NBFC Due Diligence involves evaluating the commercial worth of a Non-Banking Financial Company by analysing its liabilities and assets. This evaluation is usually done by investors to figure out the viability of investing in the NBFC and to keep stability and safety of their investments. It is evidence of the caution being exercised by persons or organisations looking for investment in an NBFC.

There is no set of prescribed criteria for NBFC due diligence. The approach is customised depending on the marketplace and market in which the NBFC operates. This customised approach helps in figuring out the true value of the NBFC and meaningful comparisons in the same market context.

Understanding Concept of NBFC Due Diligence

NBFC Due Diligence is an assessment of different aspects of a Non-Banking Financial Company.

Legal NBFC Due Diligence

Legal Due Diligence is one element of NBFC DD and also includes a comprehensive review of the NBFC's legal standing and operation. This particular legal scrutiny includes:

1. Registration & Business Structure: Whether the NBFC has been registered according to the prescribed legal business structure.
2. Registration Compliance: Whether the NBFC has been registered in accordance with the appropriate regulations before it begins its activities as an NBFC.
3. Legal Regulations Compliance: Ascertaining that the NBFC has been meeting the necessary legal compliances including maintaining required registers and accounting records in the prescribed form.
4. Litigation Status: Identifying if any legal cases against the NBFC are in progress and what their status is.
5. Legal Risk Assessment: Analysing if the NBFC is subjected to substantial legal risks that may impact its operations and financial stability.
6. Other Legal Matters: Additional legal issues or issues regarding the NBFC's activities which could relate to the due diligence procedure.

NBFC Financial Due Diligence

Financial Due Diligence is examining of financial aspects including assets / liabilities / cash flow along with other capital management factors. The key financial considerations an NBFC should think about include:

1. Accurate & Compliant Financial Records: Keeping accurate accounts along with other financial documents of the NBFC in accordance with recognised best practices and regulatory requirements.
2. Credibility & Creditworthiness: Upholding credibility and creditworthiness of the company through appropriate financial profile and payment of financial obligations.
3. General Financial Management: General financial hygiene through excellent financial management and protection against financial risks.

Commercial Due Diligence for NBFCs

Commercial Due Diligence is conducted managing the NBFC as a business unit and scrutinising its financial viability and soundness. This component of due diligence includes:

1. Performance of Competitor: To measure competitive standing, the NBFC performance is compared with its market competition.
2. Customer Relationship: Evaluating the depth and quality of relations between the NBFC and its customers because this might impact company sustainability.
3. Market Goodwill: Goodwill and reputation of the NBFC in the marketplace is able to affect customer trust and business success measurement.
4. Sales & Marketing Strategies: Analysing the strategies utilised for business growth and expansion including current and forecast sales targets.
5. Business Vision: Examining the vision and long-range objectives of the NBFC on the market relative to investor goals.
6. Getting Targets Met: Assessing realistic expectations of the NBFC in meeting its financial and operational targets.

Other (Miscellaneous) Due Diligence

Elements not covered by the above discussed categories fall under Other (Miscellaneous) Due Diligence. This comprises taxation, management practice, information technology systems, channels of interaction, data protection & data management.

Role of Non Banking Financial Companies (NBFCs)

An NBFC in India is an authorised financial institution under the 1956 Act & 2013 Companies Act. These aren't traditional banks and are becoming just as Important in the financial industry. NBFCs may carry out no. of financial activities including:

1. Extend Loans & Advances: Loans and advances to businesses and individuals.
2. Acquisitions of Shares: Purchasing shares of other companies - capital markets.
3. Leasing/Hire-Purchase: Lease financing and hire-purchase transactions allowing clients to buy property as time passes.
4. Insurance Services: Providing insurance services or products, though some particular NBFCs deal exclusively with insurance.

NBFCs are legally obligated to register with RBI under Section 45 IA of the Reserve Bank of India Act, 1934. This further ensures financial stability while protecting depositors and investors' rights and interests.

Collecting Information for NBFC Due Diligence: Best Practices

As part of Due Diligence for NBFCs, correct and relevant information is needed for good investment decision making. The information gathering source should be dependable and trustworthy because this data forms the basis of all the due diligence exercises and investing decisions. Given below are key steps and factors for collecting information effectively:

• Checklist Preparation: Make a checklist of the kinds of information necessary for NBFC Due Diligence. This checklist must include miscellaneous, commercial, financial, and legal areas. All such data must be available for a detailed NBFC due diligence.

