The Reserve Bank of India has released draft directions that would permit Indian commercial banks to provide financing for mergers and acquisitions, a change that would end a long-standing prohibition on bank lending for the acquisition of domestic companies.
Under the proposed framework, banks would be allowed to extend acquisition finance subject to defined exposure limits. The draft directions cap a bank's aggregate acquisition-finance exposure at 10 per cent of its Tier-1 capital, and set a maximum of 70 per cent of deal value as the proportion that bank debt can finance in a given transaction.
ENDING A LONG-STANDING PROHIBITION
The prohibition on M&A financing by Indian commercial banks is long-standing. Indian banks have, however, long been allowed to finance Indian companies' acquisitions of equity in overseas joint ventures and subsidiaries.
The RBI has opened a consultation on the draft directions, allowing the industry and public to comment on the proposed parameters before they are finalised.