The Reserve Bank of India (RBI) on Friday issued final guidelines for financing acquisitions (one company buying another company).
Under these new rules, banks will now be able to lend up to a maximum of 75 percent of the total value of an acquisition deal.
This limit was previously set at 70 percent in the draft rules but has been increased in the final version. This means companies will now be able to access more financial assistance from banks for acquisitions than before.
Loan up to 75% of the acquisition cost
The RBI has clarified that total bank financing for any acquisition should not exceed 75 percent of the deal value. The value of the transaction will be independently assessed by the respective banks.
This means banks will ensure that the acquisition price is fair and realistic. The acquiring company will have to raise at least 25 percent of the remaining funds from its own resources.
This ensures that the company also makes adequate investment and the entire burden does not fall on the bank.
Loan also possible against promoters’ stake
Under the new rules, banks are also permitted to lend against promoters’ shares during acquisitions. However, an important condition applies.
After the acquisition, the company’s debt-to-equity ratio must not consistently exceed 3:1. This means the company’s debt should not be more than three times its net worth.
This requirement aims to prevent companies from becoming financially vulnerable by taking on excessive debt.
Furthermore, the equity shares or compulsorily convertible debentures to be acquired must be free of any encumbrances or pledges. This ensures that the security provided to the bank remains clean and risk-free.
Banks must frame a clear policy
According to news agency Press Trust of India (PTI), the RBI has directed all banks to develop a clear policy for acquisition financing, approved by their boards of directors.
This means each bank must determine the terms and conditions under which it will lend to companies for acquisitions. This move is expected to increase transparency and accountability.
Additionally, a company seeking acquisition financing must have a minimum net worth of ₹500 crore.
The company must also have reported net profits for three consecutive years. This condition ensures that only financially strong and stable companies are eligible for such loans.
Additional conditions for unlisted companies
If a company is not listed on a stock exchange, it must obtain an investment-grade credit rating. A recognized rating agency must certify that the company’s financial position is strong and safe for lending exposure.
This requirement is aimed at reducing risk for banks.
When will the new rules take effect?
The RBI has stated that the new guidelines will come into effect from April 1. This means the revised rules will apply to acquisition deals undertaken after that date.
Earlier, in late October, the central bank had released a draft proposal allowing banks to finance acquisitions. Previously, banks were not permitted to fund such transactions.
The new regulations are expected to provide companies with better opportunities for expansion and investment.
At the same time, the RBI has introduced safeguards to ensure that the banking system is protected from excessive risk and overall financial stability is maintained.
