For buyouts, only listed companies with sound finances to get funding – News Air Insight

Acquisition finance by banks to Indian companies can only be extended for a listed entity with a satisfactory net worth and one that is profit-making for the past three years, the central bank’s draft guidelines on banks’ capital market exposure published Friday showed.

Furthermore, the annual returns of the target company should be available for at least the previous three financial years, and the acquisition value of the target company shall be determined by two independent valuations as prescribed in the SEBI regulations, the RBI said.

Aggregate exposure of a bank toward acquisition finance shall not exceed 10% of the individual bank’s Tier-1 capital. Banks have been given the freedom to fix limits for their aggregate exposures toward acquisition finance, provided the capital market exposure (CME) does not exceed 40% of Tier-1 capital for a bank on a solo basis as of the previous financial year.

The central bank had said on October 1, during the last monetary policy review, that local lenders would be allowed into acquisition financing.

A bank’s direct CME, consisting of investment exposures and acquisition finance exposures, shall not exceed 20% of solo and consolidated tier-1 capital, as applicable.

The draft guidelines come after an announcement in the post-policy developmental and regulatory policies on October 1 where the central bank for the first time proposed to provide an enabling framework for Indian banks to finance acquisitions by Indian corporates, thereby expanding the scope of capital market lending by banks.Comments and feedback on the draft guidelines can be sent to the central bank by November 21. Banks shall put in place a policy on acquisition finance, clearly defining the overall limit, terms, and conditions of eligibility of borrowers, security, margin, risk management, and monitoring norms.

“Acquiring company and the SPV set up by it, wherever applicable, shall be a body corporate and shall exclude financial intermediaries such as NBFC, Alternate Investment Fund (AIF) etc.. A bank may finance at most 70% of the acquisition value, with at least 30% of the acquisition value to be funded by the acquiring company in the form of equity using own funds,” the RBI said.

The credit assessment shall be based on the combined balance sheet of the acquirer company and the target company. Post-acquisition debt to equity ratio at the acquiring company level or the SPV/target company level, as applicable, shall be within prudential limits set by financing banks, subject to a maximum of 3:1, the RBI said.

“Acquisition finance shall be fully secured by shares of the target company as primary security. Assets of the acquirer and/or target company, or other securities held by the acquiring company, may be taken as collateral security as per the bank’s policy,” RBI said.

Banks have to 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.

Banks have also been proposed to be allowed to may provide finance for acquisition of shares of public sector companies under a disinvestment programme approved by the Government of India, including the secondary stage mandatory open offer wherever applicable, provided the promoters seeking financing have adequate net worth and an excellent track record of servicing loans and there are no constraints for the pledgee to liquidate the shares, even during lock-in period that may be prescribed in respect of such disinvestments, in case of shortfall in margin requirements or default by the borrower.

Such exposures secured by the shares of the disinvested public sector companies or any other shares shall be reckoned as direct CME, the central bank said in the draft guidelines.