India's Mergers and Acquisitions (M&As) and Corporate Financing Landscape

India's mergers and acquisitions (M&As) landscape is evolving with the Reserve Bank of India's (RBI) amendments to acquisition finance guidelines. These changes aim to enhance flexibility, strengthen safeguards, and align regulatory frameworks with market trends, thereby fostering a more mature and resilient acquisition financing ecosystem.

Current Market Dynamics

• Annual M&A deal values have averaged between $48-50 billion over the past three years.
• Domestic banks were previously limited in participation, with offshore lenders and private credit funds dominating the space.
• Industry estimates suggest that 35-40% of M&A value is bankable, unlocking a potential annual opportunity of $10-15 billion.

Key Amendments in the Framework

• Increase in permissible bank funding cap from 70% to 75%, reducing minimum acquirer equity contribution to 25%.
• Retention of 3:1 post-deal debt-equity ceiling, with potential flexibility for high-cash-flow businesses or distressed asset transactions.
• Recognition of Indian non-financial companies, subsidiaries, and special purpose vehicles (SPVs) as eligible borrowers.
• Minimum net worth requirement of ₹500 crore and a record of net profit over the preceding three years for borrowers.
• Additional safeguard requiring unlisted borrowers to have an investment-grade credit rating (BBB- or higher).

Risk Management Enhancements

• The collateral framework now includes a broader pool of securities such as listed equities, debt instruments, mutual fund units, subject to regulatory haircuts and risk controls.
• Acquisition finance exposures integrated into the broader Capital Market Exposure framework, simplifying regulatory architecture.

Opportunities for India Inc.

• Expands domestic funding avenues for strategic acquisitions amid volatile global credit markets.
• Banks can benefit from advisory mandates, underwriting roles, syndication fees, and treasury products.
• Acquisition finance can enhance banks' strategic franchise, especially for large banks with strong capital and sectoral expertise.

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