How to Sell Your Non-Banking Financial Company (NBFC)?

Non-Banking Financial Companies (NBFCs) are entities incorporated under the Companies Act that receive their operating license from the Reserve Bank of India (RBI). As financial intermediaries, NBFCs provide funding by accepting deposits and extending credit while playing a critical role in directing limited financial resources toward infrastructure development and generating employment opportunities. They work as an add-on to the formal banking sector by addressing the rising financial demands of corporations, offering credit to the unorganized sector, and catering to smaller borrowers. However, NBFCs are restricted from engaging in agricultural or industrial activities and from buying, selling, or constructing real estate.

NBFCs majorly  focus on loans and advance services, acquiring of shares, bonds, debentures, government-issued securities, and other similar investments. Their financial offerings include financing, loan distribution, and acquisition of stocks, shares, and bonds.

Sale of a NBFC

The sale of an NBFC basically involves two parties. The NBFC is the first party who is selling and the buyer –  typically the larger entity that acts as the buyer or acquirer. These two entities then engage in a series of transactions among them to merge the two companies. In this process, the buyer would procure the following:

1. The Seller’s equity to gain voting rights, enabling the selection of Board members or;
2. A change in most or all the management structure.

For an NBFC to be sold, its balance sheet must be cleared, and all assets and liabilities must be transferred to the Acquirer. Therefore, a willing buyer or Acquirer Company is essential. The RBI has provided a comprehensive guide to remove any uncertainties related to buying or selling NBFCs.  In order to avoid any misunderstanding between the parties at any fututre date, the experts suggest all such agreements and deals with the acquirer shall as a protective measure be documented.

Also, a key requirement is the signing of the Share Purchase Agreement, which must be executed by both the buyer and the seller after 31 days from the public notice of the sale. The assets of  NBFC will be reflected on the balance sheet, and the liabilities will be settled. The Acquirer Company will receive only a clean bank balance, determined by the net worth as of the sale date. This agreement serves as a contract between two parties, where one agrees to sell a specified number of shares of the NBFC to the Acquirer at an agreed-upon price. It ensures that both parties agree to the terms and conditions of the contract. The agreement outlines the consideration, the number of shares to be sold, and any additional terms and conditions agreed upon by both sides. Share allocation will be based on the terms set in the agreement. If there is any remaining consideration, it will be paid within 31 days of the public notice in the newspaper or as otherwise agreed by all parties.

Process of Sale of a NBFC

Around a time span of 2-3 months are required for the purpose of sale of an NBFC and securing the approval of RBI for the same.  Meanwhile during this time period it is very important to cross verify the credentials of the company which is acquiring the NBFC and to ensure that the agreement between NBFC and the Acquirer remains valid.

1. The first step in selling an NBFC is to obtain Board approval for the sale, with resolutions passed by both the Target and Acquirer companies.
2. After receiving board approval from both sides, business and administrative documents should be shared with the Acquirer Company. Upon confirmation to proceed, an MOU (Memorandum of Understanding) should be signed, and token money provided as a buying commitment.
3. To facilitate the sale, prepare KYC documents, a business plan, and a 3-year projection for the new or replacement directors of the Acquirer.
4. These documents must be submitted to the Regional RBI Office, under whose jurisdiction the NBFC’s registered office falls.
5. Coordinating with RBI and responding to any inquiries they may have regarding the transaction.
6. Once the approval has been granted by the RBI, a public notification is required to be made for inviting any sort of objections from the public or any interested party. As per the RBI guidelines, the notice must appear in one national and one local daily newspaper announcing the change in management, which will come on a future date.
7. On the 31st day after the newspaper notice, both parties can sign the Share Purchase Agreement, or another agreed date for handover can be set. At this point, management and administration will transfer to the Acquirer, and the remaining balance will be paid.
8. Finally, RBI mandates that all assets on the balance sheet be liquidated and liabilities paid, and the Acquirer is to receive a clean bank balance in the NBFC’s name. The net worth of the NBFC should be calculated on the sale date using RBI’s prescribed method.

Requirements of Prior Public Notice about Changes

Once the approval for the sale is obtained by the RBI, a public notice is required to be issued to in at least one leading daily national newspaper and one leading local newspaper to give the public an opportunity to raise their objections to the transactions if any in the following manner:-

1. A public notice must be provided by all involved parties, jointly or individually, at least 30 days prior to the date of actual sale or transfer of ownership by sale of shares.  This should be done only after securing RBI’s prior approval.
2. The notice should include detailed information about the buyer (transferee) and the reasons for the sale or transfer of ownership/control of the NBFC.
3. This notice must appear in at least one widely circulated national newspaper and another major local daily in the local language where the NBFC’s registered office is located.

RBI Approval to sell NBFC

As previously mentioned, obtaining RBI’s prior approval is mandatory for the purpose of making changes in the Board of Directors or  sale or takeover of an NBFC. All documents submitted to the RBI must be prepared in coordination with the Acquirer Company.

1. An application, accompanied by a cover letter on the Company’s letterhead, must be submitted to the relevant regional RBI office.
2. The application should include details of the proposed Directors/shareholders, along with their KYC documents, ID/address proofs, and educational and qualification certificates.
3. Information on the sources from which the Acquirer is obtaining the funds to purchase the NBFC.
4. A declaration from the proposed Directors/shareholders stating they have no involvement in any unregistered entities that provide loans or accept deposits.
5. A statement from the proposed Directors/shareholders confirming they have not been associated with any company whose Certificate of Registration (CoR) application was denied by the RBI.
6. A declaration from the proposed Directors/shareholders affirming they have no pending or convicted criminal cases, including any offences under Section 138 of the Negotiable Instruments Act.
7. A clean Banker’s Report for the proposed Directors/shareholders.
8. Financial Statements and Annual Reports from either the inception of the NBFC or the past three years, whichever period is longer.
9. Additionally, a public notice is required at least 30 days prior to the finalization of the sale, share transfer, or transfer of control (whether individual or joint) of ownership. This notice must be published in at least one national daily newspaper and one local vernacular daily.

Requirements of prior approval from RBI- Necessary or not?

Before selling your NBFC, it’s vital to confirm whether you need prior approval from the RBI. The approval from RBI is required in the following situations:

1. When there is a change of Ownership: If the NBFC is sold, acquired, or taken over the NBFC, you must secure prior approval, regardless of management changes.
2. When the shareholding structure changes: If there’s a transfer or acquisition of at least 26% of the paid-up equity capital, prior approval is necessary. This holds true even if the changes occur gradually unless a reduction in capital or share buyback has been legally authorized.
3. When the Management Changes: Approval from the RBI is essential if there’s a change in at least 30% of the Directors (excluding Independent Directors). However, if changes arise from the routine rotation of Directors, no approval is required.