RBI proposes to allow banks to fund acquisitions

Banks will be able to give loans to Indian companies for acquiring the entire equity stake or a controlling part of it in domestic or foreign firms as strategic investment that creates long-term value rather than for short-term financial restructuring if the Reserve Bank of India’s (RBI's) draft circular, issued on Friday, comes to fruition.

- SUBRATA PANDA

However, the circular’s condition is that acquiring companies are listed entities with satisfactory net worth and have been profitable for the previous three years.

The RBI has proposed to cap the aggregate exposure of a bank to such acquisition finance at 10 per cent of its Tier-I capital.

The RBI has proposed that banks can finance up to 70 percent of the acquisition value, with the remaining 30 per cent to be funded by the acquiring company through its equity contribution.