The Reserve Bank of India (RBI) on Friday issued final guidelines for financing acquisitions (one company buying another company).
Under these new rules, banks will now be able to lend up to a maximum of 75 percent of the total value of an acquisition deal.
This limit was previously set at 70 percent in the draft rules, but has been increased in the final rules. This means that companies will now be able to access more financial assistance from banks for acquisitions than before.
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Loan up to 75% of the acquisition cost
The RBI has clarified that total bank financing for any acquisition should not exceed 75 percent of the deal value. The value of this transaction will be independently assessed by the respective banks.
This means that the banks will ensure that the acquisition price is fair and realistic. The acquiring company will have to raise at least 25 percent of the remaining funds from its own resources.
This will ensure that the company also makes adequate investments and the entire burden does not fall on the bank.
Loan is also possible for promoters’ stake
Under the new rules, banks are also permitted to lend against promoters’ (company owners or promoters) shares during acquisitions.
However, an important condition applies: After the acquisition, the company’s debt-to-equity ratio must not consistently exceed 3:1.
This means that the company’s debt should not exceed three times its net worth. This requirement aims to prevent companies from becoming financially vulnerable by taking on excessive debt.
Furthermore, the equity shares or compulsorily convertible debentures to be acquired must be free of any encumbrances or pledges. This ensures that the security provided to the bank is clean and risk-free.
Banks will have to formulate a clear policy
According to news agency Press Trust of India (PTI), the RBI has directed all banks to develop a clear policy for acquisition financing, approved by their boards of directors.
This means that each bank must determine the terms and conditions under which it will lend to companies for acquisitions. This will increase transparency and accountability.
Furthermore, a company seeking a loan for acquisitions must have a minimum net worth of ₹500 crore. Additionally, the company must have earned a net profit for three consecutive years.
This condition is designed to ensure that only financially strong and stable companies receive bank loans for acquisitions.
Additional conditions for unlisted companies
If a company is not listed on the stock exchange, it must obtain an investment-grade credit rating. This means that a recognized rating agency must certify that the company’s financial position is strong and that it is safe to invest in.
This will reduce bank risk.
When will the new rules be implemented?
The RBI has stated that these new guidelines will come into effect from April 1. This means that the same rules will apply to acquisition deals conducted after that date.
Previously, in late October, the central bank had first released a draft proposing to allow banks to finance acquisitions.
In fact, banks were previously not permitted to finance such acquisitions. The new regulations may provide companies with better opportunities for expansion and investment.
At the same time, the RBI has also taken precautionary measures to ensure that the banking system is not exposed to excessive risk and financial stability is maintained.