Idbi Not To Fund Mergers And Acquisitions

In a policy decision that is likely to dampen the takeover plans of many a corporate, Industrial Development Bank of India (IDBI) has decided not to fund the acquisition and mergers of companies.

IDBI sources said the country's largest domestic financial institution will not buckle under pressure simply because a few institutions and banks have decided to venture into financing takeovers and mergers. Some of the financial intermediaries that are keen to fund mergers and acquisitions are Industrial Credit and Investment Corporation of India (ICICI) and Bank of Baroda (BOB).

Mergers and acquisitions as a corporate strategy came into limelight with the merger of Shipping Credit and Investment Corporation of India (SCICI) with its parent company, ICICI. Besides, the previous two financial years witnessed several mergers of multinational companies, both in the country and overseas.

 

Hence, some banks and institutions announced plans to finance acquisitions and mergers as they saw it an attractive channel for deploying resources. The reasons cited included the fact that corporates were not being able to raise cheap money due to the sluggish primary markets. Further, it was argued that the money would be loaned predominantly to blue-chip corporates which have already laid down plans for diversification, Hence, the risk of non-performing assets (NPAs) would be low.

However, IDBI has decided to buck the trend, at least for now. IDBI will continue to focus on its niche area of term lending, besides financing working capital requirements, say IDBI officials. The reason given by IDBI officials for not funding takeovers or mergers is that it will not lead to creation of new assets.

IDBI chairman and managing director S H Khan told Business Standard, The issue of financing of mergers and acquisition by us was raised at board meetings on several occasions during the past few months. However, the IDBI board has decided that the institution will not fund such ventures in the near future.

Considering the crossroads at which the Indian economy is positioned at present, institutional funds should not be diverted to financing acquisition and mergers. Dull capital markets should not be an excuse to fund such activities as they will certainly not kick-start the economy. Given the limited resources of the country, any diversion of financing activities by long term lending institutions will only fuel a further drain on an already scarce economy, said Khan.

Apart from not creating any additional assets in the country, such funding only suits the vested interest of a few corporate houses, claimed Khan. Institutions should not play into the hands of corporate raiders, he added.