Bridge Loans By Fis Against Public Issues Get Rbi Nod

The Reserve Bank of India has specified conditions under which the financial institutions may grant bridge loans to companies against public issue of equities.

In April 1995, the RBI had prohibited the financial institutions from granting bridge loans and interim finance to companies going in for public issue or GDR issue of equity shares. It has now decided to lift the ban under certain terms.

Banks too were banned from granting bridge loans in 1995 but had been allowed to do so under specified conditions in the October 1997 monetary policy of the RBI. The central bank has now extended this freedom to FIs.

 

In a circular issued last month to term lending and investment institutions, the RBI said that they can now sanction and disburse bridge loans to companies against equity and GDR issues subject to specified terms. However, the non-banking finance companies (NBFCs) have been kept out of the purview of this facility.

As per the conditions specified by the RBI, the guidelines for the sanction of bridge loans will have to be laid down by each financial institution with the approval of its board. The guidelines must specify, among other things, the security to be obtained for the loan, compliance with individual or group exposure norms, while ensuring the end-use of the bridge loan.

The maximum period of the bridge loan should not exceed one year, said the circular.

In addition, the FI extending bridge loan must obtain prior approval of other Fis or banks which has sanctioned term loan to the company.

The sanctioning FI must also obtain a commitment from the other banks and Fis that the latter would directly remit the amount of term loan to it at the time of disbursement.

In the case of banks, the amount of bridge loan along with investment in the companys shares and debentures can not exceed 5 per cent of banks incremental deposits. In the case of FI, however, no such conditions have been specified.