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.

RBI Unveils New Acquisition Finance Guidelines for Banks

RBI Announces New Guidelines for Acquisition Finance

The Reserve Bank of India (RBI) has released its final guidelines on acquisition finance, paving the way for banks to increase their lending limit to 75% of the deal value.

According to the RBI, the new regulations will enable lenders to fund promoters' stakes while establishing new companies, a significant shift from the prior prohibition on such funding activities.

Key Highlights of the New Guidelines

Lending Limit Increased to 75% of Deal Value: Total bank financing cannot exceed 75% of the acquisition value, a 5% increase from the initially proposed 70%.
Pro-Forma Consolidated Basis Credit Assessments: Lenders are required to conduct credit assessments on a pro-forma consolidated basis, encompassing financials from both the acquiring and target firms.
Corporate Guarantee and Debt-to-Equity Ratio: Banks must ensure a corporate guarantee from the acquiring company and maintain a debt-to-equity ratio of no more than 3:1.
Borrower Eligibility Criteria: Borrowers must have a net worth of at least Rs 500 crore and net profits for three consecutive years.

The new regulations, effective April 1, aim to provide banks with greater flexibility to support corporate acquisitions while ensuring prudent risk management.