Mumbai, October 25 (IANS). The Reserve Bank of India has issued a new draft circular proposing to increase the amount of loans given by banks to Indian companies to buy entire or controlling stakes in domestic or foreign firms. The Central Bank has proposed to implement these norms from April 1, 2026.
This loan given by the bank will be part of a strategic investment creating long-term value rather than short-term financial restructuring.
However, RBI has also clarified regarding the acquiring companies that these companies should be listed and their net worth should also be good, for which the profit record of the last three years of these companies will also be taken into consideration.
According to the RBI draft, “The bank can fund a maximum of 70 per cent of the acquisition price. A minimum of 30 per cent of the acquisition price will have to be funded by the acquiring company as equity using its own funds.”
It is proposed by RBI to limit the total exposure of a bank to such acquisition finance to 10 per cent of its Tier-I capital.
The circular states that banks can give loans directly to the acquiring company itself or to a step-down special purpose vehicle (SPV) set up by this company to buy the target entity.
Additionally, the central bank says that lending banks should have a policy on acquisition finance. Such a policy should contain information about the borrower’s eligibility, security, risk management, margin and monitoring terms, limits, closes and conditions.
The central bank has proposed that banks will be required to ensure that the acquiring company and the SPV formed for the acquisition are not financial intermediaries such as non-banking financial companies or alternative investment funds.
Banks will also need to verify that the acquiring company and the target company are not related parties.
As per the rules, the acquisition value of the target company should be decided under the rules of market regulator SEBI. Apart from this, banks will have to check the combined balance sheets of both the companies for credit assessment.
–IANS
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