India central bank allows banks higher acquisition financing limit

MUMBAI: Indian lenders will be allowed to finance acquisitions up to 20% of their eligible capital base, the Reserve Bank of India said in its final rules following a review of bank exposure to capital markets.

The RBI had suggested a cap of 10% of a bank’s tier-1 capital for acquisition financing in its draft rules published last year, but lenders asked for a higher cap. The central bank on Friday said the recommendation from banks has been accepted.

Up until now, Indian banks were not allowed to finance acquisitions, leaving them at a disadvantage compared to foreign banks and investment funds. The permission to enter the acquisition finance market opens up a new avenue of credit growth for Indian banks.

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Banks will be permitted to lend up to 75% of the acquisition value, the RBI said.

Acquisition finance will be permitted for the purchase of both listed and unlisted companies. The acquisition of stake can be via common equity shares or compulsorily convertible debentures (CCDs) or both, the rules said.