• Identification of Information Sources: Determine and locate sources from which the needed info will be gathered. These sources might include :.
  • Financial Records: Review of Financial statements, quarterly report & audit report of the NBFC.
  • Business news: Monitoring News articles & reports on the NBFC activities and industry developments.
  • Market data: Using Market research & Data on the financial industry and also the Market on which the NBFC operates.
  • Directors & management: Investigating the history and credentials of the company's Directors and key Management personnel.

• Engaging Professionals: Appoint expert professionals like StartupFino to collect the info and manage the Due Diligence. Our experts understand how to obtain main info from financial documents as we know how dependable information is.

Appointing professionals is essential so that the information gathered - the foundation for Due Diligence - could be correct. Our expertise helps in making sound investment decisions and reducing possible risks. Essentially, professionals make certain that Due Diligence is dependent on accurate information.

Main Legal Compliances for NBFC Due Diligence

Throughout Due Diligence of NBFCs, certain legal compliances must be scrutinised to make certain the NBFC meets the law and the applicable laws. Important legal compliances to check out during the Due Diligence:

1. Creation of Statutory Reserves: Each NBFC is obligated to create a Reserve fund and transfer a minimum of twenty percent of its total profit every year as shown in the profit & loss account before declaring dividends under section 45 IC of the reserve Bank of India Act, 1934.
2. Registration Through KYC Portal: NBFCs must log in to the KYC portal and also provide the given info in due diligence.
3. Register with Financial Intelligence Unit-India: NBFCs are governed under Protection against Money Laundering Act, 2002 along with its Rules. This involves confirming the identity of their clients and maintaining information and sharing data with the Financial Intelligence Unit India.
4. Nominated Counsel Appointment in Delhi High Court: According to Securities and Exchange Board of India instruction NBFCs authorised to invoke Sections 13 and 14 of the SARFAESI Act are to appoint appointed counsels at the High Court and submit their names on the Central Registry.
5. Membership in Credit Information Company: All NBFCs shall join one of the four Credit Information Companies as per Reserve Bank of India norms. This compliance assures NBFC contributes to credit information ecosystem.
6. Auditor's Report & Statutory Auditor Certificate: NBFCs are to follow the directions in different RBI circulars issued. This particular compliance consists of looking at the audit report and the mandatory auditor certificate together with due diligence for truthfulness and compliance with financial standards.

Conformity with these legal compliances has turned into a critical task during Due Diligence of NBFCs to enable investors to understand the NBFC's compliance with regulatory standards and overall operations integrity.

Major Areas in NBFC Due Diligence Process

For Non-Banking Financial Companies Due Diligence is an extensive evaluation which addresses areas including transparency, compliance & business viability. These given areas are considered as main for Due Diligence:

Authenticity of Documents in Due Diligence

An important task of the assessors while doing Due Diligence of NBFCs is verifying the authenticity of all the documents examined. The following documents must be validated:

The evaluator has to also confirm the authenticity of other registrations and permissions which the NBFC obtained from regulatory bodies as core documents. These documents must be kept while in the Due Diligence procedure till it finishes.

Other Documents for NBFC Due Diligence

Other documents which the NBFC should keep during its normal operations must also be scrutinised under Due Diligence:

Authenticating documents is a main type of component of Due Diligence to ensure information is accurate and dependable. This examination reduces risks and also helps informed decision making in investments and business engagements.

Expert Opinion on NBFC Due Diligence

NBFC Due Diligence is a time-consuming and in depth process. Its importance can't be overstated, because a bad investment option in the NBFC sector might prove costly for both economy and investor. Hence, it is suggested hiring professionals with expertise and a keen eye for detail such as StartupFino.

Due Diligence is a multidisciplinary procedure involving different abilities and knowledge. It can not be effectively performed by one category of professional. Rather, it takes a collective effort by others, Company Secretaries, Chartered Accountants, and lawyers. Areas assessed in NBFC Due Diligence are specific and require specialised expertise.

An excellent Due Diligence evaluation team would include a blend of these experts that contribute an assortment of knowledge and skills. This guarantees an exhaustive examination and analysis of all elements of the NBFC activities from financial and legal compliance to operational and regulatory considerations.

Why Choose StartupFino for NBFC Due Diligence?

NBFCs play a very important role in different financial activities in India. The RBI regulates their businesses to ensure soundness, accountability, and transparency of the financial system. NBFC Due Diligence is an evaluation of every main element of the company. It takes legal, financial, miscellaneous and commercial dimensions so that potential investors have a clear picture of the NBFC operations and risks. Such complex scrutiny is needed to sound investment decision making.

StartupFino offers services for NBFC Due Diligence from initial advice to complete compliance with requirements.