Reserve Bank of India allows bank loans for unlisted, listed takeovers

In the final norms on acquisition financing, released on Friday, the regulator said banks should support transactions driven by the core objective of creating long-term value for the acquirer through potential synergies, rather than mere financial restructuring for short-term gains. Banks may also finance the acquisition of an existing non-financial subsidiary of the acquiring company, or a step-down special purpose vehicle (SPV) set up specifically for the purpose.

The norms mandate that acquiring companies, whether listed or unlisted, must have a minimum net worth of ₹500 crore and must have reported net profit after tax in each of the previous three consecutive financial years. Unlisted companies are additionally required to hold an investment grade rating (BBB- or above).

The final framework drops an earlier draft proposal that capped a bank’s aggregate exposure to acquisition finance at 10 per cent of its Tier 1 capital.

Under the rules, an acquisition must result in the acquirer obtaining control of the target company through either a single transaction or a series of inter-connected transactions completed within 12 months of executing the acquisition agreement.

Where the acquiring company already holds control over the target before seeking acquisition finance, bank funding will be permitted only for the purchase of an additional stake crossing specified thresholds — 26 per cent, 51 per cent, 75 per cent or 90 per cent of voting rights — each conferring materially enhanced governance or control rights under applicable law. The acquiring company and the target company shall not be related parties, the RBI said.

For unlisted target companies, the valuation considered for financing purposes must be the lower of the values determined by two independent valuers. “The acquiring company must contribute the remaining amount from its own funds, such as internal accruals or fresh equity,” the norms said, adding that a corporate guarantee from the acquiring company, its parent or group holding entity is mandatory.

Following the acquisition, the debt-to-equity ratio at the acquiring company’s consolidated balance sheet level must not exceed 3:1 on a continuous basis.

The RBI has allowed acquiring companies to use bridge loans to meet the minimum own-funds requirement of 25 per cent, provided there is a clearly identified repayment source to replace the bridge finance with equity within 12 months. Such bridge loans must be secured.

On acquisition finance undertaken by overseas branches of Indian banks under syndication arrangements, the RBI said a bank’s contribution across all its overseas branches for a particular deal must not exceed 20 per cent of the total funding.

The regulator also detailed norms governing loans to individuals against securities, subject to loan-to-value (LTV) ratios set either by a bank’s board or prescribed by the RBI. LTV is capped at 60 per cent for listed shares and listed convertible debt securities, 75 per cent for mutual funds (excluding debt mutual funds), units of ETFs and units of Reitss/Invits, and 85 per cent for debt mutual funds.

“LTV shall be monitored on an ongoing basis and a bank shall take steps to rectify the breaches immediately, but in no case later than seven working days from the day of occurrence of such a breach,” the norms said.

Loans against collateral of government securities (including T-Bills), listed debt securities and units of debt mutual fund schemes are capped at ₹1 crore.

Banks may grant loans for subscribing to shares under initial public offerings (IPOs), follow-on public offerings (FPOs) or employee stock option plans (ESOPs) up to ₹25 lakh per individual. However, such loans must not exceed 75 per cent of the subscription value, requiring borrowers to contribute a minimum cash margin of 25 per cent.

“…no loan, whether secured or unsecured, shall be granted by a bank to its own employees or Employees’ Trust set up by the bank for purchasing its own Securities under IPOs/FPOs/ESOPs or from the secondary market,” the RBI said.

Regarding credit facilities to capital market intermediaries (CMIs), the norms specify that banks may lend only to entities registered with and regulated by a financial sector regulator and compliant with applicable prudential norms. All such facilities must be fully secured.

“A bank may provide need-based credit facilities to CMIs to fund their day-to-day operations, including general working capital facilities and specific facilities such as financing for margin trading undertaken by stockbrokers,” the regulator said.

Banks are also allowed to issue guarantees on behalf of brokers or professional clearing members in favour of exchanges or clearing houses, in lieu of security deposits and margin requirements, where permitted by exchange regulations. Such guarantees must be backed by a minimum collateral of 50 per cent, of which at least 25 per cent must be in cash.

Loan rule book for the acquirer