The Reserve Bank of India (RBI) has paved the way for banks to fund acquisitions by Indian companies but has imposed certain conditions, including restricting it to listed firms and capping the financing up to 70% of the acquisition value.

According to the RBI’s draft guidelines, the balance 30% will have to be funded by the acquiring company through its own equity. The listed company also has to have a satisfactory net worth and a profit track record for three years.

A bank’s total exposure towards acquisition finance must not exceed 10% of its tier 1 capital. 

Banks can fix limits for their aggregate exposures towards acquisition finance but the aggregate capital market exposure (CME) should not exceed 40% of their tier I capital on a solo basis as on 31 March of the previous financial year. A bank’s direct CME, consisting of investment exposures and acquisition finance exposures, should not exceed 20% of solo and consolidated tier 1 capital, as applicable.

The CME by regulated entities (REs) carry higher risk and are subject to sectoral exposure limits, purpose-specific lending caps and loan-to-value (LTV) ratios.

CME includes direct exposures (investments in securities) and indirect exposures (lending against securities, financing to capital market intermediaries like stockbrokers and custodians).

The existing guidelines have been comprehensively reviewed to align with evolving market practices and provide a more enabling framework for bank financing of CME, the draft said.

The acquisition value of the target company should be determined by two independent valuations, as prescribed under SEBI regulations, the RBI said in its draft framework.

The RBI’s new move of allowing banks to fund corporate takeovers, domestic or overseas, is to improve liquidity for mergers and acquisitions. 

Banks are to support listed companies which are acquiring stakes as strategic investments driven by the core objective of creating long-term value for the acquirer through potential synergies, rather than mere financial restructuring for short-term gains.

The financing is to be provided to the acquiring company or its step-down special purpose vehicle (SPV) set up specifically for acquiring the target firm. Intermediaries such as non-banking financial companies (NBFCs) and alternate investment funds (AIFs) are not eligible.

Post-acquisition debt to equity ratio at the acquiring company level or the SPV/target company level, as applicable, shall be within prudential limits set by financing banks, subject to a maximum of 3:1, the RBI said.

Banks should also be constantly monitoring their exposures. “Banks should put in place rigorous and continuous monitoring of acquisition finance exposures to manage the risks, with early warning systems and regular stress testing to detect and address any signs of stress in the portfolio,” the draft guidelines said.

The draft guidelines are open for public comments until 21 November and the final norms shall come into force from 1 April 2026 or an earlier date when adopted by a bank in entirety, the RBI said.