Mumbai: The Reserve Bank of India (RBI) has proposed allowing banks to extend loans to Indian companies for acquiring full or controlling stakes in domestic or overseas firms as part of strategic investments aimed at creating long-term value.

Under the draft norms, only listed companies with a satisfactory net worth and a profitable track record over the past three years will be eligible for such financing. Banks may fund up to 70% of the acquisition cost, with the remaining 30% coming from the acquiring company’s own equity.

Funding can be provided either directly to the acquiring company or through a step-down special purpose vehicle (SPV) created specifically for the acquisition. The RBI also requires a detailed policy framework on acquisition finance, covering borrower eligibility, security, margins, risk management and monitoring procedures.

The draft stipulates that both the SPV and the acquiring company must be corporates, rather than financial intermediaries such as alternative investment funds (AIFs) or non-banking financial companies (NBFCs). Additionally, there must be no familial ties between the target and acquiring entities.

As mandated by the Securities and Exchange Board of India (SEBI), two independent valuations must be conducted to determine the target company’s acquisition value. Banks will assess credit risk based on the combined balance sheets of both the target and acquiring companies.

The RBI said the proposal is intended to expand acquisition financing while ensuring responsible lending. Currently, banks participate in only a limited number of such transactions. Stakeholders have been invited to provide feedback on the draft before the guidelines are finalised.

IANS