An NBFC takeover is not treated like an ordinary acquisition because Non-Banking Financial Companies operate under the supervision of the Reserve Bank of India. Any proposed transaction that materially changes the ownership, control, shareholding pattern or management of an NBFC may require the prior written approval of RBI. Therefore, an acquirer should evaluate the regulatory implications of the transaction before completing any share transfer or management change.

The principal regulatory governing such transactions is contained in the Non-Banking Financial Companies (Approval of Acquisition or Transfer of Control) Directions, 2015, along with other applicable RBI regulations and subsequent directions. These rules are intended to ensure that persons acquiring control or significant ownership in an NBFC are financially sound, fit and proper, and capable of managing a regulated financial institution.

In this article, CA Manish Mishra talks about When Is RBI Approval Required for an NBFC Takeover?

What Is an NBFC Takeover?

An NBFC takeover generally refers to the acquisition of shares, voting rights, management rights or control over an existing RBI-registered NBFC by another person, company or group. The takeover may occur through the purchase of existing shares, fresh investment, acquisition of controlling rights or restructuring of the management and board of directors.

The term “takeover” should not be understood only as the purchase of a majority shareholding. Even where an investor acquires a smaller percentage of shares, the transaction may still amount to a takeover or acquisition of control if the investor receives the power to influence the management, policy decisions or composition of the board. Therefore, the substance of the transaction is more important than the commercial description given to it.

Why Does RBI Regulate NBFC Takeovers?

RBI regulates NBFC takeovers because NBFCs deal with financial assets, loans, investments and other regulated financial activities. A change in ownership or management can directly affect the governance, financial stability and regulatory compliance of the NBFC. RBI therefore seeks to ensure that incoming shareholders and directors are suitable to manage a regulated financial entity.

The regulatory scrutiny also helps prevent persons with questionable financial backgrounds, criminal proceedings, regulatory defaults or unclear sources of funds from acquiring control over an NBFC. RBI may therefore examine the financial standing, professional experience, source of investment funds and regulatory history of proposed shareholders and directors before granting its approval.

When Is Prior RBI Approval Required?

Prior approval of RBI is primarily required in three major situations. These include acquisition or transfer of control, acquisition or transfer of 26% or more of the paid-up equity capital of the NBFC and a change in management resulting in replacement of more than 30% of the directors, excluding independent directors. Each condition operates separately and should therefore be examined independently.

A transaction may require RBI approval even if only one of these conditions is satisfied. For example, an investor acquiring less than 26% of the equity shares may still require prior approval if contractual rights effectively provide control over the NBFC.

Takeover or Acquisition of Control of an NBFC

Prior RBI approval is required where the proposed transaction results in a takeover or acquisition of control of the NBFC. The requirement applies irrespective of whether the transaction immediately results in a change in management. Control may arise through shareholding, voting arrangements, contractual rights, board appointment powers or other rights that enable a person to influence the management or policy decisions of the NBFC.

Therefore, an investor should not assume that RBI approval is unnecessary merely because the shareholding being acquired is below the prescribed percentage threshold. For instance, if an investor acquires 20% of the equity capital but receives the right to appoint the majority of directors or exercise substantial influence over strategic decisions, the arrangement may still constitute an acquisition of control and require prior RBI approval.

Acquisition or Transfer of 26% or More Shareholding

RBI approval is required where a change in shareholding results in the acquisition or transfer of 26% or more of the paid-up equity capital of the NBFC. The requirement also covers progressive acquisitions, meaning the threshold cannot necessarily be avoided by dividing the investment into several smaller transactions. For example, if an investor initially holds 10% of an NBFC and subsequently proposes to acquire another 20%, the overall impact of the acquisition must be assessed.

Where the transaction results in the prescribed level of acquisition or transfer, prior RBI permission becomes necessary. The rule applies both to a buyer acquiring significant equity and to existing shareholders transferring such a substantial portion of the NBFC. Therefore, both sides of the transaction should determine the regulatory requirement before completing the share transfer.

