Summary: Reserve Bank of India (RBI) has updated its guidelines regarding changes in control for Non-Banking Financial Companies (NBFCs), requiring prior approval for various changes. Any takeover or change in control of an NBFC, even without a change in management, now mandates RBI approval. Additionally, acquiring 26% or more of the shares of an NBFC, whether gradually or all at once, requires approval, though if shares exceed 26% due to buybacks or court-approved capital reductions, no prior approval is needed, but the RBI must be informed within one month. Changes in the management, such as replacing more than 30% of directors (excluding independent directors), also require RBI approval. The guidelines also specify that a public notice must be issued 30 days before any sale or transfer of control, detailing the new ownership and reasons for the change. NBFCs must submit an application to RBI with relevant documentation about new directors or shareholders, their sources of funds, and declarations regarding their background. Non-compliance with these rules could result in severe penalties, including the cancellation of the company’s registration. The updated rules are effective immediately for any changes that occur from the date of the notice onward.
To: All Non-Banking Financial Companies (Except Primary Dealers)
Subject: RBI Approval Requirement for Changes in Control of NBFCs
Dear Sir/Madam,
This is regarding the need for prior approval from the Reserve Bank of India (RBI) when there are changes in the control of Non-Banking Financial Companies (NBFCs). The RBI has reviewed its earlier rules based on feedback from the industry, and new guidelines are now in place.
1. When is RBI’s Prior Approval Needed?
- Takeover or control changes: Any takeover or change in control of an NBFC, even if it doesn’t lead to a change in management, requires RBI’s prior approval.
- Change in shareholding: If a person or group acquires 26% or more of the shares in an NBFC, this must be approved by the RBI, whether the shares are acquired gradually or in one go. However, if the shareholding exceeds 26% due to share buybacks or capital reduction approved by a court, no prior RBI approval is needed, but the RBI must be informed within one month.
- Management changes: If more than 30% of the directors (excluding independent directors) of an NBFC change, RBI approval is needed. Re-election of directors due to retirement by rotation does not require approval.
NBFCs are still required to inform the RBI about any changes in their directors or management as per existing rules.
2. How to Apply for RBI Approval?
If you need RBI approval for any of the above changes, you must submit an application on the company’s letterhead along with these documents:
- Information about the new directors or shareholders.
- The sources of funds for the shareholders acquiring the NBFC’s shares.
- Declarations from the proposed directors/shareholders stating that:
- They are not linked to any unregistered entity accepting deposits.
- They are not involved in any company that has been denied a registration certificate by RBI.
- They have no criminal cases against them.
- A report from the bank about the proposed directors/shareholders.
Applications should be sent to the RBI’s regional office where the NBFC’s registered office is located.
3. Public Notice Requirement
Before a sale or transfer of control of an NBFC, a public notice must be given 30 days in advance. This notice must:
- Be published by the NBFC or both parties involved after RBI’s prior approval.
- Indicate the intention to sell or transfer control, the details of the new owners, and reasons for the change.
- Be published in at least one major national and one local newspaper (covering the location of the registered office).
4. Effective Immediately
These rules apply to any takeover, change in shareholding, or change in management that happens from the date of this notice onward.
5. Consequences of Non-Compliance
Failure to follow these rules can lead to severe consequences, including cancellation of the company’s registration.
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