RBI’s New Rules on M&A Financing and Broker Funding

The Reserve Bank of India (RBI) has issued new guidelines on merger & acquisition (M&A) financing and broker funding, introducing stricter conditions while also increasing lending limits.

Part I: M&A (Acquisition) Financing Rules

Key Provisions

1. Funding for Increased Stake Acquisition

• Banks can finance acquisitions where:
  • The acquirer already holds control (≥26%)
  • Seeks to increase stake up to 90%

2. Eligibility Criteria

For Listed Companies:

• Minimum ₹500 crore net worth
• At least three consecutive years of net profit

For Unlisted Companies:

• Must have investment-grade credit rating

3. Exposure Limits

• Banks’ exposure to acquisition financing capped at:
  • 20% of eligible capital base
  • (Higher than earlier proposed 10% of Tier-1 capital)

4. Funding Structure

• Maximum 75% bank financing
• Minimum 25% equity contribution by acquirer

Part II: Stricter Rules for Broker Financing

New Collateral Requirements

1. Bank Guarantees

• Must be backed by at least 50% tangible collateral.

2. Proprietary Trading Exposure

• Bank funding must be fully secured with high-quality collateral.