From January 1, 2017 to May 31, 2018, the open offers launched under the SEBI Takeover Regulations for listed non-banking financial companies (NBFCs) constitute approximately 23.7% out of the total open offers during this period. In the calendar year 2018 (to May 31, 2018), the percentage of open offers for NBFCs out of the total open offers launched in this period is 23%, demonstrating significant interest in one particular sector in the listed space as opposed to others. As per our study, the following diagram illustrates the open offer activity from January 1, 2018 to May 31, 2018:
Attractiveness of NBFCs
NBFCs are an important alternative source of financing. Given that banks are prohibited from funding M&A transactions, NBFCs fit in perfectly. In addition to this, that there have been few positive developments in the past couple of years that have increased the attractiveness of NBFCs. In August 2016, the Government extended the applicability of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 to 196 systemically-important NBFCs to enable them to enforce security interest in relation to secured debt of Indian Rupees one crore or more.
In the year 2016, the Government liberalised the foreign direct investment (FDI) norms in relation to the other financial services by allowing 100% FDI under the automatic route in regulated financial services activities. Prior to liberalisation, 100% FDI was permitted under the automatic route for only 18 specified financial services activities. The minimum capitalisation norms that applied to FDI in NBFCs were also done away with.
As per the RBI’s report published in the year 2017, the financial performance of NBFCs has been better in comparison to the banks in the medium term. The share of NBFCs in the total credit granted by NBFCs as well as banks rose from 9.5% in 2008 to 15.5% as of March 2017.
In May 2018, the RBI came up with a road map to eliminate the exemptions provided to Government-owned NBFCs in relation to compliance with the norms on capital adequacy, provisioning and corporate governance, and has put a timeline in place (from 2019 to 2022) to bring parity between Government-owned NBFCs and other NBFCs. All this will increase competitiveness of the private NBFCs making them an even more attractive acquisition target.
Regulatory Landscape for Takeovers
Change of control of NBFCs is regulated by the RBI and the NBFCs are required to get the RBI’s prior written approval for change in shareholding of 26% or change in 30% or more of the board of directors (excluding independent directors). In case of a takeover of listed NBFCs, the acquirers need to additionally comply with the open offer obligations and other conditions of the SEBI Takeover Regulations.
Timing, Interest Costs and Practice Tips
Since the RBI approval is a pre-requisite for taking over of NBFC, public shareholders can only be bought out through the open-offer process under the SEBI Takeover Regulations once the RBI approval comes through followed by expiry of a mandatory 30-day public notice period for the change in control.
This leads to a peculiar situation for the takeover of listed NBFCs: if SEBI issues its observation letter on the draft offer letter prior to the RBI approval coming through, SEBI requires the acquirers to pay interest on the open-offer price for the delayed period. This increases the cost of acquisition.
Based on the analysis of the open offers made for takeovers of NBFCs from January 1, 2017 to May 31, 2018, we note that:
- SEBI has generally levied a simple interest of 10% per annum on the offer price for the delay in making payment to the eligible shareholders on account of the delay in receipt of the RBI approval.
- In cases where there has been a delay, the delay has ranged from 33 days to 106 days. In the majority of cases the RBI approval was granted after SEBI issued its observations on the draft letter of offer, thereby increasing the price payable to public shareholders.
To clarify, in 40% of the cases from January 1,2017 to May 31, 2018, the RBI approval came through prior to SEBI clearance of the offer letter; hence, no additional cost. Therefore, it is advisable to time well the filing of the RBI application, so that the RBI approval process and SEBI open offer process can run in parallel to cut down the possibility of additional cost / number of days of delay.
Additionally, the practice is to issue a final letter of offer after the receipt of the RBI approval, except in the recent open offer relating to Econo Trade (India) Limited, wherein the acquirers had dispatched the final letter of offer to the public shareholders without receiving the RBI Approval but payment to public will be made after RBI approval. This will not rule out the interest cost but will complete certain stages of the open-offer process rather than waiting for the RBI approval.
As a matter of practice, it is likely to take at least six to eight months to take over a listed NBFC.*
We believe that the interest in NBFCs will continue to grow and competition within the NBFC space as well as competition with the banks will ease access to capital at even better competitive rates in the near future.
*At Cyril Amarchand, we have recently advised on the takeover of two listed NBFCs, which are the two most significant transactions in this space during the January to May 2018 period.
** The authors were assisted by Harshita Choudhary, Associate.
 Notification no. S.O. 2641(E) dated August 5, 2016, Department of Financial Services, Ministry of Finance, Government of India.
 Press Note No. 6 (2016 Series) dated October 25, 2016.
 Report on Trend and Progress of Banking in India 2016 – 17 issued on December 21, 2017, Reserve Bank of India.
 RBI Circular DNBR (PD) CC.No. 065/03.10.001/2015-16 dated July 9, 2015 on Requirement for obtaining prior approval of RBI in cases of acquisition/ transfer of control of NBFCs.