M&A Funding: When one company buys another company it requires a large sum of money. For a long time, Indian companies had to rely on foreign banks or private funds for such deals. The reason for this was that there were strict restrictions on Indian banks to give such loans. But now the picture has completely changed. The Reserve Bank of India (RBI) has eased norms for takeover financing from July 1. After this change, local banks have allowed around a dozen deals related to mergers and acquisitions (M&A) of companies to the tune of Rs. Funding of more than 10,000 crores has been provided.

In fact, the demand for such loans is increasing rapidly in various sectors. Under the new rules, Indian banks can now lend up to 75 percent of the independent appraisal value of a deal to buy any company. This facility is available for buying listed as well as non-listed companies in the stock market. However, this requires fulfilling conditions related to the eligibility of the borrowing company, its pre-existing debt burden (leverage) and its ability to handle risk.

SBI is at the forefront, private banks have also entered the fray

State Bank of India (SBI), the country’s largest government bank, has come to the fore in this new business. SBI, the largest government institution by market value alone, has participated in about a dozen deals. Many of these deals have been completed, while some are in various stages.

Not just SBI, the country’s major private banks have also actively participated in takeover funding deals in recent months. These include HDFC Bank, Kotak Mahindra Bank, ICICI Bank, Axis Bank and RBL Bank. These local banks now stand shoulder to shoulder with foreign banks like HSBC, Citibank, MUFG and Barclays.

Local banks are eyeing the Rs 2 lakh crore market

This new business has brought a huge opportunity for Indian banks to disburse loans. According to industry estimates, this market to fund buy-out companies in India is around Rs. 2 lakh crore may be. If we look at the figures for the last three years, India has averaged $50 billion worth of M&A deals every year.

Earlier, due to restrictions on Indian banks, much of this huge market was taken away by foreign banks, with private credit funds or companies having to invest money from their own pockets. According to Anu Aggarwal, head of corporate and transaction banking at Kotak Mahindra Bank, demand for these funds has picked up since July. Over a dozen deals have been completed with different banks. He said depending on the size of the deal, Kotak Bank either funds the entire amount from its balance sheet itself or takes the responsibility and raises the funds with other banks (through a syndicate).

From Crystal Crop to Weary, these big deals took place

Several large corporate deals have recently been completed with the help of banks. The most important of these deals is Crystal Crop Protection, which bought FMC Corporation’s India-based business for Rs. 2,268 crore has been bought. Apart from this Waaree Renewable Technologies to buy 55 percent stake in Associated Power Structures for Rs. 1,225 crore deal signed, with banks providing funds.

Similarly, banks have also provided money for purchases related to Tata Autocomp Systems. According to sources, funding opportunities have also come up in deals related to Rashi Peripherals, BDR Pharmaceuticals, Novartis, Action Construction and Xanax Healthcare.

Huge earnings not only from interest but also from fees

Private banks have also deployed their investment banking teams to take advantage of this opportunity. Along with this, banks have found ways to earn not only from loan interest but also from fees for various services.

Anu Aggarwal of Kotak Bank says that every advisory order related to the purchase or sale of a company is a funding opportunity for the bank. When banks provide loans for any deal, many other businesses automatically get involved. Examples include opening an escrow account to safeguard fund money, providing demat service for share transactions and foreign exchange (forex) work. Banks get good business from forex services especially when foreign companies or private equity investors are involved in the deal as buyers or sellers.