Acquisitions of non-banking finance companies in India

By Ravi Singhania and Arjun Anand, Singhania & Partners

Mergers and acquisitions (M&A) in the finance sector are controlled and regulated by the Reserve Bank of India (RBI). The RBI has over a period of time laid down the law by the virtue of which the establishment, functions and investments in non-banking finance companies (NBFCs) are managed in the country.

Ravi SinghaniaManaging partnerSinghania & Partners
Ravi Singhania
Managing partner
Singhania & Partners

No NBFC can do business without obtaining a certificate of registration from the RBI. It should be a company registered under the Companies Act, 1956/2013, and must have a net owned fund (NOF) of not less than ₹20 million (US$300,000 – prior to April 1999, ₹2.5 million). However, there are categories of NBFCs that have been exempted from the requirement of registration with the RBI, as they are regulated by other regulators.

Systematically important non-deposit taking NBFCs do not accept or hold public deposits and their asset size is of ₹5 billion or more as per last audited balance sheet. Any activity of such NBFCs is likely to have an impact on the economy of the country, hence the classification.


The regulatory regime relating to foreign direct investment (FDI) in NBFCs has been liberalized significantly. Now, 100% FDI under the automatic route is permitted and is only subject to compliance with the NOF requirement prescribed by the RBI. An investor can acquire an existing NBFC, however the investor will need to factor in time for: (1) due diligence; (2) documentation; (3) 30 days of public notice; (4) three to four months for RBI approval. In this context, it is pertinent to note that the RBI does an extensive background check on the credentials of the investor.

ARJUN ANAND 辛加尼亚律师事务所 合伙人 Partner Singhania & Partners
Singhania & Partners

Subject to certain exceptions, prior written permission of the RBI is required for:

Change in control (whether or not resulting in any change of management) i.e. the right to appoint a majority of the directors, or the right to control the management, or take policy decisions. Such right may be exercisable by a person or persons acting individually or in concert, directly or indirectly. The right may be acquired by the virtue of shareholding or management rights, or shareholders agreements, or voting agreement; and

Change in shareholding including progressive increases that result in the acquisition or transfer of 26% or more of the paid-up equity capital of the NBFC, even if such transfer is an intragroup transfer; and

Any change in management of the NBFC that results in change in more than 30% of the directors, excluding independent directors.

The RBI has issued directions on prudential norms and applicable regulations, which vary based on the deposit acceptance or systemic importance of the NBFC. Deposit-accepting NBFCs are required to comply with the statutory liquidity requirements, in addition to requirements on income recognition, asset classification and provisioning requirements applicable to NBFCs, exposure norms, disclosures in balance sheets, capital adequacy requirements, restrictions on investments in land and building, unquoted shares, and loan-to-value (LTV) ratios for NBFCs predominantly engaged in the business of lending against gold, jewellery, etc.

NBFCs having asset size of less than ₹5 billion are subject to the business conduct regulation and/or prudential norms, depending on whether the NBFC has access to public funds or has a customer interface, or both. Public funds includes funds raised either directly or indirectly through public deposits, inter-corporate deposits, bank finance, and all funds received from outside sources such as funds raised by issue of commercial papers, debentures, etc. Excluded are funds raised by issue of instruments compulsorily convertible into equity shares within a period not exceeding five years from the date of issue. Customer interface has been defined to mean interaction between the NBFC and its customers while carrying out its business.

In light of this information, the acquirer, depending on the type of NBFC, needs to ensure that the potential target is in compliance with the regulations. Non-compliance may result in stringent penalties including cancellation of the NBFC registration.

NBFCs have significantly contributed to the growth of the economy, and consequently the regulatory framework has evolved and made the acquisition of NBFCs less burdensome and more attractive for investors. However, the background of the investor is a key factor for the purposes of acquisition, as the RBI has been extremely cautious in granting approvals in the wake of NBFCs being used as vehicles for money laundering.

RAVI SINGHANIA is the managing partner and ARJUN ANAND is a partner at Singhania & Partners in New Delhi

Singhania & Partners Solicitors and Advocates

Singhania & Partners Solicitors and Advocates

P-24, Green Park Extension

New Delhi-110016

Website /

Contact details:

Phone: +91-11-4747 1414