Structuring Share Purchase Agreements for NBFC Takeovers

Acquiring a Non-Banking Financial Company (NBFC) in India requires careful compliance with a complex web of legal, regulatory, and financial frameworks. At the heart of this process lies the Share Purchase Agreement (SPA) a legally binding document that governs the transfer of ownership from the seller to the acquirer. It defines the commercial terms, ensures compliance with the Reserve Bank of India (RBI), and aligns with statutory provisions under the Companies Act, 2013, Foreign Exchange Management Act (FEMA), 1999, and SEBI Regulations for listed entities.

Given the NBFC sector’s systemic importance, the SPA must be drafted with precision and transparency to reflect RBI’s prudential and governance expectations. A well-structured SPA safeguards both parties’ interests, outlines due diligence and risk mitigation measures, and ensures lawful execution of the takeover. This article examines the key clauses, compliance provisions, and recent RBI developments influencing the structuring of SPAs in NBFC acquisitions.

In this article, CA Manish Mishra talks about Structuring Share Purchase Agreements for NBFC Takeovers.

Legal Foundation of NBFC Takeovers

The legal framework for NBFC (Non-Banking Financial Company) acquisitions is primarily governed by the Reserve Bank of India Act, 1934, particularly Chapter IIIB, which outlines the registration, regulation, and supervision of NBFCs. As per Section 45-IA, every NBFC must secure a Certificate of Registration (CoR) from the Reserve Bank of India (RBI) before commencing financial business. The RBI also holds the authority under Section 45-IA(6) to revoke this registration if the company violates prescribed conditions, fails to maintain the minimum Net Owned Fund (NOF), or engages in mismanagement or irregular activities.

When an NBFC undergoes an acquisition or change in control, the RBI’s prior approval is mandatory, ensuring that only financially sound and ‘fit and proper’ acquirers control regulated financial institutions. This requirement is formalized under RBI Circular DNBR (PD) CC.No.065/03.10.001/2015-16, which stipulates that no SPA (Share Purchase Agreement) or transfer of shares can be executed until the RBI grants its approval.

Hence, while structuring the Share Purchase Agreement, acquirers must insert conditions precedent (CPs) and a long-stop clause to ensure that the transaction becomes effective only upon receipt of RBI approval. This safeguards both parties from regulatory breaches and reinforces compliance with India’s financial stability norms, ensuring the legitimacy and continuity of the NBFC’s business operations.

Due Diligence Before Structuring the SPA

Complete due diligence is the foundation of a legally sound and risk-mitigated NBFC acquisition. Before structuring the Share Purchase Agreement (SPA), both parties especially the acquirer must conduct a detailed review of the NBFC’s financial, legal, and regulatory standing to ensure full compliance and accurate valuation.

Legal and Regulatory Due Diligence

The first step involves verifying the NBFC’s Certificate of Registration (CoR) issued under Section 45-IA of the RBI Act, 1934, and ensuring compliance with all applicable RBI Master Directions and prudential norms. This includes confirming adherence to minimum Net Owned Fund (NOF) requirements, governance standards, and restrictions imposed under the Scale-Based Regulatory (SBR) Framework, 2023. Legal due diligence also examines the NBFC’s corporate structure, shareholding pattern, pending litigations, and statutory filings with the Ministry of Corporate Affairs (MCA) to assess regulatory risk exposure.

Financial and Operational Review

A complete financial audit evaluates the NBFC’s loan book quality, asset-liability management (ALM), non-performing assets (NPA) ratio, and capital adequacy position. Special focus is given to related-party transactions, tax compliance, and provisioning norms as per RBI standards. Operational review also includes an assessment of internal control mechanisms, governance practices, and compliance with KYC and Anti-Money Laundering (AML) norms under the Prevention of Money Laundering Act (PMLA), 2002.

Impact on SPA Structure

The findings from the due diligence process form the basis of key SPA provisions. Identified risks and irregularities must be reflected in representations, warranties, and indemnity clauses. For example, undisclosed liabilities or regulatory non-compliance may warrant price adjustments, escrow mechanisms, or indemnity arrangements to safeguard the acquirer’s interests. Any significant adverse findings can also lead to conditions precedent (CPs) in the SPA, making the transaction contingent upon regulatory rectifications or approvals.

