The Reserve Bank of India (RBI) said banks can conduct acquisition financing of up to 20 per cent of their tier-1 capital, as against the proposed 10 per cent cap, in its draft guidelines. In November, businessline had reported that bankers had sought tweaks to the draft acquisition finance guidelines, including higher exposure limits, permission to fund unlisted companies’ merger and acquisition (M&A) plans and approval to finance corporates acquiring majority stