RBI Proposes New Norms to Allow Banks to Fund Corporate Acquisitions

The Reserve Bank of India (RBI) has issued a draft circular proposing to allow banks to finance acquisitions by Indian corporates both domestic and overseas marking a major policy shift in corporate financing regulations. The move aims to strengthen domestic participation in mergers and acquisitions (M&A) while ensuring financial stability through prudential exposure limits.

Key Highlights:

• Purpose: To permit banks to provide loans for acquiring entire or controlling stakes in companies as strategic investments that create long-term value.
• Eligibility: Only listed Indian companies with a satisfactory net worth and profitable operations for the past three years can access such financing.
• Funding Limit: Banks can fund up to 70% of the acquisition value, with at least 30% financed by the acquiring company’s own equity contribution.
• Exposure Cap: The aggregate exposure of a bank towards acquisition finance cannot exceed 10% of its Tier-I capital.
• Permissible Route: Banks may lend directly to the acquiring company or to a step-down Special Purpose Vehicle (SPV) set up exclusively for the acquisition.
• Restrictions:
  • Acquirer and target cannot be related parties.
  • Acquirer and SPV must be body corporates, not financial intermediaries like NBFCs or AIFs.
• Valuation: Acquisition value must be based on two independent valuations as per SEBI regulations, and credit appraisal should be on the combined balance sheet of the acquirer and target.
• Additional Provision: Banks will also be allowed to finance acquisition of PSU shares under the disinvestment programme.
• Implementation Date: The proposed norms will come into effect from April 1, 2026.
• Complementary Move: RBI also proposed lower risk weights for NBFC loans to infrastructure projects, easing capital requirements for lenders.