Non-Banking Financial Companies (NBFCs) are crucial financial intermediaries that extend credit to individuals and businesses that traditional banks often overlook, such as small enterprises, rural borrowers, and emerging sectors. By filling this credit gap, NBFCs play a key role in promoting financial inclusion and supporting India’s economic growth. Their operations influence the country’s broader financial stability, which is why any structural change like ownership transfer or acquisition demands careful supervision.

Given their systemic importance, acquisitions or takeovers of NBFCs are considered highly sensitive transactions. The Reserve Bank of India (RBI), as the primary regulator, ensures that only fit and proper individuals or entities control these institutions. Other bodies such as SEBI (for listed NBFCs), CCI (for competition oversight), and MCA (for corporate restructuring) also play vital roles. This article examines the legal, procedural, and regulatory formalities governing NBFC acquisitions, highlighting key RBI directions, statutory sections, and recent updates shaping the process.

In this article, CA Manish Mishra talks about Legal & Regulatory Formalities in NBFC Acquisition Deals.

Regulatory Framework under the RBI Act, 1934

Under Section 45-IA of the RBI Act, every NBFC must obtain a Certificate of Registration (CoR) from the RBI before starting its operations. This ensures that only financially sound and well-managed entities can engage in lending and financial activities. To strengthen supervision, the RBI issued the Master Direction Non-Banking Financial Company (Scale-Based Regulation) Directions, 2023, which lays out prudential norms, governance standards, and compliance requirements.

The SBR Framework divides NBFCs into four layers Base, Middle, Upper, and Top depending on their size, type of business, and risk exposure. Smaller NBFCs face lighter regulation, while large, systemically important NBFCs are subject to stricter monitoring and capital norms. During acquisitions, RBI’s scrutiny increases proportionately with the NBFC’s regulatory layer.

RBI Approval for Change of Control and Shareholding

According to the RBI Circular DNBR (PD) CC.No.065/03.10.001/2015-16, if someone wants to take over an NBFC, acquire a large shareholding, or if a merger or amalgamation will lead to a new management or ownership structure, the transaction cannot proceed without RBI’s permission. This ensures that only financially sound, trustworthy, and experienced individuals or companies manage NBFCs, maintaining stability in the financial sector.

RBI usually requires approval in two key cases:

• When 26% or more of the company’s equity capital is being bought, sold, or transferred.

• When 30% or more of the Board of Directors is being changed.

RBI defines “control” in a broad sense it doesn’t just mean owning most shares, but also having the power to appoint directors or influence key decisions affecting how the company is run. This wide definition helps RBI monitor both direct and indirect takeovers to protect public and financial interests.

Procedure for RBI Approval

The process begins with submitting an application to the Regional Office of the Department of Supervision of the Reserve Bank of India (RBI), under whose jurisdiction the NBFC’s registered office falls. The application must be detailed and include:

• A business plan describing how the NBFC will operate after acquisition.

• Complete details of the acquirer(s) and beneficial owners, ensuring transparency of ownership.

• Evidence of the financial strength, net worth, and source of funds of the buyer to verify legitimacy and capacity.

• KYC documents and fit and proper declarations for all proposed directors to confirm they meet RBI’s integrity and competency standards.

• Copies of the Share Purchase Agreement (SPA) or draft merger scheme outlining transaction terms.

Once RBI grants its approval, both parties must publish a public notice in one national and one vernacular newspaper at least 30 days before completing the transaction. This disclosure keeps depositors, creditors, and the public informed and allows any objections to be raised.

If an NBFC proceeds with an acquisition without RBI’s prior approval, it violates Section 45-IA(6) of the RBI Act, 1934. Such non-compliance can result in penalties or even cancellation of the NBFC’s registration, meaning it would lose the legal right to operate.

Corporate Law Compliance under the Companies Act, 2013

Under Section 179, the Board of Directors must approve any decision related to share acquisition, investment, or significant restructuring. If the acquisition or restructuring involves merging two companies or transferring ownership, Sections 230–232 come into play these require approval from the National Company Law Tribunal (NCLT) after obtaining consent from shareholders, creditors, and regulatory authorities. In cases where the acquirer wishes to buy out or “squeeze out” remaining minority shareholders, Sections 235–236 prescribe the detailed process for such compulsory acquisitions.

After the transaction, all related changes in directors, shareholding, or registered office must be filed with the Registrar of Companies (ROC) using prescribed forms like DIR-12, MGT-14, INC-22, and SH-7. Additionally, compliance with Section 186 (regulating inter-corporate loans and investments) and Section 180(1)(a)/(c) (regulating borrowing limits and asset transfers) is essential during due diligence to ensure the NBFC’s internal approvals and financial prudence are legally sound.

SEBI and Securities Law Requirements

Competition Law and CCI Approval

Under Sections 5 and 6 of the Competition Act, 2002, any merger, amalgamation, or acquisition that crosses the prescribed asset or turnover thresholds must be notified to the CCI before the transaction is completed. These thresholds are designed to identify large transactions, often referred to as “combinations,” that could potentially impact market competition. The CCI examines whether the proposed deal might lead to an “appreciable adverse effect on competition (AAEC)” for example, by creating a monopoly or reducing consumer choice in markets like retail lending, microfinance, housing finance, or vehicle loans.

The Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011, commonly called the Combination Regulations, specify the procedural steps. Acquirers must file either Form I (a short-form notification for less complex deals) or Form II (a detailed form for large or sensitive mergers). The CCI generally reviews applications within 30 to 90 working days, depending on complexity, and also provides exemptions for small transactions or intra-group restructurings, where the impact on competition is minimal.