Core Clauses of the Share Purchase Agreement

The Share Purchase Agreement (SPA) forms the legal and commercial foundation of any NBFC takeover, governing the terms, rights, and obligations of both the seller and the acquirer. Given the regulatory oversight by the Reserve Bank of India (RBI), Ministry of Corporate Affairs (MCA), and Foreign Exchange Management Act (FEMA), the SPA must be drafted with precision to ensure compliance, clarity, and enforceability.

Definitions and Interpretation

This section serves as the interpretive guide to the entire agreement, defining critical terms such as “Completion,” “Long Stop Date,” “Material Adverse Effect,” “Closing Conditions,” and “Regulatory Approvals.” Clarity in definitions prevents ambiguity and ensures that all parties interpret key provisions uniformly. For example, the definition of “Completion” typically refers to the point when all conditions precedent (CPs) are satisfied, and the ownership officially transfers to the acquirer.

Purchase Consideration and Mode of Payment

The SPA must clearly specify the purchase consideration, its calculation method, and mode of payment. Valuation of NBFC shares can be based on book value, net asset value (NAV), or discounted cash flow (DCF) methodology, depending on the business model and profitability. Where foreign investment is involved, the valuation must comply with Rule 21 of the FEMA (Non-Debt Instruments) Rules, 2019, and be certified by a Category-I Merchant Banker or Chartered Accountant. The payment structure whether lump-sum, deferred, or escrow-based should align with regulatory and tax requirements.

Conditions Precedent (CPs)

Conditions precedent are mandatory pre-closing requirements that ensure regulatory compliance before the transaction becomes effective. The SPA must clearly specify that the transaction shall not close until:

RBI approval is obtained for the change in control, as per RBI Circular DNBR (PD) CC.No.065/03.10.001/2015-16.
No Objection Certificates (NOCs) are received from lenders or debenture holders.
All KYC norms, FEMA filings, and corporate authorizations under Sections 179 and 180 of the Companies Act, 2013 are duly completed.

The SPA should also include a long-stop date a deadline beyond which, if the CPs are not fulfilled, either party has the right to terminate the agreement without penalty.

Representations and Warranties

Representations and warranties are assurances made by both parties to ensure accuracy, transparency, and protection against future disputes.

The seller must confirm that the NBFC holds a valid RBI registration, maintains regulatory compliance, and has no undisclosed liabilities, pending litigations, or breaches under laws like PMLA, 2002 or the Companies Act, 2013.
The acquirer, in turn, must affirm its financial capacity, corporate authority, and adherence to FDI or takeover regulations.

Any breach of these warranties after completion can give rise to indemnity claims or contractual rescission.

Indemnification Clause

The indemnity clause protects the buyer against financial losses arising from misrepresentation, hidden liabilities, non-compliance, or breach of warranty. The clause should detail:

Scope of indemnity: covering tax liabilities, RBI penalties, or undisclosed debts.
Time limits: defining how long claims can be raised post-completion.
Financial caps: limiting the seller’s liability to a certain percentage of the purchase price.
Claim procedures: specifying notice requirements and dispute resolution mechanisms.
Such provisions ensure fair risk allocation between the parties and maintain contractual balance.

Confidentiality and Non-Compete Clauses

Given the sensitive nature of financial data and client relationships, the SPA must include confidentiality obligations binding both parties. The seller, in particular, should be restricted from disclosing proprietary information, using client databases, or establishing a competing NBFC or financial business for a specified period post-closing. This safeguards the acquirer’s business continuity and goodwill.

Termination Clause

The termination clause specifies the circumstances under which the SPA may be dissolved. Common grounds include:

Rejection or delay of RBI approval.
Failure to fulfill CPs within the long-stop date.
Breach of material warranties or discovery of regulatory violations.
The clause typically provides that upon termination, the agreement stands void, and neither party bears further liability (except for confidentiality or indemnity obligations that survive termination).

