RBI announces draft rules for allowing banks to finance acquisitions

The Reserve Bank of India (RBI) on Friday released draft regulations allowing banks to finance corporate acquisitions, while capping their total exposure to such deals at 10% of their Tier 1 capital.

The move forms part of a broader effort to deepen India’s capital markets and encourage credit flow into mergers and acquisitions.

According to the draft circular, the RBI has proposed that banks’ aggregate exposure to the capital markets should not exceed 40% of their Tier 1 capital, while their total direct capital market and acquisition finance exposure combined must remain within 20% of the same.

Under the proposed framework, banks will be permitted to fund up to 70% of an acquisition’s total deal value, with the remaining 30% to be contributed by the acquiring company. Only listed companies with a satisfactory net worth and a track record of profitability over the last three years will be eligible for such financing.

Tier 1 capital – which comprises a bank’s core equity capital, retained earnings, and other qualifying instruments – serves as the primary buffer against losses and determines the institution’s financial strength.

The RBI said the proposal aims to ensure prudent exposure management as it expands the scope of lending for acquisition-related financing. Earlier this month, the central bank had eased restrictions on bank lending by allowing financing for acquisitions and increasing the limit on loans for subscribing to initial public offerings (IPOs).

The move could provide a significant boost to India’s growing M&A market by offering companies a regulated source of domestic funding while maintaining financial stability through strict exposure caps.