Understanding When RBI Approval is Required for Ownership or Management Changes in NBFCs
Summary: RBI approval is required for ownership or management changes in Non-Banking Financial Companies (NBFCs) under three specific circumstances. The first scenario is when there is a takeover or acquisition of control. The RBI mandates approval for any change in control, which can be de jure (the right to appoint a majority of directors) or de facto (influence over key decisions). This extends to indirect changes in control, such as when a holding company undergoes ownership changes affecting its subsidiaries, including NBFCs. The second scenario is the acquisition or transfer of 26% or more of an NBFC’s equity. Any such acquisition requires prior RBI approval to ensure regulatory scrutiny, particularly for investor-driven NBFCs. However, if a person already holds 26%, further increases may not require approval unless they exceed 50%, which could imply a change in control. In cases of inheritance or transmission of shares, RBI approval is only needed if it results in a change in management. The third scenario involves changes in the management structure, specifically when more than 30% of the board of directors (excluding independent directors) changes in a given year. This provision ensures that incoming directors meet the RBI’s “fit and proper” criteria, and aims to maintain governance standards even if the change doesn’t involve control or ownership shifts. The threshold applies cumulatively over the year, and even small boards could surpass this limit with just a few changes. These rules are designed to maintain regulatory oversight and ensure stability in NBFC governance.
This article outlines three specific scenarios where such approval becomes mandatory, based on regulatory expectations and legal interpretations.
1. Takeover or Acquisition of Control:
Any transaction that results in a change in the “control” of an NBFC triggers a mandatory requirement for RBI approval. While the RBI does not define “control” exhaustively, guidance can be drawn from the Companies Act, 2013 and the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.
Broadly, control can be:
- De jure, where a person has the right to appoint the majority of directors, or
- De facto, where a person, directly or indirectly, influences key management or policy decisions.
Courts have consistently held that control is not merely about numerical thresholds but about who effectively guides the business. For instance, if a holding company—which substantially holds shares in an NBFC—undergoes a change in ownership, this could amount to an indirect change in control of the NBFC itself, requiring RBI clearance.
It is also important to differentiate between a takeover and a mere change in shareholding. A transaction may not exceed 50% ownership but could still be classified as a change in control if it enables effective decision-making authority.
2. Acquisition or Transfer of 26% or More Shareholding
The RBI requires its prior approval for any acquisition or transfer that results in an individual or entity holding 26% or more of an NBFC’s paid-up equity capital. This threshold is considered significant and is meant to trigger supervisory scrutiny.
Key aspects to consider:
- The requirement applies only to inward acquisitions, i.e., where a new or existing shareholder crosses the 26% threshold.
- If a person already holds 26% (with prior approval), further incremental increases do not usually require fresh approval unless they cross 50%, which could be construed as control.
- Instruments such as convertible preference shares must be evaluated on a post-conversion basis.
- Joint acquisitions by persons acting in concert will be evaluated at the group level for determining the 26% threshold.
- Where shares are acquired through transmission (e.g., succession or inheritance), no RBI approval is required. However, if this results in a change in management, approval becomes necessary.
This provision is particularly important for investor-driven NBFCs, where equity infusions or shareholder restructuring are common.
3. Change in Management Involving Over 30% of Directors
The third scenario requiring RBI approval relates to significant changes in the composition of the Board of Directors. Specifically, a change affecting more than 30% of the directors (excluding independent directors) within a given financial year necessitates prior RBI approval.
Practical implications:
- This requirement applies even in the absence of a change in control or ownership.
- The 30% threshold includes progressive changes over the course of a year, not just a single transaction.
- Independent directors are excluded from this calculation.
- For NBFCs with smaller boards (e.g., 2–3 directors), even a single change could surpass the 30% mark.
Importantly, this clause focuses on incoming directors rather than exits due to resignation, death, or incapacity. The purpose is to ensure that all incoming directors meet the “fit and proper” criteria, especially in cases where board restructuring could signal a shift in governance or control.
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