Prior approval from NHB for 10% change in foreign shareholding

By Rajeev Jhawar (rajeev@vinodkothari.com)(finserv@vinodkothari.com)

The National Housing Bank (NHB) came out with a notification on 19^th July, 2018[1], (‘Notification’) amending the Housing Finance Companies (National Housing Bank) Directions, 2010 with respect to change in control of housing finance companies.

Scenario prior to the Notification

The original provisions issued on 9^th February, 2017[2], were influenced from the RBI regulations for non-banking financial companies (NBFCs). As per the said directions, any HFC undergoing any of the following change would require prior approval of the NHB:

• Change in control or management of the Company;
• Change in shareholding of the Company, including progressive changes over time, resulting in change in 26% shareholding of the Company;
• Change in management resulting in change in 30% of the composition of the Board of Directors of the company.

Scenario post Notification

The latest notification has substituted the second criteria with the following clause:

(b) any change in the shareholding of an HFC accepting/holding public deposits, including progressive increases over time, which would result in acquisition / transfer of shareholding of 10 percent or more of the paid up equity capital of the HFC by/to a foreign investor

or

any change in the shareholding of an HFC, including progressive increases over time, which would result in acquisition / transfer of shareholding of 26 per cent or more of the paid up equity capital of the HFC.

Provided that, prior approval would not be required in case of any shareholding going beyond 10% or 26%, as applicable, due to buyback of shares/reduction in capital where it has approval of a competent Court. However, the same is to be reported to the National Housing Bank not later than one month from the date of its occurrence;

The text of the condition remains, barring the portion highlighted above, which happens to be a new insertion.

As its suggests, if a foreign investor having a shareholding of 10% of total paid up capital or more in HFCs intends to transfer the stake or if a foreign investor intends to acquire shareholding of 10% of paid up capital, the HFCs will be required to get an approval from NHB prior to accepting such change.

The phrase “a foreign investor” could be interpreted as a single foreign investor. However, the term “foreign investor” still holds ambiguity due to absence of any definition. Further, since, the intention behind these provisions seems to regulate change in control over HFCs, one can argue that considering only individual shareholding must not be appropriate and one should also consider the holdings of others persons who are acting in concert with the shareholder.

Further, here the term “progressive increase” would imply that while looking at the quantum of shareholding, we can consider a single instance of change. If there are multiple instances of change within a span of time, all of them must be consolidated to see whether the threshold is breached or not.

The same can be explained by way of an example, say, a foreign investor acquires 5% of paid up equity capital of a HFC at the first instance and acquires 5% of the paid up equity capital at the next instance. In the first instance the person is acquiring only 5% of the paid up equity capital, hence the same is not crossing the threshold. However, in the second instance, even though the shareholder is acquiring only 5%, but in aggregate its shareholding is reaching the threshold; hence, a prior approval of the NHB would be required for the acquisition of 5% of paid up equity capital.

Further, though the provisions require us to consolidate progressive changes over time, however, the same is silent on the duration, which should be considered. In this regard, we can draw parallels from the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011[3], which talks about creeping acquisitions. The concept of creeping acquisition is also similar to these provisions, where the acquisitions over a period of time are considered to see if various thresholds under the Regulations are being breached or not. The time limit that has been set for this purpose under the Regulations is 1 year, it is safe to borrow the same for the purpose of these Directions as well.

Conclusion

The changes have been enforced with immediate effect. One of the significant changes introduced has been to seek approval from NHB, in case a foreign investor having a shareholding of 10% of total paid up capital or more in HFCs intends to transfer the stake or a foreign investor intends to acquire shareholding of 10% of paid up capital. The said change would enable NHB to monitor foreign intrusion and hence, ensure improved governance.

[1] http://nhb.org.in/wp-content/uploads/2016/10/Notification-No.-NHB.HFC_.ATC_.DIR_.2-MDCEO-2018.pdf

[2] Notification No. NHB.HFC.ATC-DIR.1/MD&CEO/2016 dated 09th February, 2017

[3] https://www.sebi.gov.in/legal/regulations/apr-2017/sebi-substantial-acquisition-of-shares-and-takeovers-regulations-2011-last-amended-on-march-6-2017-_34693.html