NBFC Registration

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NBFC Registration

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NBFC

Non-Banking Financial Company or NBFC is an incorporated company that is a financial institution having primary business as loans and advances, acquisition of shares, stocks, bonds, and other marketable instruments, insurance business, or chit business, etc. These companies are known for introducing a wide range of products, hassle-free finances, and ease of access to the unbanked sector. Their decisions are quicker, involves much less paperwork, prompt disbursal of loans, broader reach, and the eligibility requirements are not as rigid as the organized banks. Due to all these reasons and personalized products, more customers prefer transacting with NBFC than banks.

All NBFCs are regular companies, registered under the Companies Act of 1956 or 2013. They must not be involved in any agricultural or industrial activities, or sale, purchase or construction of immovable property, etc.
In India, NBFCs have made finance accessible to rural and semi-urban parts of the country. Providing easier working loans and credit facilities, especially where most banks either do not finance due to their stringent rules or have absolutely no reach.

NBFC Takeover

You can own an NBFC in India by either

a) Get a New Registration with RBI, or
b) Take-over an existing one.

To make a new company and then an NBFC means building a customer base, marketing the new business, hiring employees and establishing cash flow. All from scratch. This takes time and extra effort.
Getting a new NBFC registered takes approximately 3-5 months in the registration process only.
Whereas acquiring an existing NBFC takes around 2-3 months. And the time required to design and formulate the framework of the organization is saved.
The term NBFC Takeover implies buying an existing NBFC by another company or another NBFC. The takeover can be undertaken only if both, the Target as well as the Acquirer, are already registered under the Companies Act.
However, it may be a case of a friendly takeover. That is when the seller has put his company on sale. The terms are based on mutual understanding.
Or it may be hostile. When the Acquirer deliberately plans to take control of the other entity. Acquires shareholding in the Target Company without its knowledge.
In both these situations, the balance sheet of the Target NBFC has to be nullified for its assets and liabilities to enable the Acquirer to take hold of its management.

Check if Prior Approval from RBI Required?

To Takeover an NBFC, check first whether prior approval from the RBI is required or not? Or is the transaction is exempt? Certain situations have been specified by RBI when this transaction needs its approval. For situations not matching these conditions, no such prior approval is needed.

Following are the situations of NBFCs arrangements that have been mentioned as requiring RBI’s approval before proceeding:

    • Whenever a takeover of NBFC takes place. Whether it involved changes in the management or not.
    • The shareholding structure has changed. With at least 26% of the paid-up equity capital of NBFC being acquired or transferred. Such a change may have happened over a period of time.

Except for cases when a competent court has approved the buyback of the shares or reduction in the capital.

  • The structure of the management has altered. By replacing over 30% of the Directors.
    This 30% is excluding Independent Directors or is part of a regular rotation of Directors.

What is Required to Apply for Prior Approval

If any of the above situations are being met for your NBFC takeover, then prior approval from RBI needs to be applied for. This application, along with the Declarations, needs to be made on the letterhead of the company. And the following documents are to be attached:

  1. Sources of funds that are used for acquiring shares of the Target NBFC by the Acquirer.
  2. Details about the proposed Directors/shareholders. Their ID proof, Address proof, Education, Qualifications and Experience proof.
  3. Declaration by all the proposed Directors/shareholders stating their non-association with any organization involved in financial activities but was denied a Certificate of Registration (CoR) by the RBI.
  4. Declaration by all the proposed Directors/shareholders, of not having a criminal background and Non-conviction u/s 138 of the Negotiable Instruments Act.
  5. Declaration affirming their non-association with any entity accepting deposits, by all the proposed Directors/shareholders.
  6. Banker’s Report on the proposed Directors/ shareholders.

This application is to be submitted to the Regional Office of the DNBS (Department of Non-Banking Supervision), under whose jurisdiction the Registered Office of the NBFC is located. RBI may send some queries or ask for clarifications and/or proofs for details mentioned in the application. All such queries must be answered, and well in time, so that your application with RBI doesn’t get backtracked and delayed.
Generally, this approval takes about 1-3 months, differing according to the case.

Just note that in case any required document is missing while applying, the application shall be considered null and void.

Prior Public Notice About Changes

On getting the approval from RBI for the takeover, the general public has to be notified by publishing the planned takeover. In at least one leading national and one leading local newspaper, at least 30 days before such sale of shares, or transfer of control, is planned to take place. Whether the shares are being transferred or not.
The terms laid out for such publications are:

  • Public notice is to be issued at least 30 days before the change in control of the ownership is planned. Whether by the sale of shares, or transfer of control. Whether with or without the shares have been sold or not. This public notice is to be given by both the Acquirer and the Target, and also by all other parties involved, after obtaining the permission of the RBI. They may choose to publish together or separately.
  • The proposal of buying, selling, transferring ownership or control, the particulars of the transferee, the terms & conditions agreed upon, and the reasons for such takeover, sale or transfer, must be indicated clearly in the public notice.
  • This notice must 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.

