Punjab National Bank (PNB) Managing Director and CEO Ashok Chandra has announced that the bank plans to enter the acquisition finance business in the third quarter of the current financial year. The decision comes after the Reserve Bank of India (RBI) allowed banks to offer acquisition finance under new guidelines. Chandra said the bank’s board has already approved its acquisition finance policy, and PNB is now looking for a suitable partner before starting operations. Initially, the bank will provide acquisition finance to domestic companies, which will help diversify its loan portfolio.
What is Acquisition Finance?
Acquisition finance is a type of loan provided by a bank or financial institution to help a company purchase another company, business, or major asset. When a company wants to expand by acquiring another business but does not have enough money, it can borrow funds from a bank. This borrowing is known as acquisition finance. It is mainly used in mergers and acquisitions (M&A), where one company takes over another.
RBI Issues New Guidelines for Acquisition Finance
Earlier this year, the RBI released its final guidelines on acquisition finance. The central bank increased the lending limit to 75% of the acquisition deal value, compared to the 70% proposed in the draft guidelines. Banks must follow several conditions while offering such loans. These include obtaining a corporate guarantee from the acquiring company, ensuring that the debt-to-equity ratio remains below 3:1 after the acquisition, and making sure the acquired shares or convertible debentures are free from any encumbrance. Borrowers must also have a minimum net worth of ₹500 crore, a profit record of at least three years, and unlisted companies must have an investment-grade credit rating.
