The sale or acquisition of a Non-Banking Financial Company (NBFC) in India is significantly different from the sale of an ordinary company. Since NBFCs operate under the regulatory supervision of the Reserve Bank of India (RBI), a transaction involving a substantial change in shareholding, acquisition of control, takeover or change in management may require prior approval from RBI.
For an NBFC promoter considering an exit, finding a buyer and agreeing on a commercial value is only one part of the transaction. The process may involve regulatory due diligence, assessment of the proposed buyer, transaction structuring, RBI approval, public notice, execution of transaction documents, transfer of shares and management, and post-closing corporate and regulatory compliances.
This guide explains the key legal, regulatory and practical considerations involved in selling or acquiring an NBFC in India.
Can an NBFC Be Sold in India?
Yes. An NBFC can undergo a change in ownership or control through transfer or acquisition of shares, subject to the applicable RBI regulatory framework, provisions of the Companies Act, 2013, FEMA requirements in case of foreign investment, contractual restrictions and other applicable laws. However, the expression “sale of an NBFC licence” can be misleading. Generally, the RBI Certificate of Registration (CoR) is not treated as an independent asset that is simply transferred from one company to another. In a typical NBFC acquisition, the buyer acquires shares and/or control of the company that already holds the RBI registration. Therefore, the corporate entity generally continues to exist, while its ownership, control and, in many cases, management change.
When Is Prior RBI Approval Required?
Prior written permission from RBI is required for specified transactions involving ownership, control or management of an NBFC. The regulatory requirement should be examined at the structuring stage itself because the parties should not implement a transaction that requires RBI approval before such approval has been obtained.
The key triggers can be summarised as follows:
| Proposed Change | Prior RBI Approval |
|---|---|
| Takeover or acquisition of control of an NBFC, whether or not there is a change in management | Required |
| Change in shareholding resulting in acquisition/transfer of 26% or more of the paid-up equity capital, including progressive increases over time | Required, subject to applicable exceptions |
| Change in management resulting in change of more than 30% of directors, excluding independent directors | Required, subject to applicable exceptions |
| Transaction below 26% shareholding | Must still be examined if it results in acquisition of “control” |
| Routine changes not crossing the prescribed regulatory thresholds | To be evaluated based on the nature and effect of the transaction |
Accordingly, merely keeping a share transfer below 26% does not automatically mean that RBI approval is unnecessary. If the transaction results in acquisition of control, the regulatory implications must be examined separately.
Why Do Promoters Sell an NBFC?
Promoters may consider selling an NBFC for several strategic, commercial or regulatory reasons. Some may wish to exit the financial-services sector, restructure their group businesses or deploy their capital into other ventures. Others may find that maintaining the regulatory, compliance, governance and operational infrastructure of an NBFC is no longer commercially suitable. At the same time, investors intending to enter or expand in the lending and financial-services sector may consider acquiring an existing NBFC rather than establishing an entirely new entity. An acquisition may provide an existing corporate and regulatory platform; however, it also carries the historical compliance, financial and legal position of that company.
For this reason, an existing RBI registration alone should not determine the attractiveness or valuation of an NBFC. Its regulatory history, assets, liabilities, portfolio quality, tax position, litigation and compliance framework are equally important.
