ROLE OF NBFC DEBT IN MERGERS AND ACQUISITIONS

This article is written by Sarika Kumari, BALLB 3^rd-year student at Mewar Law Institute, Ghaziabad.

The term ‘NBFC’ entails a very wide meaning. NBFCs include not just the finance companies that the general public is largely familiar with, the term also entails a wider group of companies that are engaged in the investment business, insurance, chit fund, Nidhi, merchant banking, stock broking, alternative investments, etc. as their principal business. Today I would be concentrating only on those NBFCs that are under the regulatory purview of the Reserve Bank. NBFCs are financial organizations that do not have full banking licenses but provide financial services similar to that of banks. NBFCs assist the flow long term debt by advising and providing, a great size of capital to the companies during their mergers and acquisitions. By any M&A it is generally believed that two separate companies together create more value compared to being individual. Mergers are the combination of two companies to form one, while acquisitions are one company taken over by another.

Key takeaways

NBFC, debt, mergers and acquisitions, increased loan size, and economic development.

What is NBFC debt?

We first need to understand what is NBFC? A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 and 2013 and also, under RBI Act 1934 under section 45-1A engaged in the business of loans and advances, acquisition of shares/ stocks/ bonds/ debentures/ securities issued by Government or local authority or other marketable securities of a like nature such as leasing, hire-purchase, insurance business, chit business.

 It does not include any institution, whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities), or providing any services and sale/purchase/construction of the immovable property.

A non-banking institution that is a company and has the principal business of receiving deposits under any scheme or arrangement in one lump sum or installments by way of contributions or in any other manner is also a non-banking financial company (Residuary non-banking company). Some examples of well-known NBFCs are:

 Muthoot Finance Ltd

Muthoot Finance Ltd is India’s first NBFC tracing its history back to 1888 when it began as a small lender from a village in Kerala. Muthoot Finance Ltd sanctions loans only against the pledge of gold ornaments. It offers foreign exchange services, money transfers, wealth management services, travel, and tourism services, and home loans.

Tata Capital Financial Services Ltd

Tata Capital Financial Services Limited is top of India’s leading NBFCs. Established in 2007. It is registered with RBI as a ‘Systemically Important Non-Deposit Accepting Non-Banking Financial Company (NBFC)’. Products offered by TCFS to individuals, families, and businesses, are commercial finance, infrastructure finance, wealth management, consumer loans, and distribution and marketing of Tata Cards.

L & T Finance Limited

L & T Finance Limited is a strong player in the non-banking financial sector and was established in 1994. L & T offers funding services to different sectors like trade, industry, agriculture, Commercial Vehicle loans, Individual Vehicle loans, and corporate and rural loans.

Aditya Birla Finance Ltd. 

A part of the Aditya Birla Financial Services was incorporated in 1991 and is an ISO 9001:2008 certified NBFC. ABFL is registered with RBI as a ‘systemically important non-deposit accepting NBFC’ and it ranks among the top five largest private NBFCs in India. It offers precise and customized solutions across a wide range, from corporate finance to commercial mortgage, and from capital markets to structured finance.

Types of NBFCs

There are several companies registered as NBFCs to facilitate the flow long term debt based on the following–

1. Based on deposits-

Deposit Non-Banking Financial Companies – Deposit NBFCs are NBFCs that can accept deposits from the general public.

Non-deposit Non-Banking Financial Companies – Non-deposit NBFCs are those that cannot accept deposits from the general public.

• Based on the size of their assets-

Systematically Important NBFCs – Systemically important NBFCs are those with assets of INR 500 crore or more as of the most recent audited balance sheet.

Non-systematically Important NBFCs – Non-systemically important NBFCs are those with assets of less than INR 500 crore as of the most recent audited balance sheet.

• Based on Their pursuit (work)-
• Asset Finance Company (AFC)-

As its primary business, It is a financial institution that finances various assets for individuals and businesses to support productive/economic activity. The income from these should not be less than 60% of the total assets.

Examples are tractors, machinery, heavy industrial equipment, automobiles, large power generator sets, earthmoving & material handling equipment, production & farming equipment, general-purpose industrial machines, etc.

• Loan Company (LC)-

It is a financial institution that provides loans for a variety of purposes except for AFC. However, housing finance firms are included. The loan is being offered for purposes other than assets, such as working capital finance, etc.  

Examples are LIC Finance Ltd, PNB Housing Finance Firm, and HDFC.

• Mortgage Guarantee Company (MGC)-

NBFC-MGCs are financial institutions for which: At least 90% of the business turnover is mortgage guarantee, or 90% of the gross income is from the mortgage guarantee business, or the NOF is Rs. 100 crores.

• Investment Company (IC)-

The primary business of a financial institution is the acquisition of securities. That is, it collects money from the general public and invests it in various securities and financial products. The remaining profit is distributed to shareholders after the company deducts its operational costs from the earned profit.

 Examples- Bajaj Alliance General Insurance Company, IDFC, and HDFC mutual funds.

• Infrastructure Finance Company (IFC) –

It is an NBFC that –Deploys 3/4th of its total assets in infrastructure loans. It has a minimum Net Owned Fund of Rs 300 crores. Has been ranked at least “A” in its credit rating or similar. CRAR of at least 15%.

 examples are GMR infrastructure ltd, Hindustan Construction Company, etc

• Housing Finance Company-

Housing finance companies have mentioned housing finance as the main clause in their main memorandum of association. NBFCs have complemented commercial banks in providing mid-term capital loans to individuals or firms; their flexibility and less stringent regulation provide them competing for an edge over the commercial bank.

