Funding Takeovers

The takeover code allows the bidder to furnish the bank guarantee as an option and cash need not be deposited in the escrow account.

Bank of Baroda has decided to furnish the guarantee only for top rated clients. This will not only make the transaction safe but could also provide the necessary fillip to takeovers in the country. The bank proposes to treat a takeover as a project and it must be appreciated that Bank of Baroda is the first Indian bank to acknowledge this reality.

Takeover is an activity in which only cash-rich companies will be able to indulge in successfully. A cash-rich company almost always has unutilised credit limits and instances have been recorded of companies diverting bank funds into financial markets.

 

Now with the takeover process being simplified, it makes sense for cash-rich companies to avail of unutilised credit facility as one of the mode for financing takeovers.

Granted, the bank will charge an interest but interest is a tax-deductible expense and debt being always preferred to equity, it makes greater sense for a cash-rich company to offer cash rather than shares.

The bank has also sought approval to introduce a new lending scheme for companies which have not been able to tap capital market despite getting the acknowledgement card from Sebi. The management of the bank is of the opinion that this is not a bridge loan. The bank will extend a loan to the bank only when the bank is convinced about the viability of the project of the company that proposes to come out with the public issue.

The amount will be recovered once the company manages to raise the funds. The loan will be termed as approach loan.

Normally, bridge loans were repaid in one instalment but indications are that the approach loan will be repaid in a staggered manner. This will facilitate companies in need of money and will not violate RBI guidelines on bridge loans as well.