NBFC Due Diligence

NBFC Due diligence is the process of evaluating an NBFC's assets and liabilities to determine its commercial worth. Typically, this research is carried out by and for the benefit of the investors to determine if an investment is feasible and to make sure that any money invested in the NBFC would be secure. This activity also serves as a representation of the careful consideration given by the organisation or person considering investing in an NBFC..

A Quick Summary

It should be emphasised that there are no predetermined standards for doing NBFC due diligence. The NBFC Due Diligence procedure is planned and carried out in accordance with the market and industry in which the organisation is doing its operations. It is simpler to determine the true worth of the NBFC and to conduct comparisons within the same market thanks to such a specially created activity..

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What components of NBFC due diligence are there?

An NBFC must do NBFC due diligence in order to assess its business operations and determine its assets and liabilities from a commercial standpoint. Any investor who is considering investing in an NBFC would want to do this exercise to make sure that his money is not being wasted and that it is going into a company that will be profitable. Each NBFC due diligence process is broken down into one of the following four categories:

Legal Research with Care

The examination of an NBFC conducted on a legal basis is known as legal due diligence. This examination considers the NBFC's contracts, assets, loans made, ongoing legal disputes, organizational structure, and employment compliances. Legal due diligence entails examining an NBFC's whole operation from a legal perspective and includes an evaluation of the following factors:

Do you know whether the NBFC has been formed using the appropriate business structure or vehicle?

Whether the NBFC has been registered in accordance with the relevant legislation or not before engaging in NBFC activities?

Whether or whether the NBFC has been maintaining the required legal compliances, such as the upkeep of registers and the upkeep of accounts in the required format, etc.

Whether there are any cases ongoing against the NBFC and what their status is?

Whether there is a danger of legal action for the company?

any further legal case involving the NBFC.

Due diligence on Financial Report

TAs part of the financial due diligence process, the NBFC's financial information is determined, including information about its capital, management, and other financial characteristics as well as information about its assets and liabilities, including debts and cash flow. The financial areas where a business must maintain its financial cleanliness are as follows:

According to recommended best practices, the accounts and other financial records should be true and correct; the company's reputation and creditworthiness should also be preserved; and overall financial cleanliness should be preserved.

Commercial Due Diligence

Commercial due diligence is carried out while keeping in mind NBFC as a business entity and evaluating the project's soundness and financial feasibility. The NBFC is assessed as a component of the business market, with comparisons made based on the performance of the rivals, the NBFC's customer relationships, its vision, its present and anticipated sales, its development plans, and its positioning within the market. To be more specific, the techniques listed below are a component of commercial due diligence:

Comparison of the performance of the NBFC's rivals based on market circumstances; Degree of client interaction with the NBFC; Market reputation of the NBFC;

Employed marketing and sales tactics to expand the company in the near future;

Reasonable anticipations that the NBFC will achieve its goals, etc.

Reasonable anticipations that the NBFC will achieve its goals, etc.

The scope of Other (Miscellaneous) Due Diligence includes the aspects of investigation that did not fall under the previous three headings. Those elements that make up essential parts, such as taxation, management, IT systems, communication routes, data management and protection, etc. From the explanation above, it can be fairly inferred that an NBFC's due diligence requires review of every significant component of the NBFC and cannot be limited to a small number of areas. The examination focuses on the overall

Non-Banking Financial Company (NBFC) definition

A business that has been registered under the Companies Act of 1956 or 2013 is referred to as a non-banking financial company. Its activities include providing loans, making advances, buying shares, leasing, hire-purchase, insurance, and running a chit business. In accordance with section 45-IA of the Reserve Bank of India Act, 1934, it is also required of an NBFC.

NBFC Due Diligence Information Gathering

It is crucial to adopt only true information relevant to NBFC Due Diligence beforestarting the process of NBFC Due Diligence. The source of the information being gathered for the purposes of due diligence must also be trustworthy since it forms the foundation for the whole NBFC due diligence process and the investment decision that results from it.