Relation of NBFCs Debt with Mergers and Acquisitions

By Debt, we understand “a sum of money that is owed or is due”. There are several roles of non-banking financial companies during mergers and acquisitions of companies by facilitating with increased loan size, it allows the acquirer to avoid many of the costly as well as time-consuming aspects of asset purchase, software development, it also accomplishes tax-free status for both the parties and increase its market shares. Roles played NBFCs are usually for-

• Development of sectors like transport and infrastructure.
• Substantial employment generation.
• Help and increase wealth creation.
• Broad-based economic development.
• Major thrust ion semi-urban, rural first-time users/buyers.
• To finance economically weaker sections.

What is the NBFC merger?

 A merger means ‘the combination of two companies that form into a new company’ to improve the organization’s financial and operational strength. For instance, the merger of the UK’s two largest pharmaceutical firms in 2000 led to what is currently the 6th largest pharmaceutical firm in the world, and the only British firm in the top 10. While by acquisitions, ‘a company assumes ownership over another company’. For instance, As of June 2022, the largest acquisition ever made was the takeover of Mannesmann by Vodafone occurred in 2000 and was worth ~$203 billion. Both types of mergers and acquisition transactions can enable organizations to expand their reach the increasing their market share.

Process Of NBFC Merger Under Companies Act,2013

According to the Companies Act of 2013, the following is the procedure for NBFC Merger-

1. Sign the Memorandum of Understanding and Get BOD Approval

• When both firms sign the MOU, the NBFC Merger procedure begins (Memorandum of Understanding). It states that both firms are prepared to enter into a Takeover Agreement. The directors of the Target Company and the Acquiring Company sign them jointly. The MOU outlines each company’s requirements and obligations, and after the MOU is accepted, the Acquiring Company pays the Target Company the amount of token to finalize the transaction.
• The combination has been approved by the bank.
• Prepare all director paperwork in businesses for KYC.
• Establish a business strategy.
•  RBI Approval

• If a company’s management changes after the acquisition, RBI must approve the change. For example, if a Non-Banking Financial Company’s ownership differs by more than 26 percent (after the Acquisition) of the paid-up equity capital.
• If an NBFC is taken over, the management of around 30% of the number of directors is likely to change.
• If the shareholding change is due to a repurchase offer or the rotation of directors, RBI approval is not required.
• Submit Document to RBI

• Particulars about the prospective directors or shareholders.
• Information about the funding sources.
• Bankers’ reports for directors or shareholders
• Affidavit and declaration of non-criminal history.
• Financial history during the previous three years.
• Received RBI Approval

• Hold a board meeting to consider the public notification, date, and time of the EGM.
• After thirty days following RBI clearance, publish a public notice in two languages (English is required) inviting any objections to the proposed arrangement. Before taking over, the following tasks must be completed:

1. Obtain a No-Objection Certificate (NOC) from your creditors.
2. Enters into a formal agreement for the purchase of a share, a management transfer, or the transfer of shares or an interest in an NBFC.
3. The RBI’s regional office has been notified.
4. Company valuation by Reserve Bank of India guidelines.
5. Asset transfer; they are by contractual agreements.

After 30 days or a month from the signing of the official agreement, publish a second public notice in two languages; the notice should include the following information:

• a desire to transfer or sell ownership or control;
• All pertinent information on the transferee;
• Reasons for NBFC Takeover Agreements/transfers of ownership or control
• NCLT Approval:

Submit an application to NCLT for approval of a merger or amalgamation scheme under Sections 230-233 of the Companies Act 2013.

The following records should be submitted to NCLT for approval:

1. Application to the NCLT for the holding of the general meeting.
2. The Tribunal will issue an order calling a shareholder meeting.
3. The business will convene shareholder meetings to seek approval for the merger.
4. Submit a certified copy of the most recent audited balance sheet and profit and loss statement.
5. SEBI permission, in the case of a listed firm.
6. Prepare a descriptive statement for the merging strategy.
7. Creditors are listed in order of their outstanding debts.
8. The liquidator’s report has been authorized.
9. Obtain a value report.
10. Notification of statutory procedures initiated by or against the firm.
11. In the application, NCLT may check for the following observations:

1. They have the right to ask questions on the material statements in the bank’s most recent financial status auditor report, as well as any other observation.
2. Those who attended the meeting fairly represented the creditor/member or any class of them.
3. If at all feasible, the program should be in the public interest.
4. The program is in the best interests of the firm, its members, and its creditors.

Conclusion

NBFCs play an important role in the financial industry by filling the gap created by the traditional banking system. These Non-Banking Financial Companies are completely altering the banking experience.

NBFCs have many features, including variable duration and interest rates, increased loan size, help in reducing government tax rates, improving market shares, and so on, which enable them to establish a significant client base. Takeovers and mergers are on the rise and are critical drivers of exponential growth. It has quickly become one of the most important sources of corporate expansion in the acquisitions of companies. Non-banking financial companies provide a ray of hope for those companies that are unable to establish their own NBFC.