RBI's Proposal on Acquisition Financing
The Reserve Bank of India (RBI) has proposed to cap acquisition financing exposure of banks at 10 per cent of their Tier-I capital. Bankers find this restrictive and suggest expanding the caveat to include equity and other capital instruments like preference shares and convertible securities.
Key Elements of the Proposal
- Bank Financing: Banks can finance Indian companies acquiring stakes in domestic or overseas firms if the investments create long-term strategic value rather than short-term financial restructuring.
- Funding Structure: Banks can fund up to 70 per cent of the acquisition cost, with the acquiring firm contributing 30 per cent through equity.
- Acquirer Criteria: The acquiring company must be a listed entity with satisfactory net worth and at least three years of profitability.
- Exposure Cap: A bank's total exposure to such financing is capped at 10 per cent of its Tier-I capital.
Concerns and Suggestions
- Bankers suggest increasing the exposure limit to 30 per cent of Tier-I capital.
- Experts highlight risks such as credit underwriting challenges and asset-liability mismatch.
- Banks should strengthen internal frameworks and credit underwriting capabilities.
Opportunities and Market Impact
- RBI's framework could open a new market worth $10–15 billion annually.
- India’s M&A volumes have shown strong growth, with deals potentially exceeding $50 billion for the year.
- The proposal allows banks to participate in strategic value creation while safeguarding depositor interests.
Long-term Considerations
- RBI might adjust the exposure ceiling for banks with strong governance and risk control in the future.
- The proposal could help support mid-market ecosystems and foster sustainable growth.