Information from the company's financial records, business news, market data, the company's directors, etc. should be used to carry out the exercise of NBFC due diligence. When gathering the data, the following considerations should be made:

Create a checklist of all the information types needed to carry out the NBFC Due Diligence process; Identify the sources from which the information is being gathered;

The hiring of experts to complete the whole NBFC due diligence procedure and gather the necessary data.
Because experts have the necessary expertise to carry out the exercise of due diligence on NBFCs and have the necessary skills to extract the crucial information from dense texts of financial data, hiring professionals to carry out the exercise of due diligence is crucial. These experts are also skilled at determining if the information is true or false. In conclusion, these experts can aid in deciding whether the data gathered is accurate or not and whether or not the exercise of due diligence may be undertaken based on this data.

Checking legal compliances as part of NBFC due diligence

The auditor must verify the following legal compliances for NBFC due diligence purposes :
Creation of Statutory Reserves: Section 45-IC of the Reserve Bank of India Act,1934 mandates that every NBFC establish a reserve fund and transfer a sum equal to at least 20% of its net profit, as reported in the profit and loss account, each year, as well as prior to the declaration of any dividend.

Registration of the NBFC with the KYC portal: Every NBFC must register with the site and provide the required information.

Registration with the Financial Intelligence Unit- India (FIU-Ind)
According to the Prevention of Money Laundering Act, 2002 and Rules issued thereunder, NBFCs are required to verify the identification of their customers, keep records, and provide information to the Financial Intelligence Unit-India (FIU-Ind).

Nominated counsel must be appointed in the Delhi High Court, and their names must be submitted to the Central Registry of Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest, per a guidance note issued by SEBI. This requirement applies to all NBFCs with the authority to invoke sections 13 and 14 of the SARFAESI Act.

Become a member of a Credit Information Company (CIC):According to the RBI, all NBFCs must become members of one of the four Credit Information Companies.

Auditor's Report to Directors and Statutory Auditor Certificate:In accordance with the guidelines of different RBI circulars, the auditor's report and the statutory auditor certificate should be examined for the purpose of due diligence

Important Subjects Involved in the NBFC Due Diligence Process

As part of the NBFC Due Diligence process, the following papers are scrutinised:

Company's affairs

Foreign Direct Investment (FDI)

Issues Relating to the NBFC's Financials

Real Estate and Property Assets Held by the NBFC

Human Resource (HR) Capabilities and All HR Compliances

The NBFC owns intellectual property rights.

examination of the meeting minutes from the past

All of the secretarial requirements

All of the significant contracts that the NBFC engaged into

RBI requirements for compliance with different regulations

NBFCs' pending legal disputes

Insurer claims made by NBFCs

each and every tax compliance

Ensure the papers' authenticity.
When doing due diligence, the evaluator must first be certain that the papers being examined are legitimate. It is the responsibility of the hired specialists performing the activity of due diligence to confirm the validity of the following documents: NBFC Certificate of Incorporation, GST Registration, TAN Registration, and PAN
All the paperwork filed to the MCA, RBI, and other regulatory agencies in order to do NBFC activity.
The validity of any additional registrations and authorizations received by the NBFC from different regulatory organisations must also be confirmed for the evaluator's satisfaction. The evaluator must keep these materials on file until the Due Diligence process is completed.
Other important papers must be kept on file by an NBFC as part of continuing business until the Due Diligence process is complete. The papers are listed below:

Board decisions made up to the due diligence date

Minutes of all sessions conducted up to the end of the due diligence

Reports of statutory audits

A list of the company's entire net worth

Expert Opinion on NBFC Due Diligence
Due diligence performed by NBFCs is time-consuming and requires attention to detail; thus, its significance cannot be minimised or disregarded in any way since making the incorrect investment choice might have negative effects on both the investor and the economy as a whole. Therefore, it is usually advised to choose a specialist with years of expertise and a keen eye for detail. Due diligence is a practise that cannot be carried out by a single type of professional; rather, it necessitates the skills of a variety of professionals including lawyers, Chartered Accountants, Company Secretaries, and others because the various areas that must be evaluated are distinct and call for various skill sets. An evaluation team made up of these experts is the perfect assessor.

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