NBFC Takeover

The NBFC takeover is understood to be a layman when a big NBFC acquires a small or equal-sized NBFC. It can also be taken as two NBFCs merging into one with mutual consent at times or without mutual consent. It involves a set of rules and regulations set by the Reserve Bank of India, which needs to be abided by the NBFC acquiring another NBFC.

The RBI tries simultaneously to make the business of NBFCs smoother while retaining the requirement of basic compliance. The takeover of NBFC signifies the purchase of one NBFC by another company. Only those registered with NBFC under the Companies Act are eligible to acquire control of another NBFC.

What kind of companies are involved in this process?

1. Target Company: Company being targeted to be acquired. 
2. Acquirer Company: Company developing the target company.

What are the two ways in which an NBFC takeover can be done?

1. Friendly takeover: 

• takes place between companies with their mutual consent. 
• Acquirer Company offers the target company itself for being acquired.
• The target company accepts the Acquirer Company’s offer.

2. Hostile takeover: 

• Acquirer Company secretly tries to acquire the target company. 
• It takes place when the management of the target company is unwilling to accept the takeover offer.

What are the pros of the NBFC takeover?

1. Increase in profitability of Target Company.
2. The decrease in competition.
3. Increase in sales/revenue.
4. Expansion of a distribution network.
5. Economies of scale.

What are the Cons of the NBFC takeover?

1. The amount paid for goodwill is often less compared to its actual price.
2. Conflict in new management.
3. Cultural clashes between the two companies.
4. Reduce employee morale.
5. Hidden liabilities of the Target Company.

What are the RBI Regulations on the NBFC takeover?

1. The takeover of the NBFC requires prior approval of RBI whether there is a change in management or not
2. Approval should be in writing.
3. Prior approval of RBI will be required when acquisition or transfer of shareholding for more than 10% is involved.
4. No RBI approval is required in case of a change in shareholding for more than 26% for buyback or reduction in share capital, provided that the competent authority should approve this reduction or buyback.
5. In the case of more than 30% of the change in the directors of the company, prior written approval from the RBI is required.
6. Prior public notice is needed in case of change in the direction of the company at least 30 days before the official announcement of such change.
7. No RBI approval is required in case of change in the management by 30%, including Independent Directors or by rotation of the existing directors in Board.

What are the steps involved in the NBFC Takeover?

Step 1:

Signing of Memorandum of Understanding: The Non-Banking Financial Company Takeover procedure initiates from signing the Memorandum of Understanding (MOU) with the proposed company.

Step 2: 

Approval from RBI: Prior authorization is required from RBI. It is considered the most crucial step. 

Step 3:

Publish Public Notice Bilingually: Public notice needs to be published in two regional languages, i.e., English being the first and regional language being the second one. Notice should be released within 30 days of receiving RBI clearance.

Step 4:

Publish Second Public Notice: The second public notice needs to be published in two regional languages, i.e., English being the first and regional language being the second one. Notices should be published before moving into a formal agreement at least 30 days before purchasing shares, transferring authority, transferring shares, or before-divulged concerns about the takeover.

Step 5:

Set Foot in the Formal Agreement: A formal agreement is executed between the parties, and now the following things can be done for takeover: 

• Purchase share or 
• Transfer of administration or 
• Transfer of shares.

Step 6:

Commencement of Liquidation Process: In this step, the liquidation of all the target company assets is initiated. Moreover, any liabilities of any kind will be paid off first. The acquirer here gets to evaluate a fair balance in the bank on the name of the company. During calculation in this step, net worth is considered as the basis as it was on the takeover day.

Step 7:

Obtain NOC from Creditors End: Target Company must acquire a NOC from the creditors before the assets’ transfer of the targeted company. 

Step 8:

Asset Transfer: The transfer of assets commences once the RBI approves the scheme without any objections.

Step 9:

Entity Valuation in Agreement to the RBI Prescribed Rules: The entity's valuation can be done to confirm the set of rules and regulations as prescribed by the RBI. The discounted cash flow (DCF) method is used as a technique for the valuation process. This method is known for displaying the net present value of any entity.

Step 10:

Grant of NBFC Takeover Approval: Approval is being sought at the regional office of the Non-banking Supervision Department. The department grants such approval for the NBFC takeover by issuing a Non-Objection Certificate (NOC). The department has all the powers to ask further questions to satisfy itself if it doubts some, even after the preliminary screening of the application.

Conclusion: 

Mergers and Takeovers have become an active part of the whole corporate scenario. NBFCs are also influenced by the impact of such compromises and arrangements. The Reserve Bank of India has recently laid down some procedures and regulations for the process of NBFC takeover.