Context:
State Bank of India (SBI), the country’s largest lender by assets, has sought regulatory approval from the Reserve Bank of India (RBI) to allow banks to finance mergers and acquisitions (M&A) of companies.
Key Highlights:
Current Regulatory Restriction
- Banks in India are currently barred from lending directly for mergers and acquisitions (M&A).
- Companies seeking funds for acquisitions depend on non-banking financial companies (NBFCs) or raise capital through bonds.
SBI’s Request to RBI
- SBI Chairperson Challa Sreenivasulu Setty urged the RBI to consider permitting acquisition financing, at least for large, listed companies.
- The move is aimed at enhancing bank participation in strategic corporate deals and boosting India’s M&A landscape.
Significance
- Allowing banks to fund acquisitions could:
- Increase liquidity for big-ticket deals.
- Reduce dependency on NBFCs and foreign lenders.
- Strengthen domestic credit markets.
Mergers and Acquisitions (M&A)
Mergers and Acquisitions (M&A) refer to the consolidation of companies, banks or assets through various financial transactions, including mergers, acquisitions, tender offers, and management buyouts.
Key Concepts:
- Merger:
- When two companies combine to form a new entity.
- Example: Vodafone India and Idea Cellular merged to form Vodafone Idea Ltd.
- Acquisition:
- When one company purchases and takes over another company.
- Example: Facebook’s acquisition of WhatsApp.
