RBI Proposes Banks May Finance Domestic and Foreign Acquisitions

The Reserve Bank of India (RBI) has proposed allowing banks to extend loans to Indian companies for acquiring full or controlling stakes in other firms, both within India and abroad. The draft circular, issued on Friday, said such funding will only be permitted for acquisitions made as long-term strategic investments, not for short-term financial restructuring.

Eligibility Conditions

Only listed companies with a sound net worth and consistent profits for the past three years will qualify for such financing. Banks can offer acquisition loans directly to the acquiring company or to a special purpose vehicle (SPV) set up for the deal. 

However, these entities must be corporate bodies and not financial intermediaries such as non-banking finance companies (NBFCs) or alternative investment funds (AIFs).

Lending Limits and Funding Structure

The draft proposes that banks can fund up to 70% of the acquisition value, with the remaining 30% to be contributed by the acquiring company through equity. The RBI has suggested that a bank’s total exposure to acquisition finance should not exceed 10% of its Tier-I capital. Tier-I capital includes a bank’s core equity, reserves, and retained earnings.

Assessment and Monitoring Norms

The acquisition value must be determined through two independent valuations, following the Securities and Exchange Board of India (SEBI) norms.

Banks are required to assess the creditworthiness of the acquiring and target firms based on their combined balance sheet. The post-acquisition debt-to-equity ratio should remain within the prudential limit of 3:1. 

Banks will also need to monitor these exposures continuously through early warning systems and periodic stress testing.

Other Provisions and Implementation

Banks can extend loans for acquiring shares of public-sector undertakings under the government’s disinvestment programme. They may also lend up to ₹25 lakh per individual for subscribing to IPOs or employee stock options. The proposed norms are scheduled to come into effect from April 1, 2026, once finalised.

Read More: RBI Allows Early Exit for 2018 Gold Bonds; Investors See 304% Returns!

Conclusion

Once implemented, the draft rules will establish a formal structure for banks to extend acquisition finance within prescribed prudential limits.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions. 

Investments in the securities market are subject to market risks, read all the related documents carefully before investing.