The article is written by Adv. Siddhant Jain
Non-Banking Financial Companies (NBFC) are specialized financial institutions registered under the Companies Act of 2013 or 1956, engaged in a variety of financial activities, including lending, asset financing, and investment in securities, real estate, and money market instruments. To operate, NBFC are required to maintain a minimum net owned fund, which is set at 5 billion rupees for non-deposit-taking NBFCs and 20 million rupees for systematically important NBFCs, as per their most recent audited balance sheet. Additionally, obtaining a certificate of registration from the Reserve Bank of India (RBI) is mandatory, ensuring that these companies meet the necessary regulatory standards to conduct their financial operations.
Mergers among NBFC, governed by the Companies Act of 2013, serve as a strategic mechanism to strengthen financial and operational capacities. These mergers often involve the acquisition of the target company’s equity shares by the acquiring entity, leading to significant benefits such as economies of scale, enhanced competitiveness, and potential eligibility for bank licenses. While mergers offer advantages like cost savings, tax benefits, and reduced non-performing assets, they also come with challenges, including managerial and operational complexities. Therefore, thorough due diligence and careful planning are essential to ensure that the merger aligns with the strategic objectives and regulatory requirements, ultimately contributing to the long-term growth and stability of the involved entities.
Non-Banking Financial Companies (NBFC)
NBFCs are organisations that are registered under the Companies Act of 2013 or 1956 and that carry out a range of financial operations, including lending money, financing assets, buying stocks, debentures, and other securities, providing credit facilities, and making investments in real estate and money market instruments. According to their most recent audited balance sheet, non-bank financial companies (NBFCs) must have a minimum net owned fund of 5 billion rupees for non-deposit taking NBFC or 20 million rupees for systematically important NBFCs in order to function. NBFCs must also get a certificate from the RBI.
“In order to improve the financial and operational strength of both companies, mergers of non-bank financial companies (NBFC) typically involve the acquisition of the target company’s majority equity shares by the acquiring company, or the target company may surrender the majority of its shares to the acquiring company.” RBI regulations state that only non-bank financial companies registered under the Companies Act of 2013 are allowed to undertake NBFC takeovers. One of the many advantages of mergers is economies of scale, which can facilitate growth and competition with government and multinational banks and even lead to bank licences.
In comparison to establishing a new NBFC, they also save money and time, provide tax advantages, improve competition with banks, grow market share, foster goodwill, and lower non-performing assets. However, because of the size of NBFC companies, mergers can provide operational difficulties that lead to managerial and operational problems as well as staff unhappiness.
There are 2 kinds of mergers: hostile takeovers, in which the acquiring business buys the target company secretly, usually in response to the target company’s board of directors rejecting the offer, and friendly takeovers, which are based on mutual consent.
It is essential to do due diligence before seeking a merger. It is essential to do in-depth background research on target organisations in order to confirm important details and match objectives with possible acquisitions. Crucial actions include assessing the target company’s financial standing and calculating the maximum amount needed for the takeover using cash flows. It’s critical to price the offer right because if you offer less than the target organisation is willing to accept, they may reject it.
MERGER PROCEDURE FOR NON-BANKING FINANCIAL COMPANIES (NBFCs)
- Initially, both parties agree to and sign a Memorandum of Understanding (MoU), followed by approval from their respective boards of directors.
The merger process for NBFC commences with the signing of the MoU by both entities, indicating readiness for the takeover agreement. Directors from both the acquiring and target companies convene to sign the MoU, outlining the needs and responsibilities of all involved parties. Upon approval of the MoU, the acquiring company disburses a token amount to the target company, signaling the initiation of the transaction.
- Subsequently, consent from the bank for the proposed merger is obtained.
- KYC documents for directors in the companies are prepared.
- A comprehensive business plan is then prepared.
- Obtain RBI Authorization (3-4 months)
• Approval from the RBI is necessary for a company if there is a change in management subsequent to the acquisition, such as a shift in the shareholding of an NBFC exceeding 26% of the paid-up equity capital after the acquisition. • RBI authorization becomes requisite if the NBFC takeover results in the alteration of approximately 30% of the total number of directors.
• No RBI approval is mandated in cases where changes in shareholding occur due to a buyback offer or the rotation of directors.
Documentation Required for RBI Submission:
- Comprehensive details of the proposed directors /shareholders.
- Banker’s report for the proposed directors /shareholders.
- A declaration confirming the non-association of the company with any entity that has been denied a Certificate of Registration by the RBI.
- Information pertaining to the sources of funds.
- An affidavit and declaration asserting a clean criminal background.
- Financial records from the preceding three years.
- Upon Receiving RBI Approval
• Convene a meeting of Board of Director to deliberate on matters concerning public notice, the date, and time of the Extraordinary General Meeting (EGM).
• Issue a public notice in two languages (English being mandatory) 30 days after obtaining RBI approval, inviting objections to the proposed arrangement. The following steps need completion prior to the takeover:
• Obtain a No Objection Certificate (NOC) from creditors.