Regulatory Compliance under the RBI Framework

Regulatory compliance is the cornerstone of any NBFC acquisition. The Reserve Bank of India (RBI) ensures that all ownership transitions maintain financial stability, transparency, and governance discipline. The Scale-Based Regulatory (SBR) Directions, 2023, have further strengthened the RBI’s supervisory approach, making it imperative for acquirers to adhere to both pre- and post-acquisition compliance obligations.

Classification under the Scale-Based Regulatory Framework

The RBI’s SBR Directions, 2023 categorize NBFCs into four layers Base, Middle, Upper, and Top Layer depending on their size, activity, and systemic risk profile.

Base Layer NBFCs face minimal compliance obligations.
Middle and Upper Layer NBFCs are subject to heightened governance and disclosure norms.
Top Layer NBFCs may face enhanced capital and risk management scrutiny due to their systemic importance.

The degree of regulatory oversight during an acquisition is directly proportional to the NBFC’s classification, ensuring that larger and riskier entities undergo comprehensive regulatory vetting.

Mandatory RBI Approval Prior to Acquisition

The Share Purchase Agreement (SPA) must clearly state that the transaction will not proceed without RBI’s prior written approval, as required under:

Paragraph 3 of the RBI Circular DNBR (PD) CC.No.065/03.10.001/2015-16, which mandates prior permission for any takeover or change in control/management of an NBFC.
Section 45-IA(4)(c) of the RBI Act, 1934, empowering RBI to determine the “fit and proper” status of new acquirers, directors, or shareholders.

This ensures that only credible, financially sound, and compliant individuals or entities gain control of NBFCs institutions that play a crucial role in credit delivery to underserved sectors.

Post-Acquisition Reporting Obligations

Once the acquisition is completed, the acquirer must formally notify the RBI and provide detailed documentation confirming compliance. This includes:

The updated shareholding pattern and beneficial ownership structure.
KYC records and fit and proper declarations of new promoters and directors.
Board reconstitution documents, revised organizational chart, and the post-acquisition business plan.

The above filings are mandated under the Non-Banking Financial Company (Scale-Based Regulation) Directions, 2023, ensuring continued regulatory oversight and smooth management transition.

Consequences of Non-Compliance

Failure to comply with these regulatory provisions can have serious consequences. Under Section 45-IA(6) of the RBI Act, the RBI may cancel the Certificate of Registration (CoR) if the NBFC fails to meet the prescribed conditions or violates approval terms. In addition, penalties under Section 58B of the Act may apply, which include fines and, in severe cases, imprisonment for responsible officers.

Compliance with the Companies Act, 2013

In addition to RBI and FEMA compliance, the Companies Act, 2013 lays down several statutory and procedural obligations that must be fulfilled during and after an NBFC acquisition. These provisions ensure transparency, lawful execution of share transfers, and protection of shareholder and creditor interests. Every corporate action related to acquisition, share issuance, or management restructuring must be supported by proper board and shareholder approvals and filings with the Registrar of Companies (ROC).

Board and Shareholder Approvals

Under Section 179(3) of the Companies Act, 2013, the Board of Directors of both the acquiring and target NBFC must pass a formal Board Resolution approving the acquisition, share purchase, or investment. This resolution authorizes the execution of the Share Purchase Agreement (SPA) and designates authorized signatories to carry out necessary filings and regulatory submissions.

If the acquisition involves a significant change in control or management, the company may also be required to seek shareholder approval through an Extraordinary General Meeting (EGM), depending on the terms of the transaction and applicable thresholds under the Act.

Statutory Filings and Forms

Post-approval, several statutory forms must be filed with the Registrar of Companies (ROC) to record changes in the company’s structure and governance:

Form DIR-12 – For appointment, cessation, or change in designation of directors post-acquisition.
Form MGT-14 – For filing Board or shareholder resolutions approving the acquisition or related corporate actions.
Form SH-7 – Required in case of alteration of share capital, such as issuance of new shares or increase in authorized capital.
Form PAS-3 – To report allotment of shares to the acquirer in case of new issuance or subscription as part of the acquisition deal.

Timely filing of these forms is crucial to ensure that the acquisition is legally recognized and reflected in the MCA database.

