Source: BS
What Happened?
After the Reserve Bank of India (RBI) issued final guidelines on acquisition financing, banks are preparing to enter the segment gradually and cautiously.
What is Acquisition Financing?
- Loans provided by banks to companies to purchase or acquire another company or asset.
- Common in mergers, takeovers, and corporate restructuring.
Key RBI Guardrails (Risk Control Measures)
1. Exposure Limits
- Earlier draft: 10% of Tier-I capital.
- Final rule: Up to 20% of eligible capital.
- Still counted within overall capital market exposure limits.
2. Corporate Eligibility Conditions
Acquiring company must have:
- Minimum ₹500 crore net worth.
- Net profit for 3 consecutive years.
- Investment-grade rating (if unlisted).
3. Leverage Control
- Post-acquisition Debt–Equity ratio capped at 3:1 (continuous basis).
4. Financing Structure
- Banks can fund maximum 75% of acquisition value.
- Remaining 25% allowed via bridge finance, repayable within 1 year.
Purpose of Safeguards
- Ensure only financially stable companies access funding.
- Prevent excessive leverage and risky lending.
- Limit systemic risk to banking sector.
