MUMBAI: The Reserve Bank has issued draft guidelines to allow banks to fund India Inc to acquire strategic equity stakes, in full or in part both, domestic as well as overseas, in listed companies as a strategic investment that creates long-term value rather than for short-term financial restructuring.
From April next, when the new norms will come into force, banks can lend up to 70 percent of the acquisition value, with the reminder amount coming in from the acquirer’s own equity. In a draft circular issued late Friday, the central bank, however, put a caveat that acquiring companies are listed entities with satisfactory networth and have been profitable for the previous three years.
In another draft circular, the monetary authority has also proposed lower risk weighting for non-banks to lend to infrastructure projects. The RBI has proposed to cap the aggregate exposure of a bank to such acquisition finance at 10 percent of its tier-I capital and for the acquirer, the maximum debt can be 70 percent of the deal value with the remaining 30 percent to be funded by the acquiring company through its equity contribution.
The draft rules also propose bank financing for public sector divestments, and IPO subscriptions. According to the circular, banks can lend the acquiring company directly or its step-down special purpose vehicle (SPV), set up specifically for buying the target entity. Banks must have a policy on acquisition finance, defining the caps, terms and conditions of the eligibility of borrowers, security, margin, risk management and monitoring norms etc.
It is proposed that banks ensure that the acquiring company and any SPV set up for acquisition are body corporate and not financial intermediaries such as NBFCs or alternative investment funds. Additionally, banks must verify that the acquiring company and the target company are not related parties. According to the draft, the acquisition value of the target company must be determined based on two independent valuations as prescribed under Sebi regulations, and credit assessment by banks should be conducted on the combined balance-sheets of the acquirer and the target company.
The post-acquisition debt-to-equity ratio at the level of the acquirer, or the SPV/target firm, must remain within prudential limits set by the financing bank, with a cap of 3:1.“Banks shall put in place rigorous and continuous monitoring of acquisition finance exposures to manage the risks, with early warning systems and regular stress testing to detect and address any signs of stress in the portfolio,” the draft regulations said.
The circular has allowed banks to provide financing for acquiring shares of public-sector undertakings under a disinvestment programme approved by the government. This includes the secondary-stage mandatory open offer wherever applicable. The companies, including their promoters, receiving bank finance must have adequate net worth and an excellent track record of servicing loans.
Additionally, banks have been allowed to grant loans to individuals for subscribing to shares under initial public offerings, follow-on public offers, or in an employee stock options up to Rs 25 lakh per individual. The circular also allows banks to provide need-based credit facilities to capital market intermediaries to fund their day-to-day operations, including general working-capital facilities and specific facilities.
Lower risk weight for NBFCs to fund infra projects
The draft circular for NBFCs funding infra projects, the regulator has sought to lower the risk weighting for such loans. The draft norms define high-quality infrastructure projects, aim to reduce capital burden for NBFCs and align risk weights with actual project performance. Loans to high quality infrastructure projects, where the borrower has repaid at least 10 percent of the sanctioned amount, would attract 50 percent of risk weight.
If the borrower has paid at least 5 percent but less than 10% of the sanctioned amount, it would attract 75 percent of risk weight compared to 100% earlier, the draft guidelines said. The draft guidelines define “high-quality infrastructure projects” as those which have completed at least one year of satisfactory operations post achievement of the date of completion of commercial operations.
“If the infrastructure project has completed at least one year of satisfactory operations post-achievement of the date of completion of commercial operations, and the exposure is classified as standard in the books of the lender, it will be classified as a high-quality infrastructure project,” said the draft guidelines.
Further, the borrower’s revenue depends on one main counterparty- Central government or a public sector entity. Additional safeguards such as escrow of cash flows, first charge over assets, and restrictions on additional borrowing are also required. The draft guidelines also note that the borrower should have sufficient internal or external financial arrangements to cover the current and future working capital and other funding requirements of the project.
The two draft proposals are part of the 22 regulatory amendments that the central bank had suggested in the past monetary policy review meeting. Then the RBI had also said it would cull as many as 9,000 circulars and merge the remaining into 236 circulars/master circulars. The existing capital adequacy norms already permit non-banks to assign lower risk weights to operational projects under the public-private partnership model.
The move aims to reduce the cost of financing infrastructure norms. The central bank said the framework aims to align risk weights with the actual risk characteristics of operational infra projects, promoting better risk assessment and capital allocation. Some non-banks, such as infrastructure debt funds (IDFs) and infrastructure finance already apply lower risk weights (50%). This is for loans backed by tripartite agreements but not to other wholesale NBFC lending.