Mergers, Amalgamations, and NCLT Approval

If the NBFC acquisition involves a merger, amalgamation, or restructuring, the transaction must comply with Sections 230 to 232 of the Companies Act, 2013. In such cases, an application must be filed before the National Company Law Tribunal (NCLT) for approval of the scheme. The NCLT examines whether the merger scheme is:

Fair and equitable to all stakeholders.
Approved by creditors and shareholders through prescribed voting thresholds.
Compliant with tax neutrality and accounting standards.

The NCLT order approving the scheme must then be filed in Form INC-28 with the ROC to make the merger legally effective.

FEMA and FDI Considerations

When a Non-Banking Financial Company (NBFC) is acquired or invested in by a foreign entity or non-resident investor, the transaction must strictly comply with the Foreign Exchange Management Act (FEMA), 1999, and the corresponding Foreign Exchange Management (Non-Debt Instruments) Rules, 2019. These regulations, read with the FEMA (Transfer or Issue of Security by Persons Resident Outside India) Regulations, govern the entry routes, pricing norms, reporting timelines, and approval requirements for cross-border share transactions involving NBFCs.

Applicability and Legal Framework

Foreign investment in NBFCs is permitted up to 100% under the automatic route for most financial activities, provided the NBFC complies with minimum capitalization norms, fit and proper requirements, and RBI’s prudential regulations. The Share Purchase Agreement (SPA) must be structured in line with these FEMA provisions to ensure the legality and enforceability of the transaction. Additionally, any downstream investment by an Indian company with foreign ownership in another NBFC must comply with Regulation 23 of FEMA (NDI) Rules, 2019, treating it as indirect foreign investment.

Pricing Guidelines

The SPA must contain specific clauses ensuring adherence to FEMA’s pricing guidelines. For share transfers from a resident to a non-resident, the price cannot be less than the fair market value (FMV) determined by a Category-I Merchant Banker or Chartered Accountant using internationally accepted valuation methodologies (such as DCF or NAV). For transfers from a non-resident to a resident, the price must not exceed the FMV. This ensures that the transaction occurs at an arm’s-length valuation and prevents under or overvaluation of shares.

Reporting and Filing Requirements

Post-completion of the transaction, mandatory filings must be made to the Reserve Bank of India (RBI) through the FIRMS portal within 30 days, including:

Form FC-TRS: For reporting transfer of shares between residents and non-residents.
Form FC-GPR: For reporting issuance of new shares to non-resident investors.
The SPA should clearly allocate responsibility for filing these forms (generally to the Indian investee company) and ensure that RBI acknowledgment or confirmation is received to validate compliance.

Press Note 3 (2020) and Government Route Approval

As per Press Note 3 (2020) issued by the Department for Promotion of Industry and Internal Trade (DPIIT), any investment originating from countries sharing land borders with India (such as China, Nepal, Bangladesh, or Pakistan) requires prior Government approval, even if routed indirectly. Consequently, the SPA must include this condition as a mandatory condition precedent, specifying that the acquisition will not proceed without the relevant Government of India clearance. This clause safeguards the transaction from regulatory rejection or retrospective scrutiny.

RBI Intimation and Record Maintenance

Once the acquisition is complete and the filings are made, the NBFC must notify the RBI within 30 days of completion and provide supporting documents such as the updated shareholding pattern, investor KYC, and valuation certificate. Maintaining accurate records of these filings is essential for future RBI inspections or audits under Section 45-IA(6) of the RBI Act.

SEBI Regulations for Listed NBFCs

When an NBFC is listed on a stock exchange, any acquisition or change in control through a Share Purchase Agreement (SPA) triggers additional compliance requirements under the Securities and Exchange Board of India (SEBI) regulations. These regulations ensure market transparency, investor protection, and fair dealing in securities transactions, particularly where public shareholders are involved.

SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (SAST)

Under the SEBI (SAST) Regulations, 2011, any acquirer who directly or indirectly acquires 25% or more of the voting rights or control in a listed NBFC must make a mandatory open offer to public shareholders for at least 26% of the total shareholding.
This ensures that minority investors have the opportunity to exit at a fair price determined as per Regulation 8 of the SAST Regulations, which specifies that the offer price should be the highest of:

The negotiated price under the SPA;
The highest price paid by the acquirer in the previous 26 weeks; or
The 60-day volume-weighted average market price prior to the public announcement.

