RBI Unveils New Acquisition Finance Guidelines for Banks

The Reserve Bank of India (RBI) has released final guidelines on acquisition finance, increasing banks' lending limits to 75% of an acquisition's deal value. Banks can now fund promoters' stakes in new ventures, contingent upon various conditions including debt-equity ratio maintenance and corporate guarantees.

The Reserve Bank of India (RBI) announced final guidelines on acquisition finance, allowing banks to increase their lending limit to 75% of the deal value. These changes, unveiled Friday, enable lenders to fund promoters' stakes while establishing new companies, a shift from the prior prohibition on such funding activities.

According to the RBI, total bank financing cannot exceed 75% of the acquisition value, an upgrade from the initially proposed 70% in the draft rules. Lenders are required to conduct credit assessments on a pro-forma consolidated basis, encompassing financials from both the acquiring and target firms.

The central bank also specified several conditions banks must meet, like ensuring a corporate guarantee from the acquiring company and maintaining a debt-to-equity ratio of no more than 3:1. The new regulations, effective April 1, mandate that borrowers have a net worth of at least Rs 500 crore and net profits for three consecutive years.