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RBI plans to allow bank loans for acquisition of stressed assets

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One of the major issues affecting the M&A space in India is that companies cannot raise bank finance to fund acquisitions (what is known internationally as leveraged buyouts) since the same is expressly prohibited in India. 

In a discussion paper released on 17 December 2013,  titled ‘Early Recognition of Financial Distress, Prompt Steps for Resolution and Fair Recovery for Lenders: Framework for Revitalising Distressed Assets in the Economy‘, the Reserve Bank of India (“RBI“) has proposed several moves to address  the increase in non-performing assets and restructured accounts held by banks, owing to the economic slowdown during the recent years. One of the proposals of the RBI is to allow leveraged buyouts of financially stressed companies by specialised entities. Once the proposal is implemented, banks would be allowed to extend finance to entities- usually known as vulture funds- specifically put together for the purpose of acquisition of financially troubled companies. Banks would, however, be required to ensure that such entities are adequately capitalised.

RBI has invited comments on its proposals by 1 January 2014.

As mentioned above, presently, banks are not allowed to finance acquisition of promoter stake in Indian companies. As stated by RBI in its discussion paper, the underlying rationale for this position is that promoters should employ their own sources to acquire equity stake in companies and not undertake borrowings for the purpose.

RBI now proposes to change this policy and allow entities specializing in turnarounds to buy financially troubled companies with the help of bank loans.  This is one of the incentives proposed by the RBI to encourage private equity firms and other institutions to play a greater role in restructuring of troubled company accounts, as RBI expects these institutions not only to bring additional funds for restructuring but also to bring in expertise for management of the business unit in question.

Once effective, this policy is expected to attract global acquisition firms which have so far been focused on developed economies, to the Indian market.

RBI’s discussion paper can be accessed at:

http://www.rbi.org.in/scripts/PublicationReportDetails.aspx?UrlPage=&ID=715

 Neha Vijayvargiya

neha.vijayvargiya@pxvlaw.com

 

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