NBFC Takeover in India: RBI Approval, Process and Documents Required

Taking over an existing Non-Banking Financial Company can be an effective way for entrepreneurs and financial businesses to enter India’s lending and finance sector. However, an NBFC takeover is not an ordinary acquisition of a private company. Since the target company holds a Certificate of Registration issued by the Reserve Bank of India, any change in its ownership, management or control must be planned according to the applicable RBI directions. A takeover does not mean purchasing an RBI licence separately. The buyer acquires the shares and control of the company that holds the NBFC registration. Therefore, the company’s regulatory history, financial position and compliance record become extremely important for the incoming promoters. What Is an NBFC Takeover? An NBFC takeover is a transaction through which an individual, company or investor acquires ownership or control of an RBI-registered NBFC. The takeover may be completed through the purchase of shares, replacement of directors, acquisition of voting rights or another arrangement that gives the buyer control over the NBFC. The transaction may be structured as a complete takeover, where the buyer acquires the entire or majority shareholding, or as a partial acquisition that still results in a substantial change in ownership or control. RBI’s framework requires prior written approval for any takeover or acquisition of control of an NBFC, irrespective of whether the transaction immediately results in a change of management. When Is Prior RBI Approval Required? Prior approval of the RBI is generally required in the following situations: Acquisition or transfer of 26% or more shares RBI approval is required where a change in shareholding, including progressive increases over time, results in the acquisition or transfer of 26% or more of the NBFC’s paid-up equity capital. Therefore, the threshold cannot ordinarily be avoided by dividing the acquisition into several smaller transactions. An exception may apply where the shareholding crosses 26% because of a buyback of shares or reduction in capital approved by a competent authority. Such cases remain subject to the applicable reporting conditions. Takeover or acquisition of control Prior approval is required where the proposed arrangement gives a person or entity control over the NBFC, even where the shareholding acquired is below the prescribed percentage. Control may arise through voting rights, management rights, shareholder agreements or the ability to influence policy decisions. Change in more than 30% of directors RBI approval is also required where a change in management results in the replacement of more than 30% of the directors, excluding independent directors. Directors who are reappointed after retiring by rotation are generally excluded from this requirement. RBI has imposed monetary penalties where NBFCs changed more than 30% of their directors without obtaining prior permission. Why Do Businesses Choose an NBFC Takeover? Setting up a new company and applying for NBFC registration requires substantial capital, detailed documentation, an acceptable business model and regulatory scrutiny. In comparison, taking over an existing NBFC may provide access to a company that already holds an RBI Certificate of Registration. However, a takeover should not be viewed as a shortcut for avoiding regulatory requirements. RBI evaluates the proposed promoters, directors, ownership structure, source of funds and future business plan before granting approval. The buyer also becomes responsible for addressing earlier compliance failures and financial liabilities of the target company. Step-by-Step Process of NBFC Takeover 1. Identify a suitable NBFC The buyer should first identify an RBI-registered NBFC whose category and permitted activities match the proposed business plan. The Certificate of Registration should be verified against the latest list of registered NBFCs maintained by the RBI. The list also identifies NBFCs whose registrations have been cancelled. The buyer must confirm whether the target is an NBFC-Investment and Credit Company, NBFC-MFI, NBFC-Factor, Core Investment Company, Account Aggregator, P2P platform or another specialised category. 2. Conduct regulatory and financial due diligence Detailed due diligence is one of the most important stages of the takeover. The buyer should examine the NBFC’s audited financial statements, loan portfolio, bank borrowings, tax records, statutory returns, non-performing assets and provisioning position. The review should also cover RBI inspection observations, show-cause notices, penalties, pending complaints, related-party transactions, litigation, KYC compliance and adherence to the Fair Practices Code. Any hidden liability or previous default may affect the value and regulatory acceptability of the transaction. 3. Execute a preliminary agreement After the initial review, the buyer and existing promoters may execute a memorandum of understanding, term sheet or conditional share purchase agreement. The agreement should clearly state that completion of the transaction is subject to prior RBI approval and other statutory permissions. It should also address the purchase price, representations, liabilities, indemnities, management transition and circumstances under which either party may terminate the transaction. 4. Obtain Board approval The Board of Directors of the target NBFC should approve the proposed takeover, change in shareholding and proposed management structure. The Board resolution may also authorise an officer or professional to prepare and submit the application to the RBI. The proposed buyer may also pass a Board resolution approving the acquisition and authorising the investment, wherever the buyer is a company. 5. Submit the application to RBI An application seeking prior approval must be submitted to the RBI office having jurisdiction over the registered office of the NBFC. RBI examines whether the proposed shareholders and directors are financially sound, fit and proper, experienced and capable of managing a regulated financial institution. The RBI may ask for clarifications, additional declarations, financial information or revised documents during scrutiny. The transaction should not be completed until written approval is received. 6. Publish the public notice After receiving RBI approval and before completing the transfer, a public notice of at least 30 days must generally be published. The notice should communicate the intention to transfer the ownership or control of the NBFC, provide particulars of the transferee and explain the reasons for the proposed transaction. The notice is ordinarily published in one leading national newspaper and one leading local vernacular newspaper circulating at the location of the NBFC’s registered office. It may be issued jointly by the NBFC, transferor and transferee. 7. Complete the transfer After the notice period expires, the parties may complete the share transfer according to the RBI approval and transaction documents. The company must update its register of members, share certificates, beneficial ownership records and Board composition. Applicable filings must also be submitted to the Registrar of Companies. Where foreign investment is involved, FEMA rules, sectoral conditions, pricing guidelines and RBI reporting requirements must be examined separately. 8. Complete post-takeover compliance After completion, the NBFC should notify relevant authorities, banks, lenders and business partners about the approved changes. It should update its KYC records, authorised signatories, internal policies, organisational structure and regulatory portal details. The new management should review the NBFC’s business plan, lending policies, risk-management systems, asset classification, customer grievance mechanism and regulatory reporting calendar. Documents Generally Required The takeover application and transaction file may include: RBI Certificate of Registration and corporate documents Board resolutions of the buyer and target NBFC Existing and proposed shareholding patterns Details and KYC documents of proposed shareholders and directors Net-worth certificates and credit reports Audited financial statements and income-tax returns Declarations regarding regulatory, civil and criminal proceedings Documents establishing the source of acquisition funds Bankers’ reports and financial background of the acquirers Details of group, associate and related companies Proposed business plan and management structure Draft share purchase agreement or memorandum of understanding Due diligence report and details of pending liabilities The exact requirements may vary depending on the NBFC’s category, transaction structure and observations raised by the RBI. Risks of Taking Over an NBFC The most significant risk is acquiring a company with undisclosed regulatory or financial problems. An inactive NBFC may still have unfiled returns, unresolved inspection observations, outstanding customer claims, tax liabilities or non-compliant loan accounts. The transaction may also be delayed or rejected where the source of funds is unclear, proposed directors do not satisfy fit-and-proper expectations or the future business model is inconsistent with the NBFC’s registration category. A transfer completed without prior RBI approval may invite regulatory action, monetary penalties and even cancellation of the Certificate of Registration. Conclusion An NBFC takeover can provide an established route into the financial services sector, but it requires careful planning, transparent documentation and prior RBI approval. The buyer should conduct detailed legal, financial and regulatory due diligence before committing funds. A properly structured takeover protects the buyer from hidden liabilities and ensures that the NBFC remains eligible to carry on its regulated activities after the change in ownership. Professional assistance during due diligence, RBI application, public notice, share transfer and post-takeover compliance can make the transaction more secure and manageable.