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Asia CommentGC Asia View

RBI: trust Indian banks to let the right ones in

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The successful placement of an outbound acquisition financing for Indian company Intas Pharmaceuticals has put the spotlight on rules barring Indian banks from supporting local M&A. Intas’s loan has demonstrated that the country’s lenders are well positioned to structure and distribute complex deals with cross-border elements. It’s time for the regulator to rethink rules on domestic transactions.

A $754m-equivalent fundraising for Intas’s acquisition of a portfolio of assets in the UK and Ireland was anything but straightforward. First, the company had to beat aggressive competition from other suitors for the target, for which getting the financing package right was key.

Secondly, the assets were located in Europe and the purchase consideration was in euros and sterling, so the loan had to be dual currency. As is standard in cross-border acquisitions, Intas used an overseas subsidiary to acquire the businesses, so a part of the financing was one level removed from the parent, though guaranteed by it.

A group consisting of Axis Bank, Bank of Tokyo-Mitsubishi UFJ, Citi, HSBC, ICICI Bank and Kotak Mahindra Bank put together the winning financing package. And the trade marked the debut of Kotak, which has no physical presence outside of India, as an arranger of an international loan.

The robust structuring of the trade was evident during syndication. A diverse set of lenders from Europe, Japan, Taiwan and the Middle East jumped on board, with only one complaint from the leads in the end — the challenge of allocating the deal.

That success has led to many loans bankers applauding the involvement of Indian lenders. But that was only possible as the borrower was buying assets outside India. The Reserve Bank of India prohibits banks from funding acquisitions of domestic companies through loans — but it’s time to revisit the regulations.

There is no consensus among market participants about the origin or objective of the RBI’s rule. Some reckon it is to dissuade state-owned Indian banks from deploying the public’s deposits in riskier investments. Others say it is a result of a protectionist mindset, that made sense in a bygone era, but is no longer relevant.

Indian banks have proved they are just as good as their foreign peers when it comes to assessing risks and putting in place a sound structure with adequate security. Event-driven financing is a higher fee generator than run-of-the-mill refinancing for Indian corporates but the rules mean domestic lenders lose out on opportunities in their backyard.

But the biggest losers in this situation are smaller Indian firms, which are not well known or banked by foreign lenders. These companies have expansionary aspirations, but may struggle to muster enough support from foreign lenders.

If the rules are supposed to keep acquisition risk out of the Indian banking system, they aren't working properly. When a company takes the bond route to fund acquisitions, a lot of the buyers of that debt are mutual funds, which are ultimately part of Indian banks.

India has taken a big step forwards in enabling its banks to compete on an international level by setting up Gift City, a special economic zone for financial institutions. Indian banks operating there can build an offshore balance sheet without setting up a branch outside the country.

But they are still missing on domestic M&A financing. It is time for the RBI to take another big step and lift restrictions on Indian banks lending out money for local acquisitions. 

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