NBFC Sale Process at a Glance
A properly structured NBFC transaction ordinarily involves several stages. Although the exact process depends on the facts of each transaction, the following framework provides a practical overview:
| Stage | Key Activity | Purpose |
|---|---|---|
| 1 | Pre-sale regulatory and financial health check | Identify existing issues before approaching buyers |
| 2 | Determine transaction perimeter | Establish exactly what assets, liabilities and operations form part of the transaction |
| 3 | Identify and evaluate buyer | Assess financial capacity, background, source of funds and proposed business |
| 4 | NDA / Term Sheet / LOI | Establish confidentiality and preliminary commercial terms |
| 5 | Due diligence | Review regulatory, legal, financial and tax position |
| 6 | Valuation and commercial negotiation | Agree consideration and transaction structure |
| 7 | RBI application | Seek prior approval where required |
| 8 | RBI review and clarification | Address regulatory queries and provide additional information |
| 9 | Public notice | Complete the prescribed notice requirement |
| 10 | Definitive agreements | Finalise SPA and related documents |
| 11 | Closing | Transfer shares, consideration and management/control as applicable |
| 12 | Post-closing compliance | Complete corporate, regulatory, banking and operational changes |
Step 1: Conduct a Pre-Sale Health Check
Before approaching potential buyers, an NBFC promoter should first undertake an internal regulatory, financial and legal health check. This helps determine whether the company is transaction-ready and allows existing issues to be addressed before formal buyer due diligence begins.
The review should generally cover:
- RBI Certificate of Registration and present regulatory classification;
- Net Owned Fund and applicable capital requirements;
- Existing shareholding and promoter structure;
- Audited financial statements and management accounts;
- Loan portfolio and asset quality;
- NPAs, provisioning and write-offs;
- Existing borrowings and security arrangements;
- RBI returns and other regulatory filings;
- KYC and Anti-Money Laundering compliance;
- Fair Practices Code and customer documentation;
- Credit bureau reporting;
- Related-party transactions;
- Tax and statutory compliances;
- RBI inspection observations or regulatory correspondence;
- Pending litigation and disputes;
- Employee-related liabilities;
- Material contracts and outsourcing arrangements;
- Charges registered against the company’s assets; and
- Corporate and secretarial records.
A pre-sale health check can significantly improve transaction preparedness. If regulatory gaps are discovered by the buyer at a late stage, they can affect valuation, delay RBI approval, increase indemnity demands or even cause the transaction to fail.
Step 2: Determine What Is Being Sold
Not every NBFC acquisition involves the same type of company. Some NBFCs may have a substantial loan portfolio, employees, branches, borrowings, customer relationships and technology arrangements. Others may have limited operations or a minimal portfolio. The seller and buyer should therefore clearly establish the scope of the proposed transaction. This may include consideration of the existing loan book, investments, cash balances, borrowings, employees, technology infrastructure, intellectual property, customer relationships, branches, receivables, liabilities and material contracts.
This distinction is commercially important. Acquiring an NBFC with an active portfolio can involve materially different risks from acquiring an NBFC with minimal operations. The transaction structure, valuation methodology, due diligence scope, representations and warranties and indemnity package should reflect those differences.
Step 3: Evaluate the Proposed Buyer
A seller should not evaluate a prospective buyer solely on the basis of the purchase consideration being offered. In a regulated transaction, the suitability and financial standing of the proposed acquirer are also important. The seller should understand the buyer’s background, proposed ownership structure, financial capacity, source of acquisition funds, business plan and proposed directors or management. Where the buyer is an entity, its ultimate beneficial ownership should also be appropriately understood.
Important information to obtain from a prospective buyer may include:
- Identity and background of proposed shareholders;
- Existing business activities;
- Proposed shareholding after acquisition;
- Proposed directors and management team;
- Source of funds for the acquisition;
- Net worth and financial capacity;
- Proposed business model for the NBFC;
- Group structure and beneficial ownership;
- Foreign ownership, if any; and
- Any existing involvement in regulated financial businesses.
This preliminary assessment can prevent substantial time and cost being spent on a transaction that may later face regulatory difficulties.
Step 4: NDA, Term Sheet and Preliminary Documentation
Before confidential information relating to the NBFC is shared, the parties should ordinarily execute a Non-Disclosure Agreement (NDA). This is particularly important because the seller may be sharing financial records, regulatory correspondence, customer information, loan portfolio data and commercially sensitive documents.
Once preliminary discussions progress, the parties may execute a Term Sheet, Letter of Intent (LOI) or Memorandum of Understanding (MoU). Depending upon the transaction, the document can record the indicative purchase consideration, proposed transaction structure, due diligence process, exclusivity period, confidentiality obligations, conditions precedent, responsibility for regulatory approvals and proposed timelines.
