RBI proposes banks finance corporate acquisitions with stricter safeguard

The Reserve Bank of India has proposed allowing banks to finance Indian companies for domestic or overseas acquisitions. The draft sets eligibility criteria, financing limits, and safeguards, aiming to promote strategic investments while ensuring responsible lending practices

Mumbai: The Reserve Bank of India (RBI) has proposed to permit banks to extend loans to Indian companies for acquiring full or controlling stakes in domestic or overseas firms as part of strategic investments aimed at creating long-term value.

Only listed companies with a satisfactory net worth and a profitable track record over the last three years will be eligible for such financing under the draft norms. Up to 70 per cent of the acquisition cost may be financed by banks, with the remaining 30 per cent having to come from the acquiring company’s own equity contribution.

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According to the proposal, either the acquiring company or a step-down special purpose vehicle (SPV) created specifically for the acquisition can receive the funding. A thorough policy framework on acquisition finance, including borrower eligibility, security, margins, risk management, and monitoring procedures, has also been required by the central bank.

The draft stipulates that the SPV and the acquiring company must be body corporates rather than financial intermediaries like alternative investment funds (AIFs) or non-banking financial companies (NBFCs).

Additionally, there must be no familial ties between the target and acquirer entities. As required by the Securities and Exchange Board of India (SEBI), two independent valuations must be performed in order to ascertain the target company’s acquisition value.

Banks must evaluate credit risk based on the target company’s and the acquirer’s combined balance sheets. The central bank released this draft circular outlining the proposal, which aims to increase the reach of acquisition financing while maintaining responsible lending practices.

Banks are currently only allowed to participate in a small number of these transactions. Before finalising the guidelines, the RBI asked stakeholders for their input on the draft.