Ideal business structure for Small and Medium-sized Enterprises going for Partnership
NBFCs or Non-Banking Financial Companies are those companies which have been established either under the Companies Act of 1956 or 2013. They have been playing a vital role in the development of the Indian economy by bringing accessibility, diversity, convenience, and efficiency into the financial sector.
They are involved in the principal business of providing loans and advances, acquisition of shares, stocks, bonds, insurance business, or chit business, etc.
In case you are looking to own an NBFC business in India, you can opt to either:
As in most other cases, the time taken to buy-out an existing business is quicker than establishing a new one. Buying an NBFC takes around 2-3 months, whereas getting a new company established and then registered with RBI as an NBFC can take anywhere between 3-6 months. Moreover, building a business up from scratch will take a lot of time and effort. This can be avoided by taking over an existing NBFC.
You have the option, again, of purchasing an NBFC which has been put on sale. Or, if you have zeroed in on an NBFC to buy, not already on sale, you can do so by acquiring its control via deliberating planning. This acquisition is done without the knowledge of the seller, especially if the seller or the Target NBFC is unwilling. In both situations, the balance sheet of the Target NBFC would stand at null, after all, it’s assets and liabilities have been taken over by you, the Acquirer.
RBI has provided a step-by-step procedure for buying NBFCs. If the deal is a friendly buying, the first step which must be taken is to get the deal approved by the Board of Directors in a general meeting.
Once the Board has consented to both the firms, an MOU with the Target NBFC has to be finalized & signed, to execute the acquisition. Generally, an MOU is signed and some advance money is paid to the seller, as a token. And then the rest of RBI’s requirements are to be met.
Some precautions must necessarily be undertaken by the buyer to evaluate the worth of the seller. All matters about the field of “finance, legal, corporate and other”, must be reviewed and evaluated diligently.
Before buying an NBFC, first, check whether you need prior approval from RBI for buying the selected NBFC or not. The Acquirer needs to apply for approval from the RBI in certain cases, before commencing the process. Some cases, however, do not require any such prior approval
The situations when it is necessary to take prior approval from RBI:
Whenever an NBFC is acquired/bought/taken-over/merged/amalgamated, whether any changes have been made in the management or not.
The structure of shareholding has changed, resulting in at least 26% transfer of the paid-up equity share capital of NBFCs. This may have happened over some time.
**Except when the buyback or reduction in the share capital has been approved by a competent court.
An amendment in the management structure, by changing more than 30% of the Directors.
**Independent Directors are not included in this 30%. If the change is due to a routine rotation of Directors, approval from RBI is not required.
In case proper documents have not been submitted with the application, the application would be considered null and void by RBI.
By buying an existing NBFC rather than getting a new one registered, you save on time. You can use this time to enhance the work of the previous entity. Though, both processes, of getting a new one registered or buying an existing one involve similar steps. Still, the preparation time is quite less if you buy an existing one. Or you may take an NBFC on rent. This prevents those problems that any new entity faces while setting up a business, making it known to the associates, etc. A few of the advantages of purchasing an NBFC have been given here:
Competition is reduced.
The rise in sales/revenue.
The rise in sales/revenue.
Customer Base and Distribution Network increases.
Economies of scale
Once you have the approval from RBI to buy the Target NBFC, a public notice is to be given in one leading national newspaper and one leading local newspaper, at least 30-days before this transaction (of transfer or purchase of shares, which is to take place).
RBI requirements are:
Public notice is to be issued 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.
The publication needs to be by both the Acquirer Company as well as the Target NBFC. And also by all other parties concerned. They have to option to issue the notice together. After obtaining the prior permission of RBI.
The proposal of transferring or selling ownership or control, the particulars of the Target NBFC, and the reasons for such transfer or sale 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 at least one leading daily newspaper in the vernacular language of the place of registered office.
Before the process of buying an NBFC with RBI begins, it is better to make sure the following checks are performed:
Verify that only legally valid documents are being submitted to the RBI and/or other authorities.
Review all previous records, such as liability (if any). Starting from the beginning years of the Target NBFC or at least the financial statements of the last 3-years. Check if any cases are pending against the company, any legal proceedings taken-up against it, etc. And all other such details that may influence the decision of acquiring this NBFC
Examine all the registration certificates, such as PAN, GST, Certificate of Incorporation, and all other certifications availed during the existence of the company.
Check KYC of the Directors, promoters, investors presently associated with the NBFC.
After verifying all this information, you also need to sign a formal “MoU” agreement, along with a certain token amount, as mutually agreed. This binds both the Acquirer and the Target to stick to the terms, conditions, and time-lines specified in it.
If the transaction to buy out the Target NBFC is similar to any of the above situations, then you need to apply to RBI for prior approval. And your application, along with a cover letter 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 certificate of the proposed Directors.
Origins, from where the amount has been received, by the proposed shareholders which is to be used for acquiring shares in the target NBFC.
Statement by the proposed Directors/shareholders declaring 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 and/or Non-conviction u/s 138 of the Negotiable Instruments Act by all the proposed Directors/shareholders.
Statement by all the proposed Directors/shareholders/members declaring their Non-association with any entity accepting deposits,
Clean Banker’s Report on proposed Directors/ shareholders.
Once the above documents are ready, you are to submit these documents to the regional office of the “Department of Non-Banking Supervision (DNBS) of RBI”, under whose jurisdiction the Registered Office of the NBFC is situated. RBI may ask for some clarifications on the points mentioned in the application. All such queries must be replied to, well in time, and avoid any undue delay or cancellations from RBI, to process your application.
During the purchase of an NBFC, the final step is to discharge the Share Purchase Agreement. This agreement is signed by both, the buyer and the seller, after the public notice of buying has been issued. The assets of the seller or the Target NBFC are discharged in the balance sheet and liabilities are paid off. So the Acquirer Company receives only a clean balance sheet. The amount is calculated on the basis of the net worth of the Target NBFC as on the date of the takeover. RBI has also provided directions which are to be followed while determining the net worth. This is the final step in the official handover of the management and the assets/liabilities from the Target Company to the Acquirer Company. In case any consideration is remaining, 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.