The revised directions are much more stringent, putting additional burden on the smaller companies, as they will have to rush to the RBI every time there is a change in their board
The Reserve Bank of India, on 9th July, 2015, came out with the fine print of the revised directions on change in control over/ acquisition of NBFCs (revised directions). These can be viewed here
Earlier, change in control over/ acquisition of NBFCs was governed by the notification of May 2014 (please see
), whereby they were only required to obtain a prior written consent from the RBI. But under the revised directions, the RBI insists the promoters to make a full-fledged application to the RBI for the change in hands. In this write-up, we intend to draw up the impact of the revised directions and its comparison with the earlier norms.
What amounts to change in control/ acquisition of an NBFC?
As per the revised directions, the following circumstances amount to change in control/ acquisition of an NBFC and the same shall be subject to prior approval of the RBI –
(a) Any takeover or acquisition of control of an NBFC, even if the same does not tantamount to change in management of the company;
(b) Any change in the shareholding of an NBFC, including progressive increases over time, which would result in acquisition/ transfer of shareholding of 26 per cent or more of the paid up equity capital of the NBFC. However, exemption has been granted to a situation where the increase in the shareholding results due to a buyback of shares/ reduction in capital where it has been done with the approval of a competent court;
(c) Any change in management of the NBFC that would result in change in more than 30 per cent of the directors. However, change in the number of independent directors shall not constitute change in control for obvious reasons. However, prior approval would not be required for those directors who get re-elected on retirement by rotation.
Though the intent of the RBI is noble, it may at times pose a good amount of trouble to the NBFCs. There may be instances where the above events may occur due to reasons beyond the control of the promoters. Even then, a full-fledged application shall have to be made by the NBFC. Some of such instances have been discussed below.
Say, there are only three directors in an NBFC; one of them expires, which means more than 30% in the composition of the board. If we go by the directions, any change in more than 30% of the directors should be done only after prior permission of the RBI. Not sure how can an NBFC obtain a prior approval in such a case.
Let us again take an example of an NBFC with only 3 directors, and the shareholders wish to not reappoint one of the retiring director in the annual general meeting, this leads to a situation where more than 30% of the directors are changed. In this case, if the Directions were to be followed, the shareholders would require getting the consent of RBI before enforcing their proprietary rights.
Again, what happens if the 51% shares of an NBFC are being acquired by a bank/ banks under a strategic debt restructuring scheme, will it still require the prior consent of the RBI? This is a bit contradictory in nature, as one will have to obtain prior approval of RBI to act in accordance with a decision granted after exercising power granted by RBI itself.
These are only some of the instances. There can be several other instances as well, which might happen for reasons beyond the control of the promoters; but in all cases prior approval of the RBI has to be obtained.
Process of making an application to the RBI
The application for change in control/ acquisition of NBFCs has to be done by the company in its letter head along with complete details of proposed directors/ shareholders of the company (which is a list of 29 items!), sources of funds for the proposed acquisition of the shares of the company.
The revised directions also require the company to enclose various disclosures from the proposed directors/ shareholders; one of such is a disclosure that the proposed directors/ shareholders are not associated with an entity which has been denied the certificate of registration by the RBI. Therefore, if you have ever failed to register your company as an NBFC, you will never be able to become a promoter/director of an NBFC again.
The revised directions also talk about a Banker’s Report on the proposed directors/ shareholders of the company; however, nothing else has been clarified in this regard.
The application has to be submitted to the Regional Office of the Department of Non-Banking Supervision in whose jurisdiction the registered office of the NBFC is located.
Prior public notice for change in control/ management
The NBFC and proposed acquirer, either singly or jointly, shall have to issue a public notice at least 30 days before the change in control of the company/ acquisition of the shares of the company after the permission is granted by the RBI. The public notice, which is to be published in at least one leading national and in one leading local (covering the place of registered office) vernacular newspaper, shall indicate the intention to change the control, the particulars of acquirer and furthermore, the reasons for such change of ownership/ control.
The revised directions are much more stringent than what existed and this is one more sign which indicates that the RBI is intending to implement the check at the management level of the NBFCs. While the motive is noble, but at some places the core intent has got distorted. One of the major recommendation of the Usha Thorat Committee was deregulation of smaller companies, but these Directions seems to unknowingly put additional burden on the smaller companies, as they will have to rush to the RBI every time there is a change in their board.
By the way, the consequences of violation of these directions also deserve a mention; in case of any violation of the revised directions; the CoR of the company will be cancelled!