A properly structured term sheet can reduce disagreements when the definitive transaction documents are subsequently negotiated.
Step 5: Conduct Comprehensive Due Diligence
Due diligence is one of the most critical stages of an NBFC acquisition because the buyer is acquiring an existing regulated company together with its historical financial, regulatory, legal and tax position.
| Due Diligence Area | Important Matters to Review |
|---|---|
| Regulatory | RBI registration, returns, capital requirements, prudential norms, regulatory correspondence, governance and applicable directions |
| Financial | Loan book, asset quality, NPAs, provisioning, borrowings, income recognition and contingent liabilities |
| Legal | Corporate records, contracts, litigation, security interests, employment matters and legal claims |
| Tax | Income-tax, GST, assessments, notices, outstanding demands and contingent tax exposures |
| KYC/AML | Customer due diligence, AML framework, record keeping and applicable reporting |
| Operational | Employees, branches, systems, vendors, outsourcing, technology and internal controls |
| Corporate | Share capital, statutory registers, board/shareholder approvals and ROC filings |
Due diligence should not be viewed merely as a buyer-protection exercise. Sellers can also undertake vendor or seller-side due diligence before taking the NBFC to market. Doing so enables the seller to identify and rectify compliance gaps and prepare a structured data room before buyers begin their review.
Step 6: Valuation and Commercial Negotiation
The value of an NBFC should not automatically be equated with the value of its RBI registration. The commercial consideration may be affected by several factors, including the company’s net worth, financial condition, quality and size of its loan portfolio, regulatory compliance history, liabilities, operating infrastructure, profitability, business prospects and existing contractual arrangements.
For an operational NBFC, the underlying business and portfolio may form a significant part of the valuation. For an NBFC with minimal operations, the commercial considerations may be different. The parties should clearly agree upon the consideration, payment mechanism, treatment of existing assets and liabilities, adjustments at closing, responsibility for historical exposures and any amount that may be retained or held back against identified risks.
Where a non-resident buyer or seller is involved, FEMA pricing requirements and other applicable foreign investment regulations must also be considered.
Step 7: Apply for RBI Approval for Change in Control
Where the transaction triggers prior approval requirements, an application must be made to RBI before implementing the proposed change. The documentation required will depend upon the transaction and applicable regulatory framework. Information concerning the proposed shareholders and directors, source of funds, existing and proposed shareholding, management structure, background of the acquirer and transaction rationale may be relevant.
The parties should ensure consistency across the application, corporate records, financial information and transaction documents. Contradictory information can lead to additional regulatory queries and delay the approval process.
Step 8: RBI Review and Clarifications
After the application is submitted, RBI may examine the proposed transaction and request additional documents, explanations or clarifications. The buyer and seller should therefore maintain supporting documents and remain prepared to respond to regulatory queries promptly.
RBI’s published regulatory-approval timelines currently indicate a 45-day timeline for approval relating to change of control/ownership/management of an NBFC. However, this should not be interpreted as a guaranteed overall transaction completion period. The actual transaction timeline can be affected by the completeness of the application, additional regulatory queries, due diligence, documentation, public notice and other closing conditions.
Accordingly, transaction documents should provide sufficient flexibility to accommodate the regulatory process.
Step 9: Public Notice Before Effecting the Transaction
After obtaining prior permission from RBI and before effecting the sale or transfer of ownership/control, the applicable public-notice requirement must be completed. Under the RBI framework, at least 30 days’ public notice is required before effecting the sale or transfer of ownership by sale of shares or transfer of control. The notice is to be given by the NBFC and the other party, either jointly or separately.
The notice should generally contain the intention to sell or transfer ownership/control, particulars of the transferee and reasons for the proposed transaction. It is required to be published in a leading national newspaper and a leading local vernacular newspaper covering the location of the NBFC’s registered office. The public-notice period should therefore be incorporated into the transaction timetable from the beginning.
