Is RBI Allowing Banks to Finance Corporate Acquisitions with Stricter Safeguards?
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Synopsis
The Reserve Bank of India (RBI) has introduced a significant proposal enabling banks to finance corporate acquisitions, thereby opening avenues for strategic investments. This initiative aims to strengthen long-term value creation, but comes with stringent eligibility and risk management criteria.
Key Takeaways
- RBI proposes expanded financing for corporate acquisitions.
- Funding limited to listed companies with strong financials.
- Banks can finance up to 70% of acquisition costs.
- Strict eligibility criteria and safeguards ensure responsible lending.
- Stakeholder feedback is sought before finalization of guidelines.
Mumbai, Oct 25 (NationPress) The Reserve Bank of India (RBI) has put forth a proposal allowing banks to provide financing to Indian enterprises for the purpose of acquiring either complete or controlling interests in both domestic and international companies. This initiative is part of a strategy aimed at fostering long-term value creation.
Under the draft guidelines, only listed companies with a robust net worth and a history of profitability spanning the last three years will qualify for such loans.
Banks may finance up to 70% of the acquisition cost, while the remaining 30% needs to be sourced from the acquiring company's equity.
The proposal stipulates that funding can be directed either to the acquiring company or a dedicated special purpose vehicle (SPV) established solely for the acquisition.
The central bank has emphasized a comprehensive policy framework addressing acquisition finance, which includes criteria for borrower eligibility, security requirements, margins, risk management, and monitoring practices.
Importantly, both the SPV and the acquiring entity must be classified as body corporates, excluding financial intermediaries such as alternative investment funds (AIFs) or non-banking financial companies (NBFCs).
Furthermore, the proposal insists on no familial connections between the entities involved in the acquisition.
As mandated by the Securities and Exchange Board of India (SEBI), two independent valuations are required to accurately determine the acquisition value of the target company.
Banks are tasked with assessing credit risk based on the combined balance sheets of both the acquirer and the target.
This draft circular from the central bank aims to broaden the scope of acquisition financing while ensuring prudent lending practices are upheld.
Currently, banks have a limited role in these types of transactions.
The RBI is seeking feedback from stakeholders before finalizing the guidelines.
Point of View
The RBI's proposal represents a pivotal moment for corporate financing in India. While it promises to enhance investment opportunities, the outlined safeguards ensure that only financially sound companies benefit, thus maintaining stability in the banking sector.
NationPress
25/10/2025
Frequently Asked Questions
What is the RBI's new proposal regarding corporate acquisitions?
The RBI has proposed allowing banks to finance corporate acquisitions for Indian listed companies, focusing on those with a solid net worth and profitability over the past three years.
Who is eligible for this financing?
Only listed companies with a satisfactory net worth and a profitable track record over the last three years will be eligible for financing under the draft norms.
How much of the acquisition cost can banks finance?
Banks may finance up to 70% of the acquisition cost, with the remaining 30% to be covered by the acquiring company's equity.
What are the requirements for the acquiring company?
The acquiring company or its SPV must be a body corporate and cannot be a financial intermediary like AIFs or NBFCs.
What safeguards are in place for this financing?
The RBI has mandated a comprehensive policy framework, including borrower eligibility, risk management, and monitoring procedures to ensure responsible lending.
