Trending: Call for Papers Volume 4 | Issue 1: International Journal of Advanced Legal Research [ISSN: 2582-7340]




The Indian Financial market has witnessed a rise in graph of Non-Banking Financial Companies. It plays a crucial role in the development of economic market apart from the banking sector and other financial institutions. A Non-Banking Financial Company is engaged in the business of advances, loans, acquisition (bonds, debentures, stocks, shares, securities) issued either by government or local bodies or marketable securities. It excludes those institutions which are primarily engaged in business involving industrial or agricultural activities, sale or purchase of goods and services and sale, purchase or construction of immovable property.[1]


Conditions for NBFCs to operate in India

The registrations of NBFCs in India are governed by The Companies Act, 2013. It is mandatory for every NBFC to obtain NBFC Registration Certificate issued by the Reserve Bank of India since it is a necessary condition without which NBFC is not permittedto be engaged in business activity in Indian territory. It should have Net Owned Funds of minimum Rs. 20 million for systematically important NBFCs[2]. However, there exist some categories of NBFCs which are exempted from the requirement of registration with RBI since they are regulated by some other regulators as well. It is done to obviate dual regulation like stock broking companies (registered with SEBI, banking companies etc.


Categories of NBFCs

NBFCs can be classified into the following categories in terms of:

(i). Types of liabilities- Deposit and Non-Deposit accepting NBFCs

(ii). Non- Deposit taking NBFCs by their size- Systematically important and other Non-    Depositholding companies

(iii). Kind of activity engaged into.[3]


Some of the types of NBFCs are as follows[4]:

1.      Investment Company – It is primarily engaged into investment of securities.

Example: Bajaj Allianz General Insurance Company Ltd, Barclays Capital etc.


2.      Infrastructure Finance Company –It employs major share of its assets into infrastructure loans.

Example: India Infrastructure Finance Company Ltd. (IIFCL)


3.      Loan Company – It is primarily engaged into the business of providing finance to the public.

Example: SBI Personal Loan, PNB Personal Loan etc.


4.      Asset Finance Company – Its primarily engaged in the financing of physical assets that support in economic or productive company.

Example: Aditya Birla Sun Life AMC, ICICI AMC, UTI AMC etc.



Role of NBFCs in the development of Indian Economy

It plays a pivotal role of financial intermediary. It bridges the gap between borrowers and rational depositors. It taps on the presence of large scale of economies and provides a number of financial services. Since they employ professional experts, it mitigates the risk and diversifies the same into numerous units. NBFCs usually focus on providing loans to rural and semi urban retail customers (small), loans for consumable goods, trading, transportation, renovation etc.[5]It benefits in financial inclusion because many customers may find the traditional system to be inaccessible due to affordability issues. It helps in maintaining liquidity in the financial market by investing in capital markets.




Merger of NBFCs

Mergers refer to the combination of two or more existing companies into a new company. It is one of the common strategies undertaken in the corporate world to enhance the financial and operational strength of organisations.As per the Reserve Bank of India, only the registered NBFCs can engage into mergers and takeovers.


Pros of Mergers

1.      It raises the size of loan and reduces operating/ administrative expenses by employing the technique of Economies of Scale.

2.      NBFC mergers assist in growth and sets a bar to compete with existing Government and MNC banks. They can also apply for Bank licenses later.

3.      It also avoids cost and saves time otherwise to be used in asset purchases, software development etc.

4.      It increases the market share of these companies and enhances goodwill and leads to reduction in non-performing assets.

5.      It results in tax benefits.


Cons of Mergers

1.      The implementation of mergers requires time and efforts. Functional changes have to be carefully taken care of.

2.      It might result into issues in management. Employees may be in fear of retrenchment.

3.      It increases the operating risk.


Key Points of consideration prior to the merger [6]

1.      Due Diligence

It is necessary to conduct a comprehensive background search of the target companies.


2.      Estimation of financial position

It is essential to analyse the financial records of the company and to verify that these records are not fabricated.


3.      Assess the goodwill of the company

It is crucial to check the liabilities of the company and verify the assets to reach to an estimation of goodwill. It is also required to evaluate the amount that may be required to transfer for the undertaking and mode of payment.


Process of NBFC Mergers under the Companies Act, 2013

The process of NBFC Merger is as follows[7]:


1.      Signing of MOU and Approval from BOD

(i)                 Both the companies are required to sign the Memorandum of Understanding with a description that both companies have agreed for the agreement for takeover.

(ii)               The directors of both the acquiring and acquired company come together to sign it

(iii)             MOU also contains information about the deliverables, roles and responsibilities to be fulfilled by both the companies.

(iv)             On approval of MOU, the acquiring company is required to pay a token sum of amount as a confirmation.