The SPA must clearly define the trigger event for the open offer, assign responsibility for filing the public announcement, and specify timelines for submission of the draft letter of offer, SEBI review, and payment of consideration to shareholders, as per Regulations 13 to 22 of SAST.

SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR)

The SEBI (LODR) Regulations, 2015 mandate timely and transparent disclosures to the stock exchanges to maintain investor confidence. Under Regulation 30, listed NBFCs must promptly disclose:

Any change in control, promoter group composition, or key managerial personnel;
The execution or termination of the SPA; and
Any material event that may affect the company’s share price or operations.

Additionally, Regulation 31 requires quarterly filing of the updated shareholding pattern, reflecting post-acquisition changes. The SPA must include clauses ensuring that one party (usually the acquirer) is explicitly responsible for making these disclosures within 24 hours of occurrence, as non-compliance attracts penalties under Regulation 98 of the LODR.

Integration of SEBI Requirements in the SPA

The SPA for a listed NBFC must incorporate specific SEBI compliance clauses, such as:

Open offer obligations and timelines;
Determination of offer price as per SAST guidelines;
Responsibility allocation between buyer and seller for filing disclosures and announcements; and
Warranties ensuring no market manipulation or insider trading.

By embedding these conditions, the SPA becomes fully aligned with SEBI’s disclosure, pricing, and procedural requirements, protecting the interests of both acquirer and public shareholders.

Tax Implications and Valuation

Tax and valuation considerations are integral to structuring a compliant and financially sound Share Purchase Agreement (SPA) for NBFC takeovers. Both the buyer and seller must ensure that the transaction complies with the Income Tax Act, 1961, FEMA (Non-Debt Instruments) Rules, 2019, and applicable stamp duty laws to avoid post-acquisition disputes or tax liabilities.

Tax Implications under the Income Tax Act, 1961

The Income Tax Act imposes tax obligations on both the seller and the acquirer depending on the transaction value and mode of consideration:

Section 50CA: If unlisted shares are transferred at a price below their fair market value (FMV), the difference between FMV and sale price is treated as income in the seller’s hands and taxed as capital gains.
Section 56(2)(x): The buyer (acquirer) may also be taxed if shares are purchased at a value below FMV, as the differential is deemed income from other sources.

Thus, to mitigate dual taxation, it is essential that the SPA reflects a valuation consistent with both FEMA and Income Tax Rules, 1962.

Valuation Requirements

Valuation of NBFC shares should be performed by a Category-I Merchant Banker or a Chartered Accountant using recognized valuation methods — typically the Discounted Cash Flow (DCF) or Net Asset Value (NAV) approach. The valuation certificate must be annexed to the SPA to substantiate compliance with:

Rule 21 of FEMA (NDI) Rules, 2019 – For share transfers involving non-residents.
Rule 11UA/11UB of the Income Tax Rules, 1962 – For determining fair market value for tax computation.

This dual compliance ensures regulatory alignment and prevents future disputes with tax authorities or the RBI.

Stamp Duty and Transaction Costs

The SPA must also account for stamp duty implications under respective state laws, as the duty on share transfers varies by jurisdiction. For physical share transfers, stamp duty is typically 0.25% of the consideration value, whereas for dematerialized shares, it is 0.015% on the market value, payable through the depository mechanism. The SPA should specify which party (buyer or seller) bears this cost to avoid ambiguity during completion.

Additionally, the transaction structure should address withholding tax obligations (TDS), capital gains computation, and any indirect tax exposure if shares are transferred through complex arrangements such as mergers or slump sales.

Recent Developments

The regulatory landscape governing NBFC acquisitions in India has evolved significantly in recent years, reflecting the Reserve Bank of India’s (RBI) growing emphasis on transparency, prudential governance, and systemic stability. The latest policy updates have made it imperative that Share Purchase Agreements (SPAs) for NBFC takeovers are structured with meticulous attention to evolving compliance and disclosure norms.

