MUMBAI: Banks are gearing up to expand their presence in India’s mergers and acquisitions (M&A) financing market as the Reserve Bank of India’s new framework allowing lenders to fund acquisitions comes into effect, opening a segment that has so far been dominated by private credit funds and foreign banks.
The move comes amid sustained dealmaking activity. India Inc. recorded 190 M&A and private equity transactions worth $10.2 billion in May, including 76 M&A deals valued at $6.3 billion. Banks have already started positioning themselves to tap the opportunity. In June, Bloomberg reported that State Bank of India (SBI) plans to join a consortium of global lenders to finance Sun Pharmaceutical Industries’ nearly $12 billion overseas acquisition, with the bank expected to commit up to $1 billion, subject to board approval.
Other public sector lenders are also putting the framework into action. Punjab National Bank said it has received board approval for its acquisition financing policy, while Bank of Baroda this week entered into a strategic partnership with Japan’s Mizuho Bank to collaborate on M&A financing and corporate banking solutions.
Vivek Iyer, Partner and Financial Services Risk Leader at Grant Thornton Bharat, expects the framework to boost acquisition activity, particularly in the middle-market segment, where access to financing and funding costs have historically constrained dealmaking.
“With the acquisition financing guidelines in effect, we expect M&A activity to increase significantly in the middle-market space. Cost of funding and access to funding have been historical constraints, and the new framework is likely to ease these bottlenecks,” Iyer said.
He expects larger private sector banks and leading public sector banks to emerge as the biggest beneficiaries, given their stronger capital base and ability to develop specialised credit assessment and monitoring capabilities required for acquisition financing. Smaller private banks are likely to remain marginal players, though they could participate through syndicated lending structures. The framework may also narrow the advantage foreign banks have traditionally held in acquisition finance.
According to Devang Rajkotia, AVP-Analyst at Moody’s Ratings, the framework is likely to increase competition in a segment historically dominated by private credit providers.
“While the new rules may benefit borrowers by lowering financing costs and increasing funding availability, they could compress yields and reduce deal flows for private credit providers for acquisition financing,” he said.
Industry participants, however, do not expect aggressive lending. Acquisition financing is likely to remain focused on well-rated corporates and transactions backed by robust credit assessment, with banks expected to adopt a calibrated approach as the market develops.
Source: The Financial Express
