RBI proposes 70% cap on financing for acquisitions

Suggests raising banks’ exposures to capital market

- CHRISTINA TITUS

IN A DEVELOPMENT that will encourage banks to participate more aggressively in funding acquisitions by India Inc, the Reserve Bank of India (RBI) on Friday issued a draft circular on acquisition financing that proposes to allow banks to finance as much as 70% of the acquisition value, provided the rest 30% comes from the acquirer.

“Acquisition financing can be extended by banks to Indian corporates for acquiring equity stakes in domestic or foreign companies as strategic investment... by the core objective of creating long-term value... rather than restructuring for short-term gains,” the draft circular said.

The regulator asked banks to put in place a policy on acquisition finance, which defines the overall limit under the “direct capital market exposures”, eligibility of borrowers, security, margin, risk management and monitoring norms, among others.

ITALSO SAID that the aggregate exposure of a bank towards acquisition financing shall not exceed 10% of Tier-1 capital and proposed that the financing can be extended directly to the acquirer or to a step-down SPV set up for acquisition.