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 otherwise;
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 depositors.
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.