Regulatory Domain over M&A for NBFCs

The Reserve Bank
of India (RBI) has issued a notification
relating to mergers and acquisitions (M&A) involving non-banking finance
companies (NBFCs). This now brings most M&As relating to NBFCs within the
regulatory domain of the RBI thereby requiring its prior approval.
The following
types of transactions fall within the RBI approval requirement:
1.         takeover or
acquisition of control of an NBFC, whether by acquisition of shares or
2.         merger of an NBFC
with another entity or vice versa
that would give the acquirer control of the NBFC;
3.         merger of an NBFC
that would result in acquisition of more than 10% shareholding of the NBFC; and
4.         schemes of
arrangement involving NBFCs that require the sanction of the court.
The policy
rationale behind this approach is to ensure that the acquirer / resulting
entity following the M&A is a “fit and proper person” that has the
necessary qualifications to carry on the business of the NBFCs, and such that
the M&A is not prejudicial to public interest or the interest of
This now adds
another complexity to M&A in NBFCs (although it likely that companies may
have nevertheless been previously obtaining the assent (informal or formal) of the
RBI for such significant transactions). The new formal approval requirement
extends both to mergers and restructuring transactions undertaken through a
court scheme as well as “change of control” transactions such as takeovers.
Interestingly, the
RBI notification defines “control” as having the same meaning assigned to it in
the SEBI Takeover Regulations. Therefore, any type of control over management
and policy decisions of the company, whether through acquisition of shares or
through other means such as shareholder agreements could fall within the
purview of the RBI approval requirement. Hence, even acquisitions of small
amounts of shares in NBFCs may be subject to scrutiny if they are accompanied
by significant rights granted to acquirers/investors through additional
protective provisions such as board nominations, quorum rights, veto rights and
the like that may be contained in shareholders’ (or similar) agreements or in
the articles of association of companies. In other words, the approval
requirement may be triggered not just for outright acquisitions or takeovers
but also investments that are accompanied by significant protective rights to
the investors.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

1 comment

  • It is noted that, issuance of such notification by way of extending 'regulatory regime', either by RBI or SEBI, has been frighteningly assuming almost the 'force of habit'.
    The norms laid down are, of course, claimed to have an ideal aim namely,"…the M&A is not prejudicial to public interest or the interest of depositors." In a manner of viewing, the once- upon- a -time (in the hoary past) vociferously decried and stoutly resisted 'licence raj' has, in recent times, staged a forceful come-back. No knowing how far or to what extent all such measures, rightly or wrongly thrust upon, are going to fly in the face of or meekly yield to the near dramatic changes lately announced in further liberalizing the governmental attitude towards FDIs and FIIs.
    Further, if one were to bear in mind the common bitter experience even in the recent past, the pastime of churning out more and more such fashionable rules, with no let up, but without a matching effective monitory mechanism, mostly entail adverse consequences to the national economy; but without anywhere meeting or remotely succeeding in the stated aim.
    Over to 'experts' for true and fruitful enlightenment.

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