RBI Liberalises Acquisition Finance: Banks Can Now Fund 75% of Deal Value

The Reserve Bank of India (RBI) has released final guidelines allowing banks to provide acquisition finance, raising the lending cap to 75% of the deal value. This is higher than the 70% limit proposed in the earlier draft norms. The move marks a major shift because such financing by banks was restricted until recently. The central bank said the acquisition value must be independently assessed by the lending bank. The revised framework aims to support structured corporate growth while maintaining safeguards.

Under the new rules, banks can also fund promoters’ stakes when they establish new companies. Credit appraisal must be done on a pro forma consolidated basis. This means lenders will evaluate the combined financials of both the acquiring and target entities. The RBI expects this approach to give a clearer picture of repayment capacity. It also helps banks better assess risks in complex acquisition deals.

The regulator clarified that the remaining 25% of the acquisition cost must come from the acquiring company’s own sources. These may include internal accruals or fresh equity infusion. The RBI has also imposed strict conditions to keep leverage under control. One key requirement is that the post-acquisition debt-to-equity ratio must not exceed 3:1. Additionally, acquired shares or convertible debentures must remain free from encumbrances.

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Banks have been directed to frame board-approved policies before undertaking acquisition financing. These policies must include underwriting benchmarks and risk management measures. The RBI specifically highlighted the need to address exposure limits and leverage multiples. Lenders must also evaluate cash-flow certainty in such transactions. The aim is to ensure disciplined and prudent lending practices.

To be eligible, borrowers must have a minimum net worth of ₹500 crore. They must also report net profits for the previous three years. Unlisted entities seeking such loans must additionally hold investment-grade ratings. The final guidelines will come into effect from April 1. The RBI believes the new norms will balance credit growth with financial stability.

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