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Banks can fund overseas acquisitions by companies
By agencies
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Wednesday, 08 June 2005, 19:30 IST
MUMBAI: Indian banks have been allowed to freely fund overseas acquisitions by Indian companies. Until now such finance was possible through select routes, including one under refinance agreement by Exim Bank of India.
According to a notification issued to banks by the Reserve Bank of India, banks are permitted to lend money to Indian companies for acquisition of equity in overseas joint ventures, wholly owned subsidiaries, or in other overseas companies, as strategic investment.
RBI, in its Credit Policy, had allowed Indian companies to invest up to 200 per cent of their net worth from the earlier level of 100 per cent.
RBI today said bank boards would have to approve a policy for such lending and incorporate it in their loan policy. Such a policy should include overall limit on such financing, terms and conditions of eligibility of borrowers, security, margin, etc, RBI said in a press release.
While the board may frame its own guidelines and safeguards for such lending, such acquisitions should be beneficial to the company and the country, the release added.
Several Indian companies have of late moved to acquire or participate in operations abroad, latest being the $519-million bid by Tata Chemicals Ltd to buy a fertilizer company in Egypt.
According to a senior official of a public sector bank, this move may not be of much use if banks are not given permission to raise additional funds abroad. Currently banks are allowed to raise funds abroad only to lend money to domestic exporters, he said. Any additional lending to companies for acquiring foreign companies will put pressure on the banks' capital, as of now.
"This move is a positive step for Indian companies as they can use it as a window to acquire aggressively. For banks too it can be positive, provided we are permitted to raise additional funds abroad," he said.
Banks with large overseas operations are expected to benefit from this move.
Earlier, RBI rules stipulated that promoters' contribution towards the equity capital of a company should come from own resources and banks should not normally grant advances to take up shares of other companies.
However, a few exceptions have been made in this regard. Under the refinance scheme of Export-Import Bank of India, banks were allowed to sanction term loans on merit to eligible Indian promoters for acquisition of equity in overseas joint ventures or wholly owned subsidiaries, provided the term loans have been approved by the Exim Bank for refinance.