Indian Banks’ Association (IBA), the umbrella body of scheduled commercial banks in India, will send a formal request to the Reserve Bank of India (RBI), to allow Indian banks to finance acquisitions.
At present, there are restrictions on Indian banks’ ability to finance the acquisition of equity shares. According to the RBI’s master circular on loans and advances – statutory and other restrictions, promoters’ contribution towards equity capital of a company should come from their own resources, and banks should not grant advances to take up shares of other companies. There are also concerns around hostile takeovers using bank finance.
“It should be ensured that advances against shares are not used to enable the borrower to acquire or retain a controlling interest in the company/companies or to facilitate or retain inter-corporate investments,” the RBI master circular said.
As a result, companies often turn to non-bank finance companies, which have a more relaxed regulatory framework, or raise funds through non-convertible debentures issued on a private placement basis, which can also be subscribed to by mutual funds, alternative investment funds and foreign portfolio investors.
“Access for Indian banks to finance the mergers and acquisitions...I think we did speak earlier. To start with, we will make a formal request from the IBA (to the RBI)...at least start with some listed companies where the acquisitions are more transparent and approved by shareholders. (Thus) the issue of any hostile takeover of the funding can be minimised,” said C.S. Setty, chairman of SBI and IBA, speaking at a conclave organised by Ficci and IBA, where RBI chairman Sanjay Malhotra was also present.
“Some of these things are restricted because in the past they have been misused,” Ruchin Goyal, managing director and senior partner at consulting firm BCG, said.
“But now with so many enabling environments coming in, with NPAs at an all-time low, the regulator can start relaxing these norms. It’s for the regulators to put the right guard rails,” Goyal said, adding that this could start with “safest” segments such as large listed companies.
Private capex
Setty said that the current capital expenditure of the corporate sector is being financed by their internal accruals, equity and corporate debt.
“Lot of efforts are going into structural reforms related to GST rates and income tax exemptions up to ₹12 lakh. When the demand actually comes back in a big way, the corporates should not be found wanting for capital expenditure or the capacity availability,” Setty said, adding that corporate houses should start capacity expansion right away.
Setty added that with the RBI easing some regulatory overhangs, the banking industry is prepared for the next cycle of growth. “I don’t think it is about demand. We are all set, and hopefully, demand for corporate credit comes back soon,” he said.