RBI Master Direction - NBFC (Scale-Based Regulation) Directions, 2023

The RBI Master Direction NBFC (SBR) Directions, 2023 represents a major overhaul of the NBFC regulatory framework. It consolidates earlier circulars into a unified structure that categorizes NBFCs into four layers Base, Middle, Upper, and Top Layer, based on asset size and risk exposure. For acquirers, this means that the level of regulatory scrutiny in a takeover depends on the NBFC’s classification. Higher-layer entities, such as Upper and Top Layer NBFCs, face more stringent fit and proper assessments, capital adequacy standards, and board governance norms. The Directions also introduced a greater focus on disclosure and compliance continuity post-acquisition, mandating prompt notification of any ownership or control changes and ensuring that the new management upholds the RBI’s governance framework.

RBI Draft Voluntary Amalgamation Directions, 2025

In 2025, the RBI issued the Draft Voluntary Amalgamation Directions, further tightening regulatory control over NBFC consolidations and mergers. The Draft mandates obtaining a prior No-Objection Certificate (NOC) from the RBI for any merger, amalgamation, or acquisition involving NBFCs.
The proposed framework aims to:

Ensure that the merging entities are financially sound and compliant with prudential norms.
Prevent regulatory arbitrage or misuse of mergers to bypass RBI supervision.
Protect depositor and creditor interests by maintaining transparency in valuation and amalgamation processes.

This marks a shift toward pre-transaction regulatory scrutiny, making it crucial for SPAs to include clauses that make RBI’s NOC a mandatory condition precedent for closing the deal.

Tightened Oversight on Cross-Border Investments

The RBI has also increased vigilance over cross-border NBFC acquisitions, particularly those involving investors from Financial Action Task Force (FATF) non-compliant jurisdictions. Foreign investors are now subject to enhanced due diligence, with a requirement to prove the legitimacy of funds, beneficial ownership, and compliance with Anti-Money Laundering (AML) standards. This has made it essential for SPAs involving foreign acquirers to incorporate specific representations and warranties confirming compliance with FEMA, KYC, and AML regulations, and to include termination rights in case of denial of government or RBI approval.

Strengthened SEBI-RBI Coordination

Another notable development is the enhanced coordination between SEBI and RBI to reduce regulatory overlap, especially for listed NBFCs. This collaboration ensures consistent oversight of takeovers, open offers, and shareholding disclosures under both the SEBI (SAST) Regulations, 2011 and RBI’s NBFC framework. Consequently, SPAs must now address dual compliance obligations explicitly assigning responsibility for filings, disclosures, and public announcements under both regulators’ frameworks.

Practical Implications for SPA Drafting

These developments underscore the importance of adaptive and compliance-centric SPA drafting. A modern SPA must:

Embed RBI approval and disclosure clauses aligned with the 2023 and 2025 regulatory directions.
Include FATF compliance warranties for foreign investors.
Clearly specify obligations under SEBI and RBI frameworks to prevent duplication or omission of filings.

Conclusion

A well-structured Share Purchase Agreement (SPA) serves as the cornerstone of a legally compliant and risk-mitigated NBFC acquisition. It must seamlessly integrate the regulatory mandates of the Reserve Bank of India (RBI) concerning change in control, adhere to FEMA (Non-Debt Instruments) Rules, 2019 for foreign investment, and align with corporate governance obligations under the Companies Act, 2013 and SEBI (LODR and SAST) Regulations for listed entities. By embedding clear definitions, conditions precedent, representations, warranties, and indemnities, the SPA ensures that all stakeholders operate within a transparent legal framework.

With the advent of the Scale-Based Regulatory (SBR) Framework, 2023 and enhanced RBI scrutiny on governance and ownership transitions, acquirers must exercise meticulous planning and foresight. A carefully drafted SPA supported by detailed due diligence, valuation accuracy, and robust compliance clauses facilitates a smooth transition of ownership, reduces litigation exposure, and upholds the integrity and sustainability of India’s NBFC ecosystem.

Frequently Asked Questions (FAQs)

Q1. What is a Share Purchase Agreement (SPA) in the context of an NBFC takeover?

Ans. A Share Purchase Agreement (SPA) is a legally binding contract between the buyer and seller that governs the transfer of ownership in a Non-Banking Financial Company (NBFC). It outlines key terms such as purchase price, representations and warranties, conditions precedent, and regulatory approvals. The SPA ensures that the acquisition complies with laws under the RBI Act, 1934, Companies Act, 2013, FEMA, 1999, and SEBI Regulations, where applicable.