Change of More Than 30% of Directors

Prior RBI approval may also be required where the proposed transaction results in a change in management involving more than 30% of the directors, excluding independent directors. This condition often becomes relevant after an acquisition because the incoming shareholder may wish to replace existing directors and appoint its own nominees. A change in the board structure can significantly alter the management of the NBFC even if there is no immediate large-scale share transfer.

For example, if an NBFC has six relevant directors and three of them are proposed to be replaced, the transaction may cross the 30% threshold and require prior RBI permission. Businesses should therefore examine proposed board changes along with the shareholding structure.

Exception for Directors Re-Elected by Rotation

RBI regulations provide relief where the change in directors occurs merely because directors retire by rotation and are subsequently re-elected. Such routine corporate changes are generally not treated as a change in management requiring prior approval.

However, this exception should be applied carefully. If retiring directors are replaced by completely new individuals and the overall board composition changes substantially, the transaction may still trigger RBI approval. The nature and extent of the management change should therefore be considered rather than relying solely on the fact that directors retired by rotation.

Exception Where Shareholding Changes Due to Buyback or Capital Reduction

A limited exception may apply where the shareholding percentage of an existing shareholder increases beyond the prescribed threshold because the NBFC undertakes a buyback of shares or reduction of capital rather than because the shareholder acquires additional shares.

In such a case, prior approval may not be required in the same manner, subject to the conditions prescribed by RBI. However, the change must generally be reported to RBI within the applicable period. Businesses should therefore distinguish between an actual share acquisition and a passive increase in percentage holding caused by capital restructuring.

Is RBI Approval Required for Acquisition Below 26%?

An acquisition below 26% does not automatically require RBI approval merely because of the shareholding percentage. However, the transaction must still be examined from the perspective of control and management.

If an investor acquires 15% or 20% of the shares without obtaining any controlling rights and there is no qualifying management change, the 26% threshold may not be triggered. On the other hand, if the same investor obtains significant board nomination rights, veto powers or authority to influence key policy decisions, RBI approval may still be required because the transaction amounts to an acquisition of control. Therefore, shareholding percentage should never be considered in isolation when structuring an NBFC takeover.

Documents Required for RBI Approval for NBFC Takeover

The application for prior RBI approval should contain sufficient information regarding the proposed transaction, incoming shareholders, directors and source of funds. RBI may use these documents to determine whether the proposed acquirer and management are fit and proper to control a regulated financial institution.

Details of Proposed Shareholders and Directors

Detailed particulars of proposed shareholders and directors are generally required as part of the application. These details may include their names, addresses, PAN, DIN, nationality, educational background, professional experience, existing directorships, business interests and association with other financial entities.

RBI may also examine whether the persons have been involved in any regulatory default, financial misconduct, banking default or investigation. The purpose of collecting such information is to assess the suitability and credibility of the persons who will have substantial influence over the NBFC.

Source of Funds

The proposed acquirer is generally required to disclose the source of funds used for acquiring shares in the NBFC. RBI may examine bank statements, financial statements and other supporting records to confirm that the investment is being made from legitimate and identifiable sources. A clear source of funds is particularly important in financial-sector transactions because RBI is expected to ensure transparency in the ownership of regulated entities. Unexplained or complex funding arrangements may result in additional queries and may delay regulatory approval.

Declaration Relating to Deposit-Taking Bodies

Proposed shareholders and directors may be required to provide declarations confirming that they are not associated with an unincorporated body that accepts public deposits in violation of applicable law. Such declarations enable RBI to assess whether incoming promoters or management have any association with activities that could raise prudential or depositor-protection concerns.

Declaration Regarding Rejected NBFC Registration

The proposed shareholders and directors may also be required to disclose whether they were associated with a company whose application for an NBFC Certificate of Registration was previously rejected by RBI. This information is important because a previous rejection may indicate regulatory concerns regarding the applicant's financial standing, business model, governance or compliance background.

