MUMBAI: The nation’s largest lender State Bank of India with a business of over Rs 103 trillion as of December, is talking to Japanese banks for collaboration in acquisition financing which the regulator RBI has just allowed, chairman CS Setty has said.
The bank has a war chest of about Rs 94,000 crore for this, the chairman said further, adding “the bank will be going to board soon for sops, pricing etc..”
“Given Japanese banks experience in funding acquisitions, we are keen to collaborate with them,’” he said without offering more details. Setty had earlier said when the draft direction on acquisition financing was released that it would be based under a special wing of the bank’s I-banking arm-SBI Capital Markets.
The chairman was speaking on the sidelines of the 78th AGM of the industry lobby IBA which was attended by DFS secretary M Nagarani and who asked banks to look at offering loans to small business at the same rate they lend to large companies.
On February 13 the RBI issued the final guidelines allowing up to 75% bank funding of M&As, up from 70% in the draft norms and also allowed such funding to both listed and unlisted companies which was also a change from the draft which allowed only listed companies.
In the final directions the central bank also stated that banks will be allowed to fund promoters' stake while they set up new companies.
"Total bank financing shall not exceed 75% of the acquisition value, as independently assessed by the bank," the central bank said, adding the new facility will be available for banks and companies from April 1.
The move opens up a large funding avenue for banks as the annual M&A funding is valued at around $40 billion.
The remaining 25% of the deal value should be arranged by the acquiring company using its own funds, which may include internal accruals or fresh equity, it said.
The central bank has also listed out a set of other conditions to be met while banks do such financing activities, including getting a corporate guarantee from the acquiring company and ensuring that the debt to equity ratio does not exceed 3:1 post-acquisition on a continuous basis.
Also, the equity shares or compulsorily convertible debentures acquired by the acquiring company shall be free from any encumbrance, the final guidelines said.
The norms also demands banks to put in place a board-approved policy on acquisition finance, incorporating the underwriting benchmarks that address the structural complexities of such transactions, in particular relating to exposure limits, equity contribution, leverage multiples, and cash-flow certainty.
A borrower needs to have a net worth of at least Rs 500 crore and net profit for three years, and the unlisted entities should additionally enjoy investment grade ratings, it said.
Setty said “the bank to begin with will have a maximum book size can be Rs 94000 crore depending on capital adequacy as it wants to go slow initially. Also, sbi will initially we will keep structure simple. Go for listed companies and offer debt for equity.
When asked about the pricing he said obviously it will be priced higher than other loans and the rate will depend on the risk perception of the deal from both angles.