Guidelines for NBFC Takeover Procedure and Due Diligence

What is meant by takeover?

Takeover: Takeover is a business strategy of acquiring management of the

target company either directly or indirectly. The motive of the acquirer is to
gain control over the board of directors of the target company for synergy in
decision making.

Takeovers are of two types “friendly” and “hostile”. In a friendly takeover, the
acquirer first approaches the promoters/ management of the target company
for negotiating and acquiring the shares.

The friendly takeover is for the mutual advantage of the acquirer and acquired
companies.

On the other hand “hostile takeover” is against the wishes of the target
company’s management. Acquirer makes a direct offer to the shareholders of
the target company, without the prior consent of the existing promoters/
management.
 Guidelines for NBFC Takeover Procedure and Due Diligence

What is meant by due diligence in the matter of takeover?

Due diligence is the inspection of the facts /the documents, background

verification, to check the authenticity of matter/organization transaction of
the entity to be acquired/purchased.

In the process of takeover of an NBFC following steps of due diligence

that should be taken:

1. KYC of all incoming and outgoing Directors, promoters,

2. Incorporation certificate, GST, all other such registrations availed at the

time of incorporation or during the ongoing tenure of the company.

3. Inspection of all the documents to be submitted to the RBI

4. The previous records i.e. last 3 year financial statements, cases pending
against the company, indebtedness if any, such other details which could
impact the decision.

5. Formal MOU to be signed with a certain token of money. This will

confirm the seriousness of both the parties interested in the matter.
 Guidelines for NBFC Takeover Procedure and Due Diligence

Procedure for Takeover:

Governing authority for the takeover of NBFC is RBI (Reserve bank of India).
Firstly we need to know when prior approval is required for NBFC takeover.

In following cases the prior approval of RBI is required to be taken

wherein:

1. Takeover takes place.

2. Change on management leading to change of 30% of the Directors.

However, of such change pertains to change of 30% of the Independent
directors or due to rotation of directors then such changes do not require
prior approval of RBI.

3. Change in a Shareholding pattern in such a manner that it leads to

transfer of 26% of the Paid up capital of the company. However, if such change
is due to Buyback of the shares or reduction in capital by the approval of a
competent court then such changes do not require prior approval of RBI.
 Guidelines for NBFC Takeover Procedure and Due Diligence

Procedure for approval in the case where prior approval is required:

An application on the letterhead of the company requesting the approval is

required to be made and certain documents to be attached with the
application. Following Documents are required to be attached:

a) All the details about the proposed directors/ shareholders ;

b) Sources of funds to be used by the shareholders to acquire the shares in

the NBFC

c) Nonassociation/association declaration by the proposed directors/

shareholders of being associated with any unincorporated body that is
accepting deposits or with any company, the application for Certificate of
Registration (CoR) of which has been rejected by the Reserve Bank

d) Declaration by the proposed directors/ shareholders that there is no

criminal case, including for offense under section 138 of the Negotiable
Instruments Act, against them

e) Bankers’ Report on the proposed directors/ shareholders

f) Financial Statements/Annual Report for last Three years

Public Notice: Two times Public notice in two regional languages of which
one should be English and other in vernacular language should be published.
When??
 Guidelines for NBFC Takeover Procedure and Due Diligence

1. For 30days after approval of RBI. I.e. wait for 30days after approval
before taking any step in furtherance to the previous steps for takeover. If any
opposition or concerns are received w.r.t. the Public notice resolves it.

2. Before 30days of entering into an agreement to purchase share/transfer

of shares/ transfer of management or such interest for takeover.

Where to submit Application?

It can be submitted to the Regional Office of the Department of Non-Banking

Supervision in whose jurisdiction the Registered Office of the NBFC is located.

Resolve all the queries of RBI department and usually expected time period
for approval is 3-4 months.