Step 10: Execute the Share Purchase Agreement
The Share Purchase Agreement (SPA) is generally the principal definitive document governing an NBFC share acquisition. Because an NBFC is a regulated entity, the SPA should deal not only with commercial matters but also with regulatory risks and historical liabilities.
A comprehensive SPA may address:
- Number and class of shares being transferred;
- Purchase consideration and payment mechanism;
- Conditions precedent to closing;
- RBI approval requirements;
- Public-notice compliance;
- Seller and buyer representations and warranties;
- Historical regulatory liabilities;
- Tax liabilities;
- Identified compliance deficiencies;
- Indemnification mechanism;
- Treatment of existing loans and borrowings;
- Pending litigation;
- Employee-related matters;
- Conduct of business between signing and closing;
- Closing deliverables;
- Management and operational handover; and
- Dispute-resolution mechanism.
The transaction documents should be consistent with the information submitted to RBI and should not provide for premature transfer of control before the required regulatory approval.
Step 11: Closing and Transfer of Ownership
Once all applicable conditions precedent have been satisfied, including RBI approval and the required public-notice period, the parties can proceed to closing in accordance with the definitive agreements. Closing may involve payment of purchase consideration, transfer of shares, delivery of share certificates or completion of depository formalities, board reconstitution, resignation or appointment of directors, handover of statutory records, transfer of bank and operational authorities and other agreed deliverables.
Particular attention should be paid to the sequence of closing actions. A transaction should not be structured in a manner that effectively transfers control to the buyer before the necessary regulatory approvals have been obtained.
Step 12: Post-Closing Compliances
Completion of the share transfer is not the end of the NBFC acquisition process. A number of regulatory, corporate and operational changes may need to be implemented following closing. Post-closing work may include ROC filings, updating statutory registers, recording changes in shareholding and directors, updating authorised signatories and bank mandates, making applicable regulatory intimations, updating licences and registrations, implementing revised governance arrangements and ensuring continuity of RBI reporting.
The incoming management should also review the NBFC’s compliance framework immediately after acquisition so that regulatory obligations continue without interruption.
Key Documents in an NBFC Sale Transaction
The exact documentation will vary according to the transaction, but an NBFC sale or acquisition may involve the following:
| Document / Information | Purpose |
|---|---|
| RBI Certificate of Registration | Verification of regulatory status |
| Audited financial statements | Assessment of financial condition |
| RBI returns and correspondence | Regulatory due diligence |
| Shareholding records | Verification of ownership |
| NDA | Protection of confidential information |
| Term Sheet / LOI / MoU | Recording preliminary commercial understanding |
| Due diligence report | Identification of transaction risks |
| RBI approval application | Seeking regulatory approval where required |
| Share Purchase Agreement | Governing the acquisition |
| Public notice | Compliance with RBI change-in-control framework |
| Board/shareholder documents | Corporate approval and implementation |
| Closing documents | Completion of share/control transfer |
| ROC and regulatory filings | Post-closing statutory compliance |
Special Considerations for Foreign Buyers
Where a foreign investor or non-resident proposes to acquire shares in an Indian NBFC, the transaction requires an additional foreign investment and FEMA analysis.
The parties should examine the permitted financial activity, applicable entry route, sectoral conditions, pricing guidelines, beneficial ownership requirements, source and route of investment funds and applicable reporting requirements.
Therefore, a cross-border NBFC acquisition should be structured after considering both the RBI framework applicable to NBFCs and the foreign investment/FEMA framework applicable to the proposed investor and transaction.
How DSB Law Group Can Assist in an NBFC Sale or Acquisition
An NBFC acquisition requires coordination across RBI regulation, corporate law, transaction documentation, financial matters, taxation and operational transition. A fragmented approach can lead to inconsistencies between the commercial deal and the regulatory process.