FEMA and FDI Regulations

Foreign participation in NBFCs is governed by the Foreign Exchange Management Act, 1999 (FEMA) and the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019. Under these rules, 100% Foreign Direct Investment (FDI) is allowed in most NBFC activities such as lending, leasing, hire purchase, and housing finance—through the automatic route. This means that prior approval from the Reserve Bank of India (RBI) or the government is generally not required. However, foreign investors must comply with Know Your Customer (KYC) norms, pricing guidelines, and reporting requirements to ensure transparency and traceability of funds.

When shares of an NBFC are transferred or issued to a foreign investor, certain filings must be made:

• Form FC-TRS for share transfer between a resident and a non-resident.

• Form FC-GPR when new shares are issued to a non-resident.
  Both forms must be filed with the RBI within 30 days via the FIRMS portal.

Additionally, investments from countries that share land borders with India such as China, Pakistan, Nepal, Bhutan, and Bangladesh are subject to Government route approval under Press Note 3 (2020). This measure was introduced to prevent opportunistic takeovers and ensure national security, making prior government clearance mandatory for such cross-border transactions.

Due Diligence and Fit & Proper Criteria

Post-Acquisition Compliances

The mandatory compliance steps that must be followed after the completion of an NBFC acquisition to ensure continued regulatory adherence and smooth transition of ownership.

Once the acquisition or merger is finalized, the acquirer must immediately inform the Reserve Bank of India (RBI) about the transaction’s completion. This notification confirms that the acquisition has been executed in accordance with RBI’s prior approval and specified conditions. At the same time, the company must update its statutory filings with the Ministry of Corporate Affairs (MCA), such as changes in directors, shareholding patterns, or registered office details, using the relevant e-forms.

Next, the NBFC must reconstitute its Board of Directors and key committees including the Audit, Risk Management, and Nomination & Remuneration Committees in line with the Scale-Based Regulatory (SBR) governance norms. The company should also review and align its internal credit, risk management, and IT governance policies to reflect the new ownership and regulatory expectations.

Finally, the NBFC must submit post-acquisition reports or returns as required by the RBI. Non-compliance with these obligations can result in penalties under Section 58B of the RBI Act, 1934 or additional regulatory directions under Section 45L, which empowers the RBI to issue corrective measures or even restrict business operations until full compliance is achieved.

Recent Regulatory Developments

Conclusion

Acquiring an NBFC is not just a commercial or financial transaction it involves a multi-layered legal process that requires approvals and filings with several regulatory authorities. An acquirer must secure prior approval from the RBI, comply with the Companies Act for internal corporate changes, fulfill SEBI disclosure norms for listed NBFCs, file combination notifications with the Competition Commission of India (CCI) if size thresholds are crossed, and adhere to FEMA reporting requirements in case of foreign investment. Each of these steps ensures transparency, accountability, and protection of stakeholders.

The conclusion emphasizes that with the RBI’s Scale-Based Regulatory (SBR) Framework, NBFCs are now governed with stricter norms closer to banks in terms of governance, capital adequacy, and risk management. Therefore, a well-planned regulatory strategy, supported by thorough due diligence, accurate documentation, and timely compliance, is crucial. In India’s evolving financial environment, legal compliance is not optional it is the foundation for a successful and sustainable NBFC acquisition.

Frequently Asked Questions (FAQs)

Q1. What is the meaning of “change in control” in an NBFC acquisition?

Ans. “Change in control” refers to the right to appoint the majority of directors or influence management or policy decisions of an NBFC, directly or indirectly, as defined under Section 2(27) of the Companies Act, 2013.

Q2. Is RBI approval mandatory for every NBFC acquisition?

Ans. Yes, RBI approval is required for any takeover or acquisition of control, or where 26% or more of shareholding or 30% or more of the board changes.

Q3. Can foreign investors acquire Indian NBFCs?

Ans. Yes. 100% FDI is allowed under the automatic route for most NBFCs, subject to compliance with FEMA and RBI regulations. However, investors from countries sharing borders with India need government approval.

Q4. How long does RBI take to approve an NBFC acquisition?

Ans. The approval process typically takes 3–6 months, depending on the completeness of documents and the complexity of the transaction.

Q5. What is the role of SEBI in NBFC acquisitions?

Ans. SEBI regulates acquisitions of listed NBFCs through the SAST Regulations (open offer requirements) and LODR Regulations (disclosure obligations).

Q6. When is Competition Commission of India (CCI) approval required?

Ans. When the acquisition crosses the threshold limits defined in Section 5 of the Competition Act, 2002 based on assets and turnover of the transacting entities.

Q7. What are the “fit and proper” criteria for NBFC directors?

Ans. The criteria include integrity, financial soundness, competence, and the absence of criminal convictions or regulatory defaults.

Q8. Can an NBFC merge with another NBFC without RBI approval?

Ans. No. Any merger or amalgamation between NBFCs requires prior RBI approval, along with NCLT sanction under Sections 230–232 of the Companies Act, 2013.

Q9. What happens if RBI approval is not obtained before acquisition?

Ans. The transaction may be deemed invalid, and RBI may impose penalties or cancel the NBFC’s Certificate of Registration under Section 45-IA(6).

Q10. Are there recent changes in NBFC acquisition regulation?

Ans. Yes. The RBI Master Direction (2023) and Draft Voluntary Amalgamation Directions (2025) have introduced tighter scrutiny, making compliance with SBR norms and ownership transparency mandatory for all NBFC acquirers.