The Reserve Bank of India (RBI) has eased its proposed norms on acquisition financing, allowing banks to extend aggregate exposure of up to 20% of their capital towards such funding, up from the earlier proposed cap of 10%. The relaxation follows requests from several lenders who said the previous limit curtailed their ability to participate in acquisition deals.
The RBI released the final capital exposure market guidelines on Friday. The draft version had been issued on October 24.
In a key change, the regulator has permitted banks to finance the acquisition of unlisted companies, provided the target has a minimum net worth of Rs 500 crore, has been profit-making for the last three years, and carries an investment-grade rating (BBB– or above) from a credit rating agency. The draft guidelines had restricted financing to listed entities only.
Accepting a key industry demand, the central bank has also raised the permissible bank financing portion to 75% of the acquisition value from the proposed 70%, with the remaining 25% to be met through the acquirer’s own funds — either internal accruals or fresh equity issuance.
Further, the apex bank said that a listed acquiring company may use bridge finance for its own contribution, provided the bank has identified a clear repayment source. It retained the stipulation that the acquirer’s consolidated balance sheet must reflect a post-acquisition debt-to-equity ratio not exceeding 3:1.
The final guidelines also allow banks to finance transactions where a company seeks to increase its stake — a flexibility absent in the draft version.
Most other provisions remain unchanged. The regulator has, however, raised the ceiling on bank lending against shares from Rs 20 lakh to Rs 1 crore, removed the regulatory cap on lending against listed debt securities, and increased the limit for initial public offering (IPO) financing to Rs lakh from Rs 10 lakh per person.