DSB Law Group provides end-to-end advisory support for NBFC sale, acquisition, takeover, restructuring and change-in-control transactions. Our assistance can cover:
- NBFC sale and acquisition strategy;
- Identification and coordination of potential buyers and sellers;
- Preliminary regulatory assessment;
- NBFC regulatory health check;
- Legal and regulatory due diligence;
- Transaction structuring;
- Buyer eligibility and transaction review;
- Term Sheet, LOI and MoU drafting/review;
- Share Purchase Agreement drafting and negotiation;
- RBI change-in-control approval assistance;
- Preparation and coordination of RBI submissions;
- Assistance in responding to regulatory queries;
- Public-notice compliance;
- Companies Act and secretarial compliances;
- FEMA advisory for foreign investment transactions;
- Closing documentation and transaction coordination;
- Management and operational transition; and
- Post-acquisition NBFC regulatory and compliance support.
With extensive experience in the NBFC and financial-services sector, DSB Law Group works with promoters, investors, CAs, CSs, lawyers and other professionals on regulatory and transaction matters across the NBFC lifecycle.
Frequently Asked Questions (FAQs)
1. Is RBI approval required to sell an NBFC?
Prior RBI approval is required in specified cases, including takeover or acquisition of control, acquisition or transfer of 26% or more of the paid-up equity capital and certain changes in management involving more than 30% of directors, excluding independent directors, subject to applicable exceptions.
2. Can an NBFC licence be directly sold?
Generally, an NBFC transaction is structured through acquisition of shares and/or control of the company holding the RBI Certificate of Registration. The CoR should not simply be viewed as an independently transferable asset.
3. Is RBI approval unnecessary if the buyer acquires less than 26%?
Not necessarily. The 26% threshold is one regulatory trigger. A transaction resulting in takeover or acquisition of control can independently require prior RBI approval even where the percentage of shares being acquired is below 26%.
4. Is public notice mandatory for an NBFC takeover?
Where the RBI change-in-control framework applies, at least 30 days’ public notice is required before effecting the sale or transfer, after prior RBI permission has been obtained.
5. How long does RBI approval for an NBFC change in control take?
RBI’s published timeline for regulatory approval for change of control/ownership/management of an NBFC is 45 days. The complete transaction can take longer depending upon documentation, regulatory queries, due diligence, the public-notice period and closing requirements.
6. Does an NBFC need to have zero liabilities before it can be sold?
Not necessarily. An NBFC with assets and liabilities can be acquired, subject to proper disclosure, valuation, due diligence and transaction documentation. However, a buyer specifically looking for a clean or minimal-portfolio NBFC may commercially require identified liabilities or exposures to be settled before closing.
7. Can a foreign investor acquire an Indian NBFC?
Foreign investment in an Indian NBFC may be possible subject to the applicable foreign investment policy, FEMA requirements, beneficial ownership requirements, pricing/reporting requirements and regulations applicable to the relevant financial activity.
8. What should a buyer verify before acquiring an NBFC?
The buyer should conduct comprehensive regulatory, legal, financial and tax due diligence. Particular attention should be given to RBI registration, compliance history, Net Owned Fund, loan portfolio, NPAs, borrowings, KYC/AML compliance, tax exposure, litigation and contingent liabilities.
9. What is the difference between an active and minimal-portfolio NBFC acquisition?
An active NBFC may have an existing loan book, borrowers, employees, borrowings, technology arrangements and ongoing contracts. A minimal-portfolio NBFC may have substantially fewer operational exposures. The scope of due diligence, valuation and transaction protections can therefore differ significantly.
10. Can shares be transferred before RBI approval and control transferred later?
Where prior RBI approval is applicable, the transaction must be carefully structured so that the required approval is obtained before implementing the regulated change. Parties should avoid arrangements that could effectively result in premature transfer of ownership or control.
Disclaimer: This article is intended solely for general informational purposes and does not constitute legal, regulatory, tax, financial or investment advice. Regulatory requirements may change and should be independently verified based on the facts of the particular transaction and the regulatory framework applicable at the relevant time.
