Coming full circle: Novel financing structures needed

Historically there have been restrictions on financing by banks. Presently, the Reserve Bank of India (RBI) has capped banks’ credit exposure limits at 15% of their capital funds, in the case of a single borrower (additional 5% permitted only on account of credit to infrastructure projects); and 40% of their capital funds in the case of a borrower group (additional 10% permitted only on account of credit to infrastructure projects). Capital funds refers to the aggregate of Tier I and Tier II capital of the lending bank.

The RBI expects banks to internally regulate their exposure limits to various sectors. The exposure of banks to the capital markets is permitted up to a limited extent. Statutorily, a bank can hold shares in any company, whether as a pledgee, mortgagee or absolute owner, but only up to 30% of the paid-up share capital of that company, and 30% of the paid-up share capital and reserves of the lending bank itself.

The aggregate exposure of a bank to capital markets in all forms is capped at 40% of its net worth, within which overall ceiling, the bank’s direct investment in shares, convertible bonds/debentures, units of equity-oriented mutual funds and all exposures to venture capital funds, is capped at 20% of its net worth. This is an effective reduction in limits as it was previously 5% of outstanding advances of the bank. In addition, the RBI also stipulates the end purpose for which banks can extend finance. As a result, banks in India are unable to provide acquisition financing or sponsor financing in any meaningful manner.

H Jayesh is the founder partner and Anahita Irani is a senior associate at Juris Corp. The firm is a full-service law firm based in Mumbai and specializes in financial transactions including capital markets and securities, banking, corporate restructuring and derivatives.