Due Diligence of NBFC (Non Banking Financial Company) By CS Shubham Katyal


Dear Professional Colleagues,

NBFC remains for a non-banking financial company registered under section 45-I of Reserve Bank of India Act, 1934. This is an essential piece of financial service Industry in the nation, creating and deploying fund for infrastructure to micro and small-medium sized industries in India. It’s a somewhere part of the alternative source of funding for various business and other needs of people.

To the extent Due Diligence is a worry as far as buying and selling of NBFC, the majority of the case is like as Normal Procedure of Due Diligence. To start with, it's an organization registered under Companies Act, 2013/1956 and the following is managed and regulated by Reserve Bank of India, subsequently both the expert to note all the while to the extent the task of the company is a concern. In addition, the taxation either Direct or Indirect, both to the extent pertinence should be sound to have great comment due to constancy report by free Professional extracting Due Diligence exercises of concern NBFC.

What actually Due Diligence is?

Due Diligence is an investigation of a business or person prior to signing a contract, or an act with a certain standard of care. Basically, there are major four types of due diligence i.e. Legal, Financial, Commercial & Other. On each segment, the entity is appraised based on a various questionnaire. Legal due diligence seeks to examine the legal basis of the transaction, legal structure, contracts, loans, property, employment and pending litigation if any.

It can be a legal obligation, but the term will more commonly apply to voluntary investigations. A common example of due diligence in various industries is the process through which a potential acquirer evaluates a target company or its assets for an acquisition. The theory behind due diligence holds that performing this type of investigation contributes significantly to informed decision making by enhancing the amount and quality of information available to decision-makers and by ensuring that this information is systematically used to deliberate in a reflexive manner on the decision at hand and all its costs, benefits, and risks.

Collection of Information

The most required and question matter in terms of Due Diligence process is information, the source of information, reliability, and accuracy. Hence Information of Target Company is most to gather and acquired in a systematic way to find the required compliance to mark in order to possess informed decision regarding any substantial decision regarding any entity of which due diligence is done. More or less information regarding entity can be accessed from Business News, Market Data, and Company Financial, directors of Company as well as an employee of the company too.

Matters to be Checked for conducting Due-Diligence

As now, discussing on Due Diligence of NBFC matter to be check is long and as a process flow, the entire questionnaire session can be more or less categorized or synchronized under four heads i.e. Legal, Financial, Commercial and other. In each class, the information of Target Company is analyzed to form a decision. In brief, professional undertaking the due diligence of NBFC can categorize the questionnaire in the sequence of:-

1. Corporate Matters:

  • Company Information 
  1. Date of Incorporation
  2. Authorised Capital
  3. Paid up Capital
  4. Date of Last Annual General Meeting
  5. Date of Last Balance Sheet
  6. Status of the Company

  • Director Information 
  1. Directors of the Company
  2. Date of Appointment of Directors

  • Charges Registered
  1. Details of Secured Lenders of the Company
  2. Quantum of Secured Loans

  • Documents
    1. Certificate of Incorporation
    2. Memorandum of Association
    3. Articles of Association
  • Minutes of Meetings & Secretarial Compliance
2. Foreign & Overseas Direct Investment, if any.
  • Filling of FC-gpr, ARF.
  • Other necessary requirements.
3. Financing Matters:
  • Verification of bank statements
  • Verification and valuation of all assets and liabilities
  • Verification of cash flow information
  • Verification of all financial statements against transactional information
4. Litigation:
  • Legal due diligence for all real estate properties of the company.
  • No objection from Secured Creditor for transfer of the company.
  • Verification of court documents and court filings, if any.
5. Operational:
  • Business Model
  • Number of Customers
  • Number of Employees
  • Production Information
  • Vendor Information
6. Taxation Compliance:
  • Income tax return filed
  • Calculation of income tax liability by the company
  • ESI / PF Returns Filed
  • Service Tax / VAT Returns Filed
  • TDS Returns
7. Human Resources

8. Material Agreements


9. Intellectual Property Rights


10. Regulatory Matters i.e., in this case, RBI compliance records.

Based on the above pointwise issue, still, the concerned person required to check the following points on NBFC Due Diligence:-

  1. Compliance with Section 45-IC i.e. Creation of Statutory Reserve @ 20% profit
  2. Registration to FIU-IND
  3. Membership of Credit Information Company (CIC)
  4. Auditor Report to Directors based on circular DNBS (PD) CC No. 129/03.02.82/2008-09 dated September 23, 2008 (now it's 2016) & Statutory Auditor Certificate (SAC)
  5. Registration of Company with Central KYC Portal
  6. Registration with information Utility set up under IBC, 2016
  7. Appointment of Nominated Counsel in Delhi High Court
What if Foreign Entity or Resident want to acquire the existing NBFC business in India then the entire process of inward remittance of funding to be channelized through Banking route in supervision and intimation of Reserve bank of India. The entire process should be read with FEMA, 1999, FDI Scheme and RBI regulation for reporting. If the target company is of Purely Investment Nature, then the Foreign Entity/person require approval from Department of Economic Affairs under extant FDI policy and FEMA regulation.

In this way, the expert occupied with doing NBFC Due Diligence can have its report prescribing the level of risk/opinion on risk/opinion in light of adequate suitable due diligence evidence collected from the entity.
 

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