Banks may soon finance corporate acquisitions — RBI suggests stricter safeguards

The Reserve Bank of India (RBI) has suggested allowing banks to provide loans to Indian companies for acquiring controlling stakes in domestic or overseas businesses as strategic investments to enhance long-term value creation.

Only publicly listed firms with strong net worth and consistent profitability over the past three years qualify for such financing under the draft guidelines.

Banks can fund up to 70% of the acquisition cost, requiring the acquiring company to contribute at least 30% from its equity resources.

The financing can be directed to either the acquiring company or a dedicated special purpose vehicle (SPV) established solely for the acquisition.

Regulators have mandated that banks develop comprehensive policies covering borrower screening, collateral requirements, risk mitigation strategies, and ongoing oversight mechanisms.

The proposal specifies that both SPVs and acquiring entities must be registered corporations, excluding financial intermediaries like venture capital funds or non-banking lenders.

Potential acquisitions cannot involve companies with existing familial connections to the acquiring entity.

Mandated by market regulators, two independent appraisals would determine the fair valuation of target companies prior to acquisition.

Credit evaluations must incorporate the combined financial position of both the acquirer and the target organization.

The central bank’s draft framework seeks to broaden access to acquisition financing while enforcing prudent lending standards beyond current limited participation.

Stakeholder feedback has been invited before finalizing these regulatory adjustments.

(With inputs from IANS)