Q2. Why is the RBI’s approval necessary before executing an SPA for NBFC acquisition?

Ans. Under the RBI Circular DNBR (PD) CC.No.065/03.10.001/2015-16, prior written approval from the RBI is mandatory before any takeover or change in control of an NBFC. The SPA must include this as a condition precedent, ensuring that the transaction becomes effective only after RBI approval. Executing or completing a transaction without such approval can result in regulatory penalties or cancellation of the NBFC’s Certificate of Registration (CoR).

Q3. What due diligence is required before drafting an SPA for NBFC acquisition?

Ans. Before drafting the SPA, comprehensive legal and financial due diligence must be conducted, covering:

Validity of the Certificate of Registration (CoR) under Section 45-IA of the RBI Act.
Compliance with RBI norms such as capital adequacy, provisioning, and asset classification.
Verification of loan books, financial statements, tax records, and related-party transactions.
Review of pending litigation, KYC/AML compliance, and regulatory filings.
These findings help in drafting appropriate warranty, indemnity, and escrow clauses in the SPA.

Q4. What are the essential clauses in a Share Purchase Agreement for NBFCs?

Ans. A well-drafted SPA for NBFC takeover should include:

Definitions and interpretation of transaction terms.
Purchase price and payment structure.
Conditions precedent, including RBI, SEBI, and lender approvals.
Representations and warranties of the seller and acquirer.
Indemnity clauses covering regulatory and financial risks.
Confidentiality, non-compete, and termination provisions.
These clauses ensure legal clarity and risk allocation between the parties.

Q5. What are Conditions Precedent (CPs) in an NBFC SPA?

Ans. Conditions Precedent (CPs) are specific actions that must be completed before the SPA becomes effective. Typical CPs include obtaining RBI approval for change in control, lender consents, SEBI open offer clearance (if applicable), and compliance with FEMA filings. If CPs are not fulfilled within the stipulated time (called the long-stop date), either party may terminate the SPA.

Q6. How does FEMA apply to NBFC share acquisitions involving foreign investors?

Ans. Foreign investment in NBFCs is governed by the FEMA (Non-Debt Instruments) Rules, 2019, which allow 100% FDI under the automatic route in most NBFC activities. Post-transaction, filings must be made via the FIRMS portal:

Form FC-TRS for share transfer between resident and non-resident.
Form FC-GPR for issuance of new shares to non-residents.
Both filings must be completed within 30 days of the transaction, as per FEMA guidelines.

Q7. What SEBI regulations apply when acquiring a listed NBFC?

Ans. For listed NBFCs, the acquirer must comply with:

SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (SAST): Triggered when acquiring 25% or more voting rights or control, requiring a mandatory open offer for 26% of public shares.
SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR): Mandates disclosure of changes in control, promoters, and key management personnel within 24 hours.
These ensure market transparency and investor protection.

Q8. What are the Companies Act requirements for NBFC takeovers?

Ans. Under the Companies Act, 2013, the following filings are required post-acquisition:

DIR-12 – Appointment or resignation of directors.
MGT-14 – Resolutions passed by the Board or shareholders.
SH-7 – Alteration of share capital.
INC-22 – Change in registered office, if applicable.
If the acquisition involves a merger or amalgamation, NCLT approval under Sections 230–232 is mandatory.

Q9. What is the role of Ind AS 103 (Business Combinations) in NBFC acquisitions?

Ans. Under Ind AS 103, NBFCs must account for acquisitions as “business combinations,” reflecting the new ownership, goodwill, and fair value of assets and liabilities in their financial statements. This ensures transparent financial reporting and compliance with Schedule III of the Companies Act, 2013.

Q10. What tax implications arise in an NBFC share purchase?

Ans. Tax implications are governed by the Income Tax Act, 1961.

Section 50CA: If shares are transferred below fair market value, the difference is taxed as income in the seller’s hands.
Section 56(2)(x): The buyer may be taxed if shares are purchased below fair market value.
Valuation must comply with FEMA and tax regulations, certified by a Chartered Accountant or Merchant Banker.