI to process your application.

Is Prior Public Notice About Changes Required?

On getting RBI’s approval to buy the Target NBFC, a public notice is to be given in one leading national and one leading local newspaper at least 30-days before such transfer of control or purchase of shares is to take place.
RBI conditions are:

  • At least 30-days before the actual purchase of, or transfer of the ownership by sale of shares, or transfer of control (whether with or without the sale of shares) takes place, a public notice is to be issued. Such public notice shall be given by both the Acquirer Company as well as the Target NBFC. And also by all other parties concerned. This public notice can be issued by all entities together also, after obtaining the prior permission of the RBI.
  • The proposal of selling or transferring ownership or control, the particulars of target and the reasons for such sale or transfer of ownership or control, must be indicated 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 registered office.

Why Purchase an NBFC?

By buying an NBFC rather than getting a new one registered, saves you on time which is required for setting up any new business. Though the process of getting registered with RBI involves similar steps, still the time is quite less if you buy an NBFC rather than establishing a new one. Or you can take an NBFC on rent. Not only you avoid the teething problems faced for making a business work, but there are also a few more advantages of NBFC buying.

  • Increase in profitability of both, the Acquirer Company and the Target NBFC.
  • Competition is reduced.
  • Rise in sales/revenue.
  • Distribution network and customer base merges and expands.
  • Economies and savings of scale.

How LegalRaasta is Best Option to Buy an NBFC?

The whole process of NBFC buying is stringently regulated by RBI. All it’s compliances must be duly met. Therefore, the persons fulfilling the requirements and forms etc. must be well-versed with all the provisions, which are relevant to both the Acquirer as well as the Target NBFC.
At only LegalRaasta, you will get assistance at every step of the way. For complying with all RBI regulations, accounting, and reporting. All the processes will be performed with utmost precision and secrecy will be maintained.

There are NBFCs on sale listed out at our site, so you can select according to your choice, objectives, and budget. We also help with mergers and take-overs. Moreover, there are many NBFCs available on rent in the region, you prefer to operate in.
You just have to pick one.

Our process begins with a detailed telephonic consultation. This enables us to get an insight into your requirements and goals, and offer you the most suitable answer.

Next, together, we go through a checklist. All the compliances, legal requirements, forms to be filed, information/paperwork to be completed, as required by RBI. This checklist would be kept updated frequently.

Now, sit back and focus on the growth of your business.
Let LegalRaasta begin the buying process with RBI and the government.
Of course, you get real-time tracking of the project process flow, as the phases get completed.

Our services, in terms of NBFCs, include:

  • Renting NBFCs
  • Takeovers
  • Mergers/Demergers
  • Business Re-structuring
  • Contract Drafting
  • Approval for Management Change from RBI
  • Designing Financial Services
  • Marketing Digital Loan Products
  • Meeting RBI Compliance
  • Internal Audit Services

Important Points before Buying an NBFC

Before initiating the process of purchasing an NBFC, make sure to fulfill the following conditions:

  • Check that only legally genuine documents are being submitted to RBI and other authorities.
  • Examine all previous records, such as indebtedness (if any) since the beginning of the Target NBFC or at least the last 3-years financial statements of it’s existence. Check for any cases pending against the company, any legal proceedings pending against the NBFC, etc. And any such other details which may impact the decision of acquiring this NBFC.
  • Inspect all the important documents such as PAN, GST, Certificate of Incorporation, and all other registrations availed during the existence of the company.
  • Check the KYC of the Directors, promoters, investors presently associated with the NBFC.

While verifying the information about the target NBFC, you can also proceed and sign a formal MOU agreement, along with a certain token of money, as mutually agreed. This binds both the Acquirer and Target to stick to the terms, conditions, and time-periods mentioned in it.

Share Purchase & Transfer

At the time of buying an NBFC, the final step is to execute the Share Purchase Agreement. This agreement is prepared and signed by both parties, the buyer and the seller or the Acquirer and Target, after the public notice of buying. The assets of the Target NBFC are discharged in the balance sheet and liabilities are paid off. The amount calculated is based on the net worth as on the date of the takeover. RBI’s directions are to be followed in determining the net worth. The Acquirer Company receives only a clean balance sheet.
This is the final official handover of the management and the assets/liabilities from the Target Company to the Acquirer Company. For any remaining consideration, it shall be paid off within 31 days of the public notice in the newspaper, as per RBI. Or as mutually agreed by all the parties.

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