A section of bankers fear that coporates will misuse the takeover funding route to divert not only funds from banks but even companies they have targeted. ``Banks and RBI need to tread cautiously on this... otherwise public money will go down in the drain,'' said a former bank official.

A circular issued by the Reserve Bank's Department of Banking Operations and Development (DBOD) in 1983 and qualifications made by the Department of Supervision's (DoS) inspectors are clearly against takeover funding. ``The matter regarding banks sanctioning advances/loans of the type referred to above was examined by us and it is felt that promoter's contribution towards the equity capital of a company, as a measure of prudenceand in order to ensure direct stake in the venture, should come from their own resources and banks should refrain from granting loans/advances to individuals/concerns to take up shares of other companies,'' the circular says.

However, seeing the business opportunity after the new takeover code was put in place, bankers have started looking at ways to get into financing takeovers. SBI chairman M S Verma has even gone on record saying that his bank ready to fund ``even hostile takeovers.'' IDBI chairman S H Khan had also told The Indian Express recently that the institution was willing to fund friendly takeovers.

RBI sources said the central bank would be soon coming out with clear-cut guidelines allowing takeover funding by banks. ``RBI needs to specify the financial strength, collateral, track-record and purpose before extending loans for takeovers. Bank funds should not be allowed to into private coffers of promoters for their vested interests. There are some cases where promoters had stripped theassets of companies acquired by them earlier. If banks/RBI are not careful, there will be several scams,'' sources said. Another argument against financing such deals is that promoters who make takeover offers should use their own funds instead of taking bank loans.

The RBI has been so far against bank funding of share acquisitions. The central bank had pulled up American Express Bank for financing share acquisitions by Tata Sons (in Tata Sons) and Godrej Soaps (in Transelektra). Similarly, RBI also objected when ICICI subscribed to the NCD issue of Mcleod Russel. Proceeds from this issue was used to part-finance a controlling stake by Mcleod Russel in Union Carbide.

The Finance Ministry, it is learnt, is believed to be against direct financing of takeovers by banks. However, it has mooted the idea of banks and institutions subscribing to bonds and debentures floated exclusively for financing takeovers. Some of the takeovers in the past have now backfired on banks and institutions. After Dunlop was takenover by Manu Chhabria, banks were eager to provide loans to the company which was a blue-chip once upon a time. Now banks have approached the court to recover their funds. In fact, banks have filed several suits against other Chhabria companies like Nihon and Orson for defaulting on loans. Banks have also filed suits against P Rajarathinam, another takeover tycoon, for loan defaults. Bankers expect the RBI to relax takeover funding in the forthcoming credit policy scheduled on April 29. Many banks have already started negotiating with takeover predators in the hope that the policy will be relaxed and made transparent. Now with more takeover offers hitting the market, the Finance Ministry is also likely to take a soft approach towards financing such deals.