Register a “Non-banking financial company”
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.
If the takeover transaction of the Target NBFC is falling under any of the above-mentioned situations, you need to apply to RBI for prior approval. Then your application needs to be accompanied by the following documents:
Cover letter on the letterhead of the company,
Details about the Directors/shareholders/members proposed to takeover. Their KYC.
Education, Qualification and Experience proof of the proposed Directors.
Sources, from where the funds to be used for acquiring shares in the Target NBFC, have been arranged.
Declaration by the proposed Directors/shareholders stating that they have not been associated with any entity which was denied a Certificate of Registration (CoR) by the RBI.
Declaration of lacking any 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 no affiliation with any entity accepting deposits,
Banker’s Report on them.
Once the above documents are ready, apply 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 require answers to all clarifications it may seek on the points mentioned in the application. And they must be answered, well in time, to avoid any undue delay or cancellations from RBI to process your application.
Once RBI approves to take over the Target NBFC, a public notice is to be given in leading national and local newspapers at least 30-days before such transfer of control or purchase of shares is to take place.
RBI requirements are:
At least 30-days before the actual purchase/transfer of ownership is planned. Whether by selling shares, or transferring control (whether with or without the sale of shares) takes place. Public notice is to be issued, by both the Acquirer Company as well as the Target NBFC. And also by other parties concerned. This public notice can be issued by them together or not. After RBI has approved of the deal.
The planned sale or transfer of ownership or control, the particulars of the Target NBFC and the reasons for this deal, 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 vernacular 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:
Ensure that the documents being submitted to RBI and other authorities are legally genuine.
Examine all previous records of the Target NBFC, such as indebtedness (if any). Since its incorporation or at least the last 3-years financial statements of its existence. Check for all lawsuits pending against the company, or some legal proceedings pending against the NBFC, etc. And all other such details which may impact the decision of acquiring this NBFC.
Inspect all the essential documents such as PAN, GST, Certificate of Incorporation, and/or other registrations availed during its existence.
Check KYC of the Directors, promoters, investors presently associated with the NBFC.
You need to sign a formal MOU agreement. And pay a token of money, as mutually agreed. This binds both the parties to stick to the terms, conditions, and time-periods mentioned in it.