The Reserve Bank of India (RBI) on Friday released a draft circular proposing to allow banks to provide loans to Indian companies for acquiring full or controlling stakes in both domestic and overseas firms as part of strategic, long-term investments rather than short-term financial restructuring.
Under the draft guidelines, only listed companies with a satisfactory net worth and a three-year profit track record will be eligible for such financing.
Key Provisions
- Funding limit: Banks can finance up to 70% of the acquisition value, while the remaining 30% must come from the acquirer’s equity contribution.
- Exposure cap: The aggregate exposure of a bank to such acquisition financing will be capped at 10% of its Tier-I capital.
- Eligible borrowers: Financing can be extended directly to the acquiring company or to a special purpose vehicle (SPV) created specifically for the acquisition. Both must be corporate entities, not financial intermediaries like NBFCs or AIFs.
- Valuation norms: The acquisition value must be based on two independent valuations as per SEBI regulations, with banks conducting credit assessments on the combined balance sheet of the acquirer and target entity.
- Leverage ceiling: The post-acquisition debt-to-equity ratio of the acquirer or SPV must stay within prudential limits, capped at 3:1.
Monitoring and Oversight
The RBI has directed banks to maintain rigorous and continuous monitoring of such exposures, supported by early warning systems and stress testing to detect emerging risks.
Additional Provisions
The draft circular also permits:
- Bank financing for acquisition of PSU shares under government disinvestment programmes, including secondary-stage open offers.
- Loans to individuals up to ₹25 lakh for subscribing to IPOs, FPOs, or employee stock option plans (ESOPs).
- Need-based working capital facilities for capital market intermediaries to support operational and liquidity requirements.
The RBI has invited stakeholder feedback before finalising the norms, which aim to enhance corporate financing flexibility while maintaining prudential risk safeguards.