Ideal business structure for Small and Medium-sized Enterprises going for Partnership
NBFCs belong to a category of companies and are established under the Companies Act, 2013. They are granted the NBFC License by the “Reserve Bank of India (RBI)”.
NBFCs are intermediaries, which are engaged in providing finances as their primary business. They accept deposits, lend finance, and play a vital role in channelizing the limited financial resources into infrastructure development and create chances of earning. They complement the organized banking sector by attending to the ever-increasing financial needs of the corporate sector, delivering credit to the unorganized sector, and small unbanked borrowers.
However, they cannot be involved in agricultural activity, industrial activity, sale, purchase, or construction of immovable property.
The financial services provided by NBFCs include “Disbursement of loans, acquisition of stocks/shares/ bonds” etc. NBFCs focus on loans and advances, acquisition of shares, bonds, debentures, stocks, securities issued by the government/local authority or other similar marketable securities, leasing, insurance business, hire-purchase, etc.
RBI has specified certain guidelines/requirements in detail, which are to be followed/met, for the sale of an NBFC in India. Therefore, there is no scope of any ambiguity about buying or selling.
The sale of NBFC would involve two parties and it will also include a series of transactions between the seller and the buyer. According to RBI, an NBFC can only be sold to another NBFC or an established company – not any other kind of entity. A sale transaction would merge these two companies into one. The buyer or the Acquirer Company would procure either:-
At the time of handing over an NBFC, its balance sheet has to stand at null & void, and all assets & liabilities are transferred to the Acquirer.
To sell your NBFC, you need a buyer or an Acquirer Company, which is ready to buy it.
And experts advise to have all the agreements & details of the deal with the Acquirer in writing, to avoid any confusion and uncertainty.
Before selling your NBFC, first, you must check whether the transaction needs prior approval from the RBI or not. Certain cases have been specified by RBI when the sale transaction needs its approval before the process is initiated.
The situations specified by RBI, where prior approval is mandatory, are given below. And if proper documents are not submitted, the application shall be considered invalid and the transaction will be considered canceled
Whenever an NBFC is acquired/bought/taken-over/merged/amalgamated, whether any changes have been made in the management or not.
The shareholding structure has changed, ending in at least a 26% change in the ownership of the paid-up equity 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.
The management structure has been modified, by changing at least 30% of the Directors..
**This 30% excludes Independent Directors. If the change has been due to a regular rotation of Directors, approval from RBI is not required.
To sell an NBFC and get RBI approval for the change in its management, will take approximately 2-3 months. Therefore, it is advised to check the credential of Acquirer Company and make sure that the agreement with it, will hold well during this period.
The first step of selling an NBFC is to ensure that this sale is accepted by the members, in a Board resolution (Of both, Target and the Acquirer Company).
When both the Boards have been approved, you’ll have to share the essential financial documents with the Acquirer Company. Once it confirms to proceed with the deal, you should sign an MOU (Memorandum of Understanding) with it. At this time, you should get some token money from the Acquirer as proof of buying.
To sell your NBFC, your KYC Documents must be ready. And you must have a “Business Plan”, prepared for the next 3-years for the new or replacing Directors of the Acquirer Company.
These documents are to be filed with the Regional Office of RBI, under whose jurisdiction the registered office of your NBFC is situated.
There must be proper coordination, with the RBI, and all questions raised by RBI concerning the transaction must be coherently answered.
When RBI approves of the deal, the public has to be notified, to invite objections, if any, from any interested parties. For this, a publication has to be issued in one daily national and one daily local newspaper, indicating that a change in management is about to take place, as per RBI guidelines.
Once 30 days of this newspaper notice are over and objections (If any) are resolved, then both parties can sign the “Share Purchase Agreement”. Or some other day of the handover can be fixed by both of you, for this purpose. The management & administration shall be handed over to the Acquirer. And you would receive the balance consideration amount.
Further, as per RBI’s requirement, the assets as shown in your balance sheet are to be liquidated and liabilities are to be paid off. So that the Acquirer receives a clean bank balance in the name of the NBFC. The net worth of your NBFC is to be calculated on the date of sale.
After getting RBI’s approval for the sale, a public notice is to be given in one leading national daily newspaper and another in a leading local daily newspaper at least 30 days before the date when this transaction is about to take place. It indicates clearly that such a sale of shares, or transfer of control so that the members of the public can object if any.
The provisions are:
Public notice is to be issued at least 30-days before the planned date when the actual sale or transfer of the ownership by sale of shares, and/or transfer of control is going to happen. Such public notice is to be given by all the parties concerned, after receiving prior approval of the RBI. They may choose to do this separately or together.
The plan to sell or transfer ownership/control of the NBFC, the particulars of the transferee, and the reasons for this transaction, 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 the registered office of your NBFC.
As mentioned above, the sale/takeover/merger or certain other changes in the Board of Directors of an NBFC requires prior approval from RBI. All documents which are being submitted to the RBI must be filed with an understanding of the Acquirer Company.
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.