State Bank of India (SBI) is in talks with some Japanese lenders to partner with them for merger and acquisition (M&A) financing in light of the new norms in that regard, SBI chairman CS Setty told reporters at the Indian Banks’ Association (IBA) annual general meeting. SBI will soon get a board approval to form a policy on this.
Let’s understand what is M&A Financing?
M&A financing means arranging funds to complete a merger or acquisition deal. When one company wants to merge with or buy another company, it usually needs a large amount of money. Most companies do not keep such huge funds ready in cash, so they raise money through bank loans, bonds, issuing new shares, or using internal reserves. When a bank provides a loan or financial support for such a deal, it is called M&A financing. Large banks like State Bank of India often participate in M&A financing because these deals involve thousands of crores and may also include cross-border transactions, where multiple lenders share the funding and risk.
What SBI Chairman said?
The bank has a lending ceiling of Rs 94,000 crore according to the new rules Setty said. SBI is talking to Japanese banks mainly because they’ve been active in that. But there’s no preference for anyone. Each transaction will bring a set of bankers together. It could be either relationship, either at the acquisition company or at the target company.
Many a time the banks are identified based on who’s the acquirer, who’s the target,” Setty said.
Guidelines announced earlier this month allow Indian banks to finance up to 75% of an acquisition’s cost in any domestic M&A with a 3:1 debt-equity ratio. The new norms also double the total acquisition finance cap to 20% of a bank’s Tier-1 capital—give them room for banks to build a business where none existed earlier.
According to SBI’s calculation the bank has a headroom of Rs 94,000 crore for these deals though the bank will take its time getting into this space.
“Initially we will go slow and small ticket size. We need to look at the transactions. Our risk appetite. The acquisition structures are very dynamic and diversified. There are major line financing, equity financing, bond program and loan. All these things are there. So initially probably we’ll not go into a complex structure. We’ll look at a plain vanilla acquisition financing where, you know, acquirer is bringing the equity and we have to give the debt,” Setty said.