Process of NBFC Takeover

  • MOU (Memorandum of Understanding):  For buying an NBFC, at first, an MOU is to be signed with the Target Company. This specifies that both parties are entering into a takeover transaction. It is to be signed by the Directors of both the companies i.e. Acquirer Company and Target Company. And at the time of signing MOU, token money is to be handed to the Target Company by the Acquirer, confirming the transaction. MOU defines the responsibilities and requirements of each party.
  • Convening Board Meeting: After the MOU has been signed, a Board Meeting is to be convened in both the companies to address the following issues;
    1. Date, timing, place of assembling Extra-Ordinary General Meeting (EGM).
    2. During which the required resolutions to take over an NBFC will get passed.
    3. Assigning the task and responsibility of replying to the queries from RBI about the takeover scheme. This person shall be mentioned while applying with RBI.
  • Public Notice: After prior approval for takeover has been taken from the RBI, the public has to be notified, to invite any objection of the public on the transaction. This notice is to be published in two leading newspapers within 30 days of approval from RBI.
  • Share Transfer Agreement: Once 31 days are over of the publication in the newspapers, the Share Transfer Agreement shall be signed and the remaining consideration to be paid by the Acquirer.
  • NOC from Creditors: An NOC (No Objection Certificate) from all the creditors of the Target Company shall be taken before the transfer of business can take place.
  • Assets Transfer: If no objections have been received from the public or creditors, and the RBI’s approval for the takeover has been received. Then the assets shall be transferred. But the transfer should not violate any clause of the agreement.
  • Evaluation: Target Company gets evaluated, in accordance with the rules specified by RBI. The stipulated technique for evaluation is DCF i.e. Discounted Cash Flow Method. This calculates the net present value of the entity. Later, a certificate shall be taken by a certified and practicing Chartered Accountant briefing the method adopted for valuation.
  • Notice to Regional Office: Nest step is to submit an application to the Regional Office of RBI. It must be on the letterhead of the company. RBI must also be intimated of all the changes in the management structure of the Target NBFC after the takeover, continuously. The application mentions:
    1. ID-proof, address-proof, and qualifications of the proposed directors and shareholders.
    2. Shareholders acquiring the NBFC and their source of funds.
    3. Declaration by the Directors and the shareholders that they are not associated with any unregistered entity which is accepting public deposits.
    4. Declaration by the Directors that no criminal proceedings have been initiated against them in the past or are pending against them in any court of law.

Benefits of NBFC Takeover

Buying an existing NBFC saves you time that is essentially required for setting up any new business when compared to getting a new one registered. Besides avoiding the troubles faced in starting a business fresh, below are a few more advantages of an NBFC takeover:

  1. 1. Increase in profitability.
  2. 2. Reduction in competition.
  3. 3. Rise in sales/revenue.
  4. 4. Business expansion with more distribution network and customer base.
  5. 5. A newly set-up business may not have a positive cash flow for two years.
  6. 6. If you buy an existing business, you are buying the history of the business. There are staff, equipment, and premises already in place.
  7. 7. There will be economies of scale, of handling two or more companies together.

Why LegalRaasta is the Best

RBI has laid down the guidelines for the process to be taken for the NBFC takeover. All the NBFCs are being strictly regulated by RBI. And, therefore, all provisions must, necessarily, be complied with. And if both the parties, especially the Acquirer Company, are not well-versed with all the compliances to be met, it becomes difficult to successfully complete the process.

Taking over an NBFC is a lengthy and time-taking process. A thoroughly planned approach is essential to adhere to the compliances of the applicable laws.
This is where LegalRaasta excels. We’ll be of service at every step and ensure the most convenient NBFC takeover. Whether it is meeting RBI regulations, Approvals, Due Diligence, Accounting, Auditing, and Reporting. We also have listed NBFCs on sale in the area of your preference.

You can also take our help for easier:

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

Important Points 

Before the process of taking over an NBFC is initiated, you must:

  • Ensure that all the documents that are to be submitted to the RBI and other authorities are legally genuine.
  • Examine all previous records, such as liabilities, past financial statements, cases pending against the company (if any), court cases pending against the company (if any), etc. And all other details that may affect the decision of NBFC takeover.
  • Review all the important documents such as Certificate of Incorporation (COI), PAN, GST, and other registrations taken during the ongoing tenure of the company.
  • Check the KYC of the Directors, investors, promoters, currently working with the Target NBFC.

Frequently Asked Questions

What is an NBFC?
How to takeover an NBFC?
What is meant by Prior Approval from RBI?
How to get Prior Approval from RBI to takeover an NBFC?
What Prudential Norms are applicable to NBFCs?
Can all NBFCs accept deposits?
What is the required ratio for liquid assets for NBFC-D?
Does RBI regulate all non-banking financial companies?
What is meant by “Principal Business”?
Does RBI regulate all companies carrying on any financial activities?
Does RBI regulate those companies not fulfilling the 50-50 criteria but accepting deposits?
What are the powers of RBI with companies meeting the 50-50 Principal Business Criteria?
Can all NBFCs accept deposits?
Which NBFCs have been specifically authorized by RBI to accept deposits?
Legally, which entities can accept deposits from the public?

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