Banks plan to move cautiously into acquisition financing after the Reserve Bank of India’s (RBI’s) final guidelines, issued last week, opened an avenue for deploying resources. The framework will take effect on April 1.
With the acquisition funding door now open, the Reserve Bank of India has installed multiple guardrails aimed at ensuring due diligence by banks.
“One has to crawl, then walk, and eventually run. Nobody is thinking of running from day one,” said a senior executive at a private-sector bank, signalling that lenders will begin with smaller transactions to test internal capabilities. “This has to be seen as a 10- to 15-year opportunity when banks will eventually be comfortable funding very large acquisitions. I don’t think in the next three to five years any bank will look to be very adventurous.”
While draft rules had capped exposure at 10 per cent of Tier-I capital, the final norms allow banks to fund up to 20 per cent of eligible capital, offering some flexibility. That ceiling, however, remains within the broader capital market exposure limit, a design feature intended to prevent “big-bang” financing of multibillion-dollar takeovers.
Other safeguards include a post-acquisition debt-to-equity (D/E) ratio capped at 3:1 on a continuous basis, a minimum net worth of ₹500 crore for acquiring companies, net profitability for three consecutive years, and an investment-grade rating requirement for unlisted entities.
“By stipulating ceilings on the D/E ratio (post-acquisition) and on capital market exposure for banks, only stable corporates would be able to access acquisition financing, thereby keeping a check on systemic risk,” broking firm JM Financial said in a note.
Even as banks cannot finance more than 75 per cent of an acquisition’s value, the final rules introduce a bridge-finance provision for the remaining 25 per cent, repayable within one year. Bankers said this is meant to ensure transactions are not stuck due to temporary funding gaps on the acquirer’s side. Even as the norms remain conservative, lenders noted that the regulator stopped short of making the business a non-starter for banks.
“The final norms do give us some flexibility, and much of this reflects suggestions from banks, including private-sector lenders. Hopefully, it should lead to market expansion and more options for Indian firms,” said a senior official at a state-owned bank.
“It will happen slowly because we must be careful with the first few deals before the model is fine-tuned,” the senior official said, adding that the 20 per cent eligible-capital condition still limits banks’ ability to underwrite very large-ticket transactions.
Initially, lenders expect to lean on existing relationships with mid-sized and large companies. In the mid segment, banks may support acquisition-led financing needs in cases where they maintain exclusive ties. “It will be opportunistic, and it will be slow,” the banker said.
Valuation methodology, a key regulatory concern, is addressed through requirements that banks appoint an independent valuer for listed targets and adopt the lower of two independent valuations for unlisted companies. “The intent of the framework appears to be fostering acquisitions in the MSME segment so that viable assets are not wasted and businesses can scale up,” said another executive at a state-owned bank. “MSME acquisitions are relatively manageable in size and risk, making them a more feasible starting point,” the executive said, noting that many lenders will need time to build specialised teams with expertise in acquisition financing.
Some large lenders, including State Bank of India, and major private-sector banks are preparing to enter the segment once board approvals are secured.
Bankers said they are already witnessing interest but stressed they will remain selective rather than proactively chase deals. “We have not zeroed in on any target companies. For those who have approached us, we’ve said we will consider proposals once the guidelines come into effect,” said the state-owned banker cited earlier. The lender is now drafting internal policies for board approval, after which standard operating procedures will be rolled out.
 "Banks take cautious approach to acquisition financing under new RBI norms")
