The Reserve Bank of India (RBI) has put forward a proposal to enable banks to provide loans to Indian companies for the acquisition of full or controlling stakes in both domestic and international firms as part of strategic investments aimed at fostering long-term value creation. Eligibility for such financing under the draft regulations will be limited to listed companies with a satisfactory net worth and a profitable performance over the previous three years. Banks may finance up to 70 percent of the acquisition cost, while the remaining 30 percent must be sourced from the acquiring company’s own equity.
The funding can be directed either to the acquiring company or to a designated special purpose vehicle (SPV) established specifically for the acquisition. Additionally, the central bank has mandated a comprehensive policy framework governing acquisition finance, which includes criteria for borrower eligibility, security, margins, risk management, and monitoring procedures. The draft specifies that both the SPV and the acquiring company must be corporate entities, excluding financial intermediaries such as alternative investment funds (AIFs) or non-banking financial companies (NBFCs). Furthermore, there must be no familial connections between the acquiring and target entities. To determine the acquisition value of the target company, two independent valuations are to be conducted as stipulated by the Securities and Exchange Board of India (SEBI).
Banks are required to assess credit risk based on the combined balance sheets of both the target and acquiring companies. This draft circular aims to broaden the scope of acquisition financing while ensuring responsible lending practices are upheld.