• Formally execute agreements for the purchase of shares, transfer of management, transfer of shares, or any other such interest pertinent to the Non BankingFinance Company takeover.
• Ensure compliance with signed agreements during the transfer of assets.
• Conduct a valuation of the company in accordance with RBI-prescribed rules, typically utilizing the discounted cash flow method.
• Notify the regional office of the RBI.
After a period of 30 days from the signing of the formal agreement or contract,
second public notice issued in two languages (with English being obligatory), which must include:
• Declaration of intention to sell or transfer control/ownership.
• All pertinent details of the transferee.
• Reasons underlying the NBFC takeover agreements or the transfer of control/ownership.
7. Last Stage: Approval from NCLT (2-3 months)
• Submit an application to the National Company Law Tribunal (NCLT) under sections 230-233 of the Companies Act of 2013, seeking approval for the amalgamation or merger scheme.
The following documents must be provided to the NCLT for consideration:
• Application to convene the general meeting with the NCLT.
• Upon approval, the Tribunal will issue an order for the general meeting of shareholders, with a list of shareholders to be furnished.
• The company will conduct the shareholder meeting to obtain approval for the merger scheme.
• Provide a certified copy of the latest audited balance sheet and profit and loss statement.
• Obtain approval from SEBI, if the company is listed.
• Notify theRD(regional director).
• Furnish a list of creditors with their outstanding dues.
• Include the official liquidator’s report.
• Prepare the merger scheme along with an explanatory statement.
• Disclose details of legal proceedings involving the company
•. Obtain a valuation report.
The NCLT will assess the application with the following considerations:
• Scrutinize material statements, the latest financial position of the bank, auditor reports, and any other relevant observations.
• Ensure fair representation of members, creditors, or any affected class in the meeting.
• Evaluate if the scheme is in the public interest and feasible.
• Determine if the scheme is beneficial to the company, its members, and creditors.
Conclusion
Merger and acquisition activities are burgeoning and serve as a significant catalyst for exponential growth. They have emerged as a crucial strategy for business expansion in the short term. NBFC takeovers particularly offer promising opportunities for companies unable to establish their own Non-Banking Financial Companies.
The merger of Non-Banking Financial Companies (NBFCs) under the Companies Act, 2013, offers significant advantages and strategic benefits to the entities involved. By merging, NBFCs can achieve economies of scale, enhance market competitiveness, and potentially secure bank licenses, thereby positioning themselves more effectively against larger banking institutions. Additionally, mergers can lead to cost savings, tax benefits, and an overall increase in market share, while also reducing non-performing assets and fostering goodwill in the financial sector.
However, the merger process is intricate and requires meticulous planning and execution. It begins with the signing of a Memorandum of Understanding (MoU) between the entities, followed by obtaining the necessary approvals from the Reserve Bank of India (RBI) and complying with various regulatory requirements, including those mandated by the National Company Law Tribunal (NCLT). Due diligence, thorough background research, and accurate financial assessments are crucial steps to ensure that the merger aligns with the strategic goals of both companies. The process also involves significant operational challenges, such as managing changes in management, handling staff concerns, and ensuring seamless integration of the entities involved.
In conclusion, while mergers of NBFCs offer considerable growth opportunities and strategic advantages, they also come with complexities that require careful navigation. The detailed procedures outlined under the Companies Act, 2013, and the associated regulatory frameworks ensure that such mergers are conducted transparently and in the best interest of all stakeholders involved. By following the prescribed steps and obtaining the necessary approvals, companies can leverage mergers to enhance their financial strength, expand their market presence, and achieve long-term success in the competitive financial landscape.
Please Find the Link to Part 1 of the article on Merger & Acquisitions in Banking Sector- Part 1
Please Find the Link to Part 2 of the article on Merger & Acquisitions in Banking Sector- Voluntary Merger- Part 2
Please Find the Link to Part 3 of the article on Merger & Acquisitions in Banking Sector- Compulsory Merger- Part 3 – Vakalat Today
Please Find the Link to Part 4 of the article on Merger & Acquisitions in Banking Sector- NBFC Merger- Part 4
Meet Siddhant Jain, a lawyer who thrives in the wild world of Business and Commercial Law—where boardrooms are battlefields, mergers are puzzles, and corporate jargon is his second language. Whether it’s navigating the maze of company law, tackling securities regulations, or guiding businesses through the stormy seas of bankruptcy and insolvency, Siddhant has done it all.
From crafting complex legal opinions on mergers to waving goodbye at company closures, Siddhant’s experience spans the corporate spectrum. When he’s not solving legal riddles, he’s busy sharing his insights through newsletters and publications, because why should only his clients benefit from all that knowledge?
If you’re looking for someone who can help you untangle the knots of business law (and maybe crack a joke while doing it), Siddhant’s your guy!
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