RBI Releases Draft Guidelines for Acquisition Finance by Banks to Indian Companies

The Reserve Bank of India (RBI) has released draft guidelines on capital market exposure by banks, paving the way for Indian banks to finance acquisitions by Indian corporates. According to the guidelines, acquisition finance shall be fully secured by shares of the target company as primary security, and banks must put in place rigorous and continuous monitoring of acquisition finance exposures to manage risks. The draft guidelines also propose to allow banks to finance at most 70% of the acquisition value, with the remaining 30% to be funded by the acquiring company in the form of equity using its own funds.

Key Takeaways:

• Acquisition finance shall be fully secured by shares of the target company as primary security, and assets of the acquirer and/or target company, or other securities held by the acquiring company, may be taken as collateral security.
• Banks shall put in place a policy on acquisition finance, clearly defining the overall limit, terms and conditions of eligibility of borrowers, security, margin, risk management, and monitoring norms.
• The acquisition value of the target company shall be determined by two independent valuations as prescribed in the SEBI regulations.
• Aggregate exposure of a bank towards acquisition finance shall not exceed 10% of its Tier 1 capital.
• Banks have been given the freedom to fix limits for their aggregate exposures towards acquisition finance provided the capital market exposure (CME) does not exceed 40% of a bank's Tier I capital on a solo basis as of the previous financial year.
• The credit assessment shall be based on the combined balance sheet of the acquirer company and the target company.
• Post-acquisition debt to equity ratio at the acquiring company level or the SPV/target company level, as applicable, shall be within prudential limits set by financing banks, subject to a maximum of 3:1.

Statistics:

• Aggregate exposure of a bank towards acquisition finance shall not exceed 10% of its Tier 1 capital.
• Banks have the freedom to fix limits for their aggregate exposures towards acquisition finance provided the CME does not exceed 40% of a bank's Tier I capital on a solo basis as of the previous financial year.
• A bank's direct CME, consisting of investment exposures and acquisition finance exposures, shall not exceed 20% of solo and consolidated Tier 1 Capital, as applicable.

Sources:

• RBI Draft Guidelines on Capital Market Exposure by Banks, released October (no specific date mentioned)
• RBI Proposed Enabling Framework for Indian Banks to Finance Acquisitions by Indian Corporates, released October 1
• SEBI Regulations (no specific source cited)