Public sector banks (PSBs) will finance acquisition of public sector undertakings (PSUs) by corporates against pledge of shares of the acquired company. The banks will seek 50 per cent margin for financing against shares.
"This is a new route for acquisition financing where instead of assets of the acquired company, the shares will be pledged. The 50 per cent margin norm is stiff but we will have to follow that keeping in mind the conditions of the stock markets," said a senior banker.
Since this will be treated as capital market exposure, the RBI will allow banks to treat these loans outside the 5 per cent cap on capital market exposure. However, despite being treated as market exposure, the acquisition financing will attract the exposure norms for single company and group of companies.
According to sources, the RBI is also likely to give an exemption on the single borrower and group exposures limit, which are currently pegged at 15 per cent and 40 per cent, respectively.
One of the reasons could be that banks already have a major exposure to most of the companies, which will be interested in the disinvestment.
The government has already allowed proceeds of American depositary receipts, global depository receipts and foreign currency commercial borrowings (ADR/GDR/FCCB) to be used to fund purchase of government equity through the disinvestment.
The RBI is expected to issue detailed guidelines on bank financing of PSU divestment programme over the next few days.
"A couple of foreign banks have already financed corporates to buy out companies. For instance, Deutsche Bank financed the Tatas to buy out VSNL stake. But the public sector banking industry has traditionally been shying away from financing take overs. The proposed RBI norms are expected to help them overcome inhibitions," said a banker.
In case of leveraged buy outs (LBOs), banks finance takeovers against the pledge of assets which can later be stripped to repay the bank loans. In case of PSU divestments, the acquiring companies will not be allowed asset stripping. On the contrary, they will be expected to add value to the acquired company. In this context, loans against shares could emerge as the ideal vehicle for bank financing, analysts said.
At present, the government does not allow use of ECB funds to invest in stock and real estate markets. It is however relaxing it for divestment deals.
"The relaxation will benefit a company that has already raised funds overseas. The government is aware that the process of ADR/GDR takes about six months to get completed and a bidder will not have the time to raise funds abroad after being declared successful. But we had asked the government to allow this route just to increase the options for PSU buyers," a ministry of disinvestment official had earlier said.
