RBI proposes to allow banks to fund domestic, overseas acquisitions

Banks will be able to give loans to Indian companies for acquiring the entire equity stake or a controlling part of it in domestic or foreign firms as strategic investment that creates long-term value rather than for short-term financial restructuring if the Reserve Bank of India’s (RBI’s) draft circular, issued on Friday, comes to fruition.

However, the circular’s condition is that acquiring companies are listed entities with satisfactory net worth and have been profitable for the previous three years.

The RBI has proposed to cap the aggregate exposure of a bank to such acquisition finance at 10 per cent of its Tier-I capital.

The RBI has proposed that banks can finance up to 70 per cent of the acquisition value, with the remaining 30 per cent to be funded by the acquiring company through its equity contribution. According to the circular, banks can lend the acquiring company directly or its step-down special purpose vehicle (SPV) set up specifically for buying the target entity. Banks must have a policy on acquisition finance, defining the limits, terms, and conditions of the eligibility of borrowers, security, margin, risk management and monitoring norms, etc.

It is proposed that banks ensure that the acquiring company and any SPV set up for acquisition are body corporate and not financial intermediaries such as non-banking financial companies or alternative investment funds (AIFs).

Additionally, banks must verify that the acquiring company and the target company are not related parties. According to the draft norms, the acquisition value of the target company must be determined based on two independent valuations as prescribed under regulations of the Securities and Exchange Board of India, and credit assessment by banks should be conducted on the combined balance sheet of the acquirer and the target company.

The post-acquisition debt-to-equity ratio at the level of the acquiring company, or the SPV/target company as applicable, must remain within prudential limits set by the financing bank, with a cap of 3:1.

“Banks shall put in place rigorous and continuous monitoring of acquisition finance exposures to manage the risks, with early warning systems and regular stress testing to detect and address any signs of stress in the portfolio,” the draft regulations said.

The circular has allowed banks to provide financing for acquiring shares of public-sector undertakings under a disinvestment programme approved by the government. This includes the secondary-stage mandatory open offer wherever applicable. The companies, including their promoters, receiving bank finance must have adequate net worth and an excellent track record of servicing loans.

Additionally, banks have been allowed to grant loans to individuals for subscribing to shares under initial public offerings, follow-on public offers, or in an employee stock option plan up to ~25 lakh per individual.

The circular has allowed banks to provide need-based credit facilities to capital market intermediaries to fund their day-to-day operations, including general working-capital facilities and specific facilities.