NBFC due diligence procedure in India

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NBFC Due Diligence

What is Due Diligence of NBFC? When is This Required?

NBFC stands for a non-banking financial company registered under section 45-I of Reserve Bank of India Act, 1934. This is an important part of financial service Industry in the country, 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. As far as Due Diligence is a concern in terms of buying and selling of NBFC, most of the case is similar to as Normal Procedure of Due Diligence. First, it’s a company registered under Companies Act, 2013/1956 and the next is regulated by Reserve Bank of India, hence both the authority to note simultaneously as far as the operation of the company is a concern.  Moreover the tax either Direct or Indirect, both as far as applicability need to be sound to have good remark due diligence report by independent Professional excising Due Diligence activities of concern NBFC.

What is Due Diligence?

The dictionary meaning of Due Diligence is an appraisal of business, especially to establish its assets and liabilities and evaluate its commercial potential. According to Institute of Chartered Accountants in England and Wales (ICAEW), 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. 

However, under Financial due diligence, the independent professional is focused on verifying the financial information provided and to assess the underlying performance of the business. It covers area like earnings, assets, liabilities, cash flow, debt, and management. Further commercial due diligence considers the market in which a business sits, for example involving conversations with customers, an assessment of competitors and a fuller analysis of the assumptions that lie behind the business plan. All of this is intended to determine whether the business plan stands up to the realities of the market. In fourth perspective i.e. other, it includes areas such as Taxation, IT Systems, and Intellectual Property.

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.

Matter to Check

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 sequence of:-

a. Corporate Matters

b.  Minutes of Meetings & Secretarial Compliance

c. Foreign & Overseas Direct Investment, if any.

d. Material Agreements

e.  Financing Matters

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

g. Property

h. Litigation

i. Human Resources

j. Insurance

k. Intellectual Property Rights

l.  Taxation Compliance

Based on 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 professional engaged in doing NBFC Due Diligence can have its report recommending the level of risk/opinion on entity information based on sufficient appropriate due diligence evidence collected from the entity.