Banks to fund foreign M&A

RBI allows financing of India Inc's acquisitions.

The Reserve Bank of India (RBI) today allowed banks to finance acquisition of equity in overseas companies.

"Banks can extend financial assistance to Indian companies for acquisition of equity in overseas joint ventures/wholly owned subsidiaries or in other overseas companies, new or existing, as strategic investment, in terms of a board approved policy, duly incorporated in the loan policy of the bank," an RBI notification said.

Such policy should include the overall limit on financing, terms and conditions of eligibility of borrowers and the security, margin. 

The big deals so far
By value in 2004  Company	in $ million
	Acquisition	Cost
ONGC	Sakhalin Oil Fields	1700
ONGC	Royal Dutch/Shell	660
Tata Steel	Natsteel	298
Reliance	FLAG Telecom	211
VSNL	Tyco Global	133
Reliance	Treviral	103
Scandent	Cambridge	100
Ranbaxy	Aventis	70
Infosys	Expert Info	23
Wipro	NerveWire Inc	18.7

Earlier, it was stipulated that promoters' contribution towards the acquisition of equity capital of a company should come from their own resources and banks should not normally grant advances to take up shares of other companies.

However, banks were permitted to extend loans to corporates against the security of shares held by them to meet the promoters' contribution to the equity of new companies in anticipation of raising resources subject to certain conditions.

Banks were also allowed to give term loans approved by the EXIM Bank for refinance.

The value of overseas acquisitions by Indian companies more than doubled to $9.30 billion in 2004 from $4.5 billion in the previous year.

While the number of deals has not gone up significantly (316 in 2004 compared with 305 in 2003), the huge rise in terms of value indicates that Indian companies are ready to dig deep into their pockets for the right acquisition.

The party seems all set to continue in 2005. Tata Chemicals' $519.2 million offer for Egyptian Fertiliser Company is one of the most recent bids for a foreign acquisition by an Indian corporate. This is close on the heels of the $5.60 billion acquisition of Basell by a consortium led by the Chatterjee group last month.

Grant Thornton India, one of the largest accounting firms in the world, sees at least a 30 per cent jump in the number of M&As in 2005. Major cross-border activity in oil and gas, technology, textiles, and health care is expected in the next 12-18 months.

"We see a lot of opportunities in the US market in the pharmaceuticals and auto-ancillary sector following this major move," said M Balachandra, executive director, Bank of India.

Sumant Sinha, president, corporate finance of the Aditya Birla group, said the move would create a more efficient market and facilitate more M&As overseas.

Kiran Mazumdar Shaw, chairman & managing director, Biocon Ltd, told Business Standard: "Access to capital is always welcome to corporates, especially for the ones that are looking out for acquisitions abroad. Currently, many Indian companies are planning such international takeovers."

In anticipation of this, most banks have started strengthening their overseas operations. "We will use our overseas book to support India Inc's acquisitions abroad," said a chairman of a bank that has overseas presence.

"Banks with international presence will stand to gain as they will be able to meet all corporate requirements," said Lalita Gupta, jt managing director, ICICI Bank.

"The RBI relaxation will enable Indian banks to service their corporate clientele better," said Harish Engineer, executive director, HDFC Bank.

Indian Banks were at an disadvantage as corporate clients approached foreign banks as foreign banks used to provide this service through its overseas branches, he added.