Source: BS
Why in News?
The Reserve Bank of India (RBI) has issued final norms permitting banks to finance acquisitions (takeovers) of both listed and unlisted non-financial companies, with safeguards to ensure prudent lending and long-term value creation.
Key Provisions
- Funding cap: Banks can finance up to 75% of the total acquisition value.
- Objective: Support acquisitions that create long-term strategic value, not short-term financial restructuring.
- Loans may also fund acquisitions through:
- Non-financial subsidiaries of the acquirer
- Step-down Special Purpose Vehicles (SPVs)
Eligibility Criteria for Acquiring Companies
- Minimum net worth: ₹500 crore
- Must have reported net profit in each of the last 3 financial years
- If unlisted → must have investment-grade rating (BBB– or above)
Control and Ownership Rules
- Acquisition must result in control of the target company within 12 months.
- If the acquirer already has control, funding allowed only when ownership crosses key thresholds:
- 26%, 51%, 75%, or 90% voting rights
- Acquirer and target cannot be related parties.
Financial Safeguards
- Acquirer must fund at least 25% from own resources (equity, internal accruals).
- Corporate guarantee from acquirer / parent / group entity is mandatory.
- Post-acquisition debt-to-equity ratio capped at 3:1 (consolidated level).
- For unlisted targets → valuation for financing based on the lower of two independent valuations.
Bridge Financing
- Banks may provide secured bridge loans to meet the 25% own-fund requirement.
- Must be replaced with equity within 12 months from a clear repayment source.
Change from Draft Proposal
- RBI removed earlier proposal that limited a bank’s acquisition finance exposure to 10% of Tier-1 capital.
