Mumbai, February 13 The Reserve Bank on Friday issued the final guidelines on acquisition financing by banks, increasing the lending limit to up to 75 per cent of the deal value from the 70 per cent proposed in the draft rules.
In amended directions governing commercial banks' credit facilities, the central bank also stated that lenders will be allowed to fund promoters' stake while setting up new companies.
"Total bank financing shall not exceed 75 per cent of the acquisition value, as independently assessed by the bank," the central bank said.
In late October, the RBI first came out with a draft, allowing banks to fund acquisitions, an activity prohibited until recently.
Credit assessment will be conducted on a pro-forma consolidated basis, incorporating the financials of both the acquiring and target entities, the RBI said.
The remaining amount should be arranged by the acquiring company using its own funds, which may include internal accruals or fresh equity, it added.
The RBI has also listed out a set of other conditions to be met while banks undertake such financing activities, including 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.
The equity shares or compulsorily convertible debentures acquired by the acquiring company shall be free from any encumbrance, it noted.
It asks banks to put in place a board-approved policy on acquisition finance, incorporating 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 a net profit for three years, and the unlisted entities should additionally enjoy investment-grade ratings, it said.
The new rules will come into effect from April 1, it said.
