The Reserve Bank of India (RBI) has deferred the implementation of the guidelines on capital market exposures to July 1, from the earlier April 1 deadline, it said in a press release on Monday. It said that the extension follows representations from banks, capital market intermediaries (CMIs) and industry bodies seeking more time and clarity on certain operational and interpretational aspects.
The final norms were issued on February 13, after public consultation. They provided an enabling framework for banks to finance acquisitions by Indian corporates, rationalise lending limits against shares and units of real estate investment trusts (REITs) and infrastructure investment trusts (InvITs), and introduce a more principle-based framework for bank lending to CMIs.
Along with this, RBI also gave some clarifications on acquisition financing. The definition of acquisition finance has been expanded to include mergers and amalgamations. Such finance may be extended only for acquiring control of a non-financial target company.
Norms listed by RBI
If the target company is a holding company or a parent company with control over other subsidiary companies, then the criteria of ‘potential synergy’ must be collectively met for acquisition finance, RBI said. Acquiring companies may also raise acquisition finance for on-lending to Indian or overseas subsidiaries to acquire a target company.
Refinancing of acquisition finance would be permitted only after the acquisition is fully concluded and control established, the RBI said. It added that the refinance must be used solely to retire the original acquisition debt. In addition, banks will have to obtain a corporate guarantee from the acquiring company where finance is extended to a subsidiary or special purpose vehicle.
On loans against financial assets
On loans against financial assets, the RBI clarified that the cap of Rs 1 crore per individual against eligible securities, and Rs 25 lakh per individual for initial public offerings (IPOs), Follow-on Public office (FPOs) and Employee stock ownership plan (ESOP) subscriptions, will apply at the banking system level.
For CMIs, the central bank said that lenders may finance proprietary trading only against 100% collateral in cash or cash equivalents.
The prohibition on extending finance to market markers against securities in which the market making operations are undertaken, has been removed. Intraday facilities to non-debt mutual funds against same-day guaranteed receivables will not be treated as capital market exposure.