The Reserve Bank of India (RBI) has issued the final guidelines on acquisition financing, opening the door for domestic banks to fund corporate buyouts from 1 April.

Banks will be allowed to finance up to 75% of the deal value, thus ensuring that the acquiring entity brings in the remaining 25% from its own equity. The last year’s October draft had suggested the bank’s cap at 70% while the acquirer’s minimum equity contribution was to be 30%. 

In the final framework, the RBI has allowed both listed and unlisted companies to access acquisition financing. But companies with a minimum net worth of Rs 500 crore will only be eligible for such funding, the central bank noted. 

There are other conditions that these companies have to meet. Unlisted companies must have a minimum credit rating of BBB-minus or higher, while listed acquirers need to have a profit track record for the last three consecutive years.

As per the final rules set by the central bank, the post-acquisition consolidated debt-to-equity ratio of the group cannot exceed 3:1. A corporate guarantor from the acquiring entity is also mandatory. 

Capital market exposure limits

The RBI capped aggregate capital market exposure of banks at 40% of eligible capital at the system level.

Within this, direct exposure is capped at 20% of eligible capital, which is nearly double the level proposed in the draft circular. Acquisition finance is capped at 20% within the overall capital market exposure limit.

The guidelines also mandate banks to put in place board-approved intraday exposure limits to manage market risk dynamically.

Until now, the financing of acquisitions was dominated by foreign banks and investment funds. With the Indian banks now being allowed to enter this space, it opens a new credit line for them.