Declaration Regarding Criminal Proceedings

Applicants may have to disclose pending or concluded criminal proceedings involving the proposed shareholders and directors. This can include proceedings relating to dishonour of cheques and other financial offences. The objective is to help RBI assess the integrity and suitability of persons seeking to control or manage the NBFC.

Bankers' Report

A bankers' report concerning the proposed shareholders or directors may also be sought as part of the RBI approval process. Such a report can provide information relating to the banking conduct and financial credibility of the persons concerned. RBI may additionally ask for further documents or clarification depending upon the complexity of the transaction and the background of the parties involved.

Where Is the RBI Takeover Application Filed?

The application for prior approval is generally submitted to the RBI office having jurisdiction over the registered office of the NBFC. The application should be filed before completing the transaction that triggers the approval requirement. Parties should therefore draft the Share Purchase Agreement or investment agreement carefully. Where RBI approval is required, completion of the acquisition should generally be made subject to receipt of RBI permission so that the transaction is not implemented prematurely.

Due Diligence Before Filing the Application

A comprehensive due diligence review should be conducted before acquiring an NBFC. The buyer is not merely purchasing shares; it is also acquiring the existing regulatory, financial and compliance history of the company. The buyer should verify the validity of the RBI Certificate of Registration, permitted business activities, regulatory filings, capital adequacy,

Net Owned Fund, loan portfolio, non-performing assets, borrowings, statutory auditor observations, KYC and AML compliance, Fair Practices Code implementation, customer complaints and pending regulatory proceedings. Tax liabilities, corporate law compliances, charges over assets, related-party transactions, pending litigation and historical RBI penalties should also be reviewed. A detailed due diligence exercise can help the buyer identify hidden liabilities and negotiate appropriate representations, warranties and indemnities in the acquisition agreement.

Public Notice Requirement After RBI Approval

Obtaining RBI approval may not be the final step in the takeover process. Where the transaction involves the sale or transfer of ownership or control, a public notice is generally required before the transaction is finally effected. The prescribed public notice should ordinarily be issued after obtaining RBI permission and at least 30 days before completing the qualifying transfer. This allows stakeholders and the public to be informed about the proposed change in ownership or control.

Who Can Issue the Public Notice?

The public notice may generally be issued by the existing NBFC, the proposed transferee or jointly by both parties. The method adopted depends on the structure of the transaction and the agreement between the parties. The important requirement is that the notice should adequately disclose the proposed transfer and satisfy RBI's regulatory conditions before the takeover is finally completed.

What Should the Public Notice Contain?

The notice should ordinarily state the intention to sell or transfer ownership or control of the NBFC. It should also contain relevant particulars of the proposed transferee and the reasons for the proposed transaction. The information should be clear enough to inform readers that a material change in the ownership or control of a regulated NBFC is proposed.

Where Should the Public Notice Be Published?

The notice is generally required to be published in at least one leading national newspaper and one leading local vernacular newspaper circulating in the area where the registered office of the NBFC is situated. The prescribed notice period should be allowed to expire before the transfer of ownership or control is finally completed.

Process for an NBFC Takeover

The NBFC takeover process should be carried out in a structured manner because several corporate and regulatory requirements may apply simultaneously.

Identification of Target NBFC

The first stage is to identify an appropriate RBI-registered NBFC for acquisition. The buyer should examine the NBFC's business model, regulatory category, Certificate of Registration and operational status. The commercial objective of the acquisition should also be matched with the permitted activities of the target NBFC.

Conducting Due Diligence

Once a suitable target has been identified, legal, financial and regulatory due diligence should be carried out. The purpose is to identify historical non-compliances, liabilities and regulatory risks before the buyer commits substantial funds. The findings of the due diligence process can also influence the purchase consideration and contractual protections negotiated between the parties.

