RBI Allows Banks for Acquisition Financing: Signaling Shift in India’s M&A Landscape

The Reserve Bank of India (RBI) has officially allowed banks to provide acquisition financing, addressing a long-standing demand from both the corporate and banking sectors. This will create a major change in India’s M&A environment.

The much-anticipated capital market exposure (CME) norms, finalised after stakeholder consultations on last October’s draft, create a clear regulatory framework allowing banks to fund mergers and acquisitions (M&A) for the first time. The rules will come into effect in the next financial year (FY27).

What New Framework Involve?

Under the new framework:

• Banks can finance up to 75% of the acquisition value.
• The acquiring company must contribute at least 25% from its own equity, ensuring meaningful promoter participation.

Eligibility Criteria

• Only companies with a minimum net worth of ₹500 crore can access acquisition finance.
• Listed acquirers must have posted profits for the last three consecutive financial years.
• Unlisted acquirers need a minimum credit rating of BBB-minus or higher.

Additional safeguards include:

• Acquisition must result in control within 12 months.
• Post-acquisition, the group’s consolidated debt-to-equity ratio cannot exceed 3:1.
• A corporate guarantee from the acquiring entity is mandatory.

These measures reflect the RBI’s intention to support deal financing while limiting excessive leverage and balance sheet risk.

Acquisition Finance Within CME Limits

Banks’ overall capital market exposure is capped at 40% of eligible capital at the system level, with further sub-limits:

• Direct exposure: max 20% of eligible capital (nearly double the draft proposal).
• Acquisition finance: capped at 20% within the CME limit.

Banks must also implement board-approved intraday exposure limits to manage market risk dynamically. This calibrated expansion, combined with strict leverage norms, indicates the RBI’s comfort in broadening banks’ role in capital markets while maintaining prudential oversight.

Overhaul of Lending Against Securities

Alongside acquisition finance, the RBI has revised rules for loans against securities:

• Retail loans against eligible securities are capped at ₹1 crore per individual.
• Funding for IPOs, FPOs, and ESOP subscriptions is allowed up to ₹25 lakh per individual, with a minimum 25% margin.

These structured LTV caps adopt a risk-weighted approach, particularly for equity-linked instruments. Investments in systemically important entities, such as Life Insurance Corporation of India, National Payments Corporation of India, National Stock Exchange of India, and BSE Limited, are exempt from total CME limits. This ensures that critical market infrastructure continues to receive adequate capital support.

Also Read: BSE Set to Roll Out Monthly Futures, Options on Focused Midcap Index 

Implications for Corporate India

The formal entry of banks into acquisition financing is set to reshape India’s M&A ecosystem:

• Until now, acquisition finance has been largely provided by NBFCs, private credit funds, and offshore lenders.
• With regulatory clarity, banks can now actively participate in large domestic buyouts, sector consolidation, and stressed asset acquisitions.
• Leverage limits (3:1), profitability requirements, and credit rating filters ensure financing remains restricted to financially stable corporates, mitigating systemic risk.

These norms, effective from FY27, are likely to influence deal pipelines, particularly in infrastructure, manufacturing, financial services, and other capital-intensive sectors.

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