Banks Eye Revival Of Acquisition Financing After RBI’s Final Norms

New Delhi, Feb 16 (KNN) Following the RBI’s final prudential norms, banks, including major public sector lenders such as State Bank of India and Bank of India, are exploring a revival of acquisition financing and seeking legal clarity on the framework. 

Lenders have begun internal reviews to implement the revised guidelines, including board-approved policies and stronger risk and staffing systems, reported Financial Express quoting sources.

A senior private sector banker said the draft norms were initially seen as restrictive, but the final guidelines have significantly changed that view. “Banks are keen to enter this segment. The final framework is much more enabling and offers sufficient operational flexibility,” a senior official at a state-run lender said.

Anu Aggarwal, President & Head- Corporate & Transaction Banking, Kotak Mahindra Bank, described the changes as a ‘major positive’ for the sector. She said the revised framework enables Indian banks, for the first time, to play a substantive role in funding domestic acquisition deals, adding that refinancing transactions are likely to generate a strong pipeline of opportunities.

Allowing refinancing of existing acquisition debt is being viewed as the most consequential shift. According to market participants, the refinancing pool could potentially exceed the volume of new acquisition deals, creating a sizable secondary market opportunity.

Pratish Kumar, Partner, JSA Advocates & Solicitors, said the exclusion of refinancing undertaken to retire a target company’s existing debt from capital market exposure limits offers significant relief, particularly in leveraged buyout structures where such refinancing is common.

The framework also expands eligibility and flexibility. Unlisted companies with a net worth of Rs 500 crore and a three-year profitability track record are now eligible borrowers. Banks can finance not only control acquisitions but also creeping acquisitions, stake increases and joint venture partner buyouts.

The mandatory equity contribution has been lowered to 25 percent from 30 percent. Listed companies can access up to 100 percent bridge finance, subject to 25 percent equity and repayment within a year. Unlisted firms must bring in 25 percent equity from non-bank sources such as internal accruals, NBFC funding or non-convertible debentures.

According to Capitaline data cited by market participants, 32 public and private sector banks together have a net worth of nearly Rs 28 lakh crore, potentially enabling acquisition financing of up to Rs 5.6 lakh crore under the revised ceiling.

The final framework mandates a corporate guarantee from promoters to ensure stronger alignment of interests and refines the debt–equity structure. It also exempts offshore branches of Indian banks, which will continue under ECB norms, preserving flexibility in cross-border M&A financing. 

Market participants said the April 1 rollout signals a pro-growth approach, with acquisition financing likely to boost M&A activity and capital expenditure.

(KNN Bureau)