Finalising the Transaction Structure

The buyer and seller should determine the percentage of shares to be transferred, purchase consideration, management rights, board composition and post-acquisition control structure. At this stage, it is essential to examine whether the structure triggers RBI's approval requirements relating to control, 26% shareholding or 30% management change.

Determining RBI Approval Requirement

Before entering into the final completion stage, the parties should determine whether prior RBI approval is necessary. All three regulatory tests should be independently reviewed. The transaction should not be implemented merely because one particular threshold has not been crossed. Control rights and management changes must also be considered.

Preparing the RBI Application

Where prior approval is required, an application should be prepared with the prescribed information and supporting documents relating to the transaction, incoming shareholders, directors and source of funds. The application should be accurate and complete because discrepancies or incomplete disclosures may result in RBI raising additional queries.

Submission and Regulatory Review

The completed application is submitted to the appropriate RBI office. RBI may examine the financial position, experience, background and regulatory history of the proposed acquirer and directors. Additional clarification or documents may be requested during the review process before RBI takes a final decision.

Obtaining RBI Approval

The qualifying takeover should not be completed until prior written RBI approval is obtained. Any conditions imposed in the approval letter should also be carefully reviewed and complied with. Transaction documents should therefore provide that regulatory approval is a condition precedent to completion wherever applicable.

Publication of Public Notice

After receiving RBI approval, the prescribed public notice should be published where the rules require it. The required minimum notice period should then be observed before effecting the transfer. Proof of publication should be maintained as part of the NBFC's compliance records.

Completion of Share Transfer and Management Changes

Once RBI approval and public notice requirements have been satisfied, the parties may proceed with the actual transfer of shares and approved changes in management. The transaction should be completed strictly in accordance with the structure and conditions approved by RBI.

Post-Takeover Compliance

After completion, the NBFC should update its statutory registers, shareholding records, board composition and authorised signatories. Necessary filings under the Companies Act and applicable RBI requirements should also be completed. The incoming management should additionally review operational policies, regulatory returns, KYC systems and internal controls to ensure continuing compliance after the takeover.

What Does RBI Examine Before Granting Approval?

RBI generally examines whether the proposed acquirers and directors are suitable persons to own and manage an NBFC. The regulator may review their financial standing, professional experience, business background, regulatory history and source of funds.

RBI may also consider whether the persons have been associated with financial defaults, rejected NBFC applications, criminal proceedings, regulatory violations or other matters that could adversely affect their fit-and-proper status. The purpose of this review is to ensure that a change in ownership does not weaken the governance or financial integrity of the NBFC.

What Happens If an NBFC Is Taken Over Without RBI Approval?

Failure to obtain mandatory prior RBI approval can expose the NBFC and responsible persons to regulatory action. RBI has powers under the applicable law to impose monetary penalties and take other supervisory measures where regulatory requirements are violated.

Non-compliance can also create difficulties in completing subsequent transactions, onboarding investors, obtaining regulatory approvals or demonstrating proper governance during RBI inspection. Therefore, the applicability of prior approval should be established before implementing the takeover.

Difference Between the 26% Shareholding Test and Control Test

The 26% shareholding test and the control test are separate regulatory concepts. The 26% test is primarily based on the extent of paid-up equity capital being acquired or transferred. Once the prescribed threshold is triggered, prior RBI approval generally becomes necessary.

The control test, on the other hand, focuses on the actual rights and influence obtained by the acquirer. A person holding less than 26% may still exercise control through voting arrangements, board appointment rights or strategic veto powers. Therefore, transactions below 26% should also be reviewed carefully to determine whether the contractual rights given to the investor amount to control.

Important Compliance Checklist for NBFC Buyers

Before acquiring an NBFC, buyers should carefully verify the regulatory and financial position of the target company. The RBI Certificate of Registration should be valid, and the business being carried out by the NBFC should be consistent with its permitted regulatory classification.

