RBI Compliance in Case of Acquisition/ Transfer of Control of NBFC

Article discusses The procedure of acquisition/ transfer of control of NBFC, The requirement of prior approval of Reserve Bank for Acquisition/ Transfer of Control of NBFC, Application for prior approval for Acquisition/ Transfer of Control of NBFC and requirement of Prior Public Notice about change in control/ management of NBFC.

Procedure of acquisition/ transfer of control of NBFC

1. Do the due diligence of the target company. (optional)

2. Sign MOU with token money.

3. Submission of Documents for prior approval to the nearest zonal office of the RBI for Acquisition/Transfer of management or control of shareholders

4. Public notice of at least 30 days shall be given before effecting the sale of, or transfer of the ownership by sale of shares, or transfer of control, whether with or without the sale of shares.

5. After the passing of 30 days from the date of the public notice, the process of Acquisition/Transfer of NBFC shall be done.

Requirement of prior approval of Reserve Bank for Acquisition/ Transfer of Control of NBFC

The prior written permission of the Reserve Bank shall be required for

• any takeover or acquisition of control of an NBFC, which may or may not result in a change of management
• any change in the shareholding of an NBFC, including progressive increases over time, which would result in acquisition/ transfer of shareholding of 26 percent or more of the paid-up equity capital of the NBFC. Provided that, prior approval of RBI would not be required in case of any shareholding going beyond 26% due to buyback of shares/ reduction in capital where it has the approval of a competent Court. The same is however required to be reported to the Reserve Bank not later than one month from its occurrence.
• any change in the management of the NBFC which would result in a change in more than 30 percent of the directors, excluding independent directors. Provided that, prior approval would not be required for those directors who get re-elected on retirement by rotation.

Application for prior approval for Acquisition/ Transfer of Control of NBFC

1. NBFCs shall submit an application, in the company letterhead, for obtaining prior approval of the RBI, along with the following documents.

• Information about the proposed directors/ shareholders
• Sources of funds of the proposed shareholders acquiring the shares in the NBFC
• Declaration by the proposed directors/ shareholders that they are not associated with any unincorporated body that is accepting deposits
• Declaration by the proposed directors/ shareholders that they are not associated with any company, the application for Certificate of Registration (CoR) of which has been rejected by the Reserve Bank
• 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, and
• Bankers’ Report on the proposed directors/ shareholders.

2. Applications in this regard may be submitted to the Regional Office of the Department of Non-Banking Supervision in whose jurisdiction the Registered Office of the NBFC is located.

Requirement of Prior Public Notice about change in control/ management of NBFC

3. Public notice of at least 30 days shall be given before effecting the sale of, or transfer of the ownership by sale of shares, or transfer of control, whether with or without the sale of shares. Such public notice shall be given by the NBFCs and also by the other party or jointly by the parties concerned, after obtaining the prior permission of the Reserve Bank.

4. The public notice shall indicate the intention to sell or transfer ownership/ control, the particulars of transferee and the reasons for such sale or transfer of ownership/ control. The notice shall be published in at least one leading national and in one leading local (covering the place of registered office) vernacular newspaper.

It is very much important to note that the above said procedures and provisions shall be in addition to, and not in derogation of the provisions of any other laws, rules, regulations or directions, for the time being in force.