MUMBAI: The Reserve Bank has issued the final guidelines on acquisition financing, allowing banks to lend up to 75% of the deal value, up from the 70% spelled out in the draft rules earlier, and also limiting such funding only to publicly traded companies.
In the final directions issued Friday, 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.
It may be noted that in late October, the RBI had first come out with a draft allowing banks to fund acquisitions, an activity prohibited till recently.
Credit assessment shall be conducted on a pro-forma consolidated basis, incorporating the financials of both the acquiring and target entities, the RBI said.
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 demand 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.