The buyer should also determine whether the proposed acquisition results in a transfer of 26% or more shareholding, acquisition of control or change in more than 30% of the directors. Where any approval requirement is triggered, RBI permission should be obtained before completing the transaction. Incoming shareholders and directors should be prepared to provide detailed declarations, financial information, source-of-funds evidence and other fit-and-proper documents. The parties should also plan for the public notice requirement and all post-takeover corporate and regulatory filings.

Conclusion

RBI approval is an important regulatory requirement in an NBFC takeover where the transaction results in acquisition of control, acquisition or transfer of 26% or more of the paid-up equity capital, or a change in management involving more than 30% of the directors excluding independent directors. Businesses should not evaluate an NBFC takeover only on the basis of the shareholding percentage. Even a smaller investment may require prior approval where the acquirer obtains significant control or management rights. Similarly, changes in the board may independently trigger the approval requirement.

A properly structured NBFC takeover should therefore include detailed due diligence, assessment of RBI approval requirements, verification of incoming shareholders and directors, source-of-funds checks, regulatory application, public notice compliance and completion of post-acquisition filings. Careful planning at the initial stage can significantly reduce regulatory risk and help ensure a legally compliant transfer of ownership and control.

Frequently Asked Questions

Q1. Is RBI approval mandatory for every NBFC takeover?

Ans. No, RBI approval is not required for every change in an NBFC. However, prior written approval is required where the transaction results in acquisition of control, acquisition or transfer of 26% or more of paid-up equity capital, or a qualifying change in management.

Q2. When is RBI approval required for acquisition of NBFC shares?

Ans. Prior RBI approval is generally required when the acquisition or transfer results in 26% or more of the paid-up equity capital of an NBFC, including progressive acquisitions over time. The transaction should not be completed before obtaining the required permission.

Q3. Is RBI approval required if less than 26% shares are acquired?

Ans. It may still be required. Even if the investor acquires less than 26% shareholding, prior RBI approval can become necessary where the transaction gives the investor control over the NBFC through voting, management, contractual or board-related rights.

Q4. What is the 30% director-change rule in an NBFC takeover?

Ans. Prior RBI approval is required where a change in management results in a change of more than 30% of the directors, excluding independent directors. This requirement should be reviewed separately from the shareholding threshold.

Q5. Is RBI approval needed when directors retire by rotation?

Ans. Generally, prior approval is not required merely because directors retire by rotation and are subsequently re-elected. However, if retiring directors are replaced by new directors and the overall management change crosses the prescribed threshold, RBI approval may become applicable.

Q6. Can an NBFC takeover be completed before RBI approval?

Ans. No, where the transaction falls within the categories requiring prior permission, RBI approval must be obtained before the acquisition, transfer of control or management change is implemented. Completing the transaction first can lead to regulatory non-compliance.

Q7. What documents are generally required for RBI approval?

Ans. The application may require details of proposed shareholders and directors, source-of-funds information, declarations regarding regulatory and criminal background, financial particulars and bankers' reports. RBI may also seek additional information depending on the transaction structure.

Q8. Is a public notice required for an NBFC takeover?

Ans. Yes, where the transaction involves sale or transfer of ownership or control, the applicable RBI framework requires a 30-day public notice before the transaction is effected. The prescribed process should be completed after obtaining the necessary RBI permission.

Q9. Where should the NBFC takeover public notice be published?

Ans. The prescribed notice is generally published in a leading national newspaper and a leading local vernacular newspaper circulating at the location of the NBFC's registered office. The notice should provide appropriate details of the proposed transfer.

Q10. What does RBI examine before approving an NBFC takeover?

Ans. RBI may examine the financial standing, business background, experience, integrity and regulatory history of the incoming shareholders and directors. It may also review the source of acquisition funds and whether the proposed owners and management are fit and proper to operate a regulated financial entity.