RBI nod for leveraged buyouts fails to evoke banker enthusiasm; mixed response to broker lending norms

Subscribe to enjoy similar stories. The banking regulator’s new rules to fund mergers and acquisitions will open the doors, but too many conditions could deter banks and borrowers, say experts. Stricter rules for lending to brokers for leveraged trading elicited a mixed response.

The rules are guardrails against the impact of elevated market volatility. While some expect an impact on volumes, others don't, citing that prop traders tendeto be well-heeled than most individual investors. In its final guidelines on acquisition financing released late Friday, the Reserve Bank of India (RBI) allowed banks to provide funding when the acquirer already controls the target company and seeks to raise its stake beyond prescribed thresholds from 26% to up to 90%.

For listed companies, borrowers must meet strict financial criteria, including a minimum net worth of ₹500 crore and three consecutive years of net profits. Unlisted entities need an investment-grade credit rating prior to disbursement, the RBI said. The central bank has also raised the cap on acquisition financing exposure to 20% of a bank’s eligible capital base from 10% proposed of Tier-1 capital in the draft guidelines.

The RBI first proposed the rules in October. Mint reported earlier that loans extended by banks to help companies buy controlling stakes in other firms had so far operated in a relatively grey area, governed mainly by broad prudential limits on capital market exposure. On Friday, RBI said many ‘entities’ sought an increase in the acquisition finance cap of 10% originally proposed in October, adding that it has accepted the request.