Streamline holding structure for India Inc. to acquire companies abroad

Indian corporate companies will soon get more muscle to acquire companies abroad. A new proposal being considered by RBI (central bank of India) will enable Indian business groups to have a more streamlined holding structure abroad, use the same vehicle for successive acquisitions and also raise cheaper funds through greater leveraging.

The new proposal aims to allow firms to lend 200% of their net worth to overseas ‘step-down subsidiaries’ to fund acquisitions. Step-down subsidiaries are ventures promoted by the holding company of the Indian corporate group. At present, Indian firms are allowed to remit funds for overseas acquisitions to a direct subsidiary but not to a group subsidiary where it holds no shares. The proposed changes will enable the step-down subsidiary to leverage the balance sheet of both the Indian corporate as well as the parent holding company that has floated the step-down arm.

Currently, either the firm or the holding company can be leveraged to borrow from banks for acquisitions. At a seminar on cross-border acquisitions RBI deputy governor said the central bank is examining the possibility of allowing firms to lend to their step-down subsidiaries within the overall limit of 200%. This raises the possibility of Indian lenders being allowed to lend to Indian corporate companies for overseas acquisitions as their exposure will be to the Indian entity and not the step-down subsidiary.

Several companies float SPVs that are subsidiaries of the acquiring firm. The step-down subsidiary acts as an arm of the holding company, which can be used for future acquisitions by the corporate group. The step-down subsidiary resorts to funding largely from overseas firms since Indian lenders do not finance acquisitions in a big way. By allowing the step-down subsidiary to raise funds on the strength of the Indian corporate companies balance-sheet, more Indian money is available for buyouts.
Indian banks should carefully evaluate risks factoring in the price at which the acquisition is made when they fund overseas acquisitions.

With many Indian companies aiming at becoming multinationals, companies have to determine the most optimal method for funding acquisitions. In the case of investments financed through debt in the books of the domestic entity and/or against guarantees issued by the Indian entity, it could involve a full or partial recourse to the Indian entity. In case there is recourse to the company, it is a direct external liability of the company to that extent.

Indian companies appear to have so far balanced all these considerations and raised bulk of these funds through LBO for large acquisitions, which reduces the risk on the domestic balance sheet.