(v)               Bank approval is required, after which documents are prepared for KYC of directors.

(vi)             Business planning is undertaken.


2.      RBI Approval

(i)                 Company requires approval from RBI if there is a modification in the management of the company after the merger takes place.

(ii)               If the takeover results into the change in management of about 30% of the number of directors.

Exception: Approval is not required when there is a change in shareholding pattern due to buyback offer or rotation of director.


3.      Submission of Documents to RBI

(i)                 It furnishes details about the proposed directors and shareholders.

(ii)               It details the sources of funds.

(iii)             The reports of bankers for directors and shareholders are also attached.

(iv)             An affidavit and declaration of non-criminal liability/ background is also submitted.

(v)               Financial record of previous three years is furnished.


4.      Procedure post RBI Approval

(i)                 Board meeting is to be conducted to discuss matters relating to public notice[8], date and time of EGM.

(ii)               No Objection Certificate from Creditors is required to be obtained.

(iii)             Formal agreement for the purchase share or management transfer or transfer of shares or such interest for the Takeover of NBFC.

(iv)             Notice is given to the regional office of RBI.

(v)               Company is valuated as per rules prescribed by RBI.

(vi)             Assets are transferred in compliance with the signed agreements.

(vii)           Post 30 days of the signing of formal agreement, second public notice is published and it must include these details:

(a)    Intention to transfer/sell ownership or control.

(b)   All vital particulars of the transferee company.


5.      NCLT Approval

Petition is filed under Section 230-233 of The Companies Act, 2013 to obtain consent for the scheme of either merger or amalgamation.


List of documents to be submitted to NCLT are as follows:

(i)                 Application to conduct general meeting.

(ii)               Obtain order from NCLT regarding the meeting of shareholders.

(iii)             Hold a meeting with the shareholders of the company.

(iv)             Certified copy of the current audited balance sheet and P&L statement to be submitted.

(v)               SEBI approval to be obtained in case of any listed company.

(vi)             Merger scheme to be prepared with descriptive statement.

(vii)           Creditor list with their outstanding dues to be furnished.

(viii)         Submit the Authorised liquidator report

(ix)             Obtain a report of valuation.

(x)               Information to be furnished regarding statutory proceedings by or against the company.


NCLT usually conducts a check with respect to following observations:

1.      Material statements of the financial record may be reviewed.

2.      Verify whether the meeting was fairly represented by the members.

3.      The merger/ acquisition should be in public interest and other stakeholders of the company.



Usually, general people are aware about the mergers of companies. However, there is a lack of awareness when it comes to NBFCs. In the coming time, NBFCs will alter the entire banking experience for the clients. Rapid advancement in technological sector and strategies with respect to interest rates will lead to a rise in the graph of client base.


Mergers has become one of the leading corporate techniques to capture market share within a short span of time. NBFCs are a driving force in the Indian finance market. They provide loans to those target audience for whom obtaining credit facilities from banks is unfeasible. These companies productively introduce innovative financial products to bridge the gap between the customer’s requirements, banks and other financial institution’s supply of financial services.


It plays crucial role in the contribution in major sectors of economic development, infrastructure, transportation etc. RBI should keep a constant check on the furnishing of financial data, risk assessment for effective management.

Authored By: Ms. Garima Jain

College: Symbiosis Law School, Noida (4th year student)

[1]India, R. (2013, May 31). All you wanted to know about NBFCs.Retrieved January 8, 2022, from https://www.rbi.org.in/Scripts/FAQView.aspx?Id=92

[2]NBFCs whose asset size is of ₹ 500 cr or more as per last audited balance sheet are considered as systemically important NBFCs. 

[3]Bhayana, A. (2018). NBFC Different types of NBFC’s in India Different types of NBFC’s in India. NBFC Different Types of NBFC’s in India Different Types of NBFC’s in India. https://www.hubco.in/articles/different-types-of-nbfc-s-in-india

[4]Gupta, S. (2018). NBFCs – Mergers and Demergers. NBFCs – Mergers and Demergers.https://taxguru.in/corporate-law/nbfcs-mergers-demergers.html

[5]The role of NBFC in development of Indian Economy: ACase Study. (2019). The Role of NBFC in development of Indian Economy: ACase Study, 02(04). https://www.inspirajournals.com/uploads/Issues/1491052596.pdf

[7]Singh, K. (2021a). Process of NBFC Merger as per Companies Act 2013. Process of NBFC Merger as per Companies Act 2013. https://swaritadvisors.com/blog/process-of-nbfc-merger-as-per-companies-act-2013/

[8]The public notice has to be published in two languages (English language is mandatory) within 30 days of approval and objections have to be invited.

Image Source

Leave a Comment

Your email address will not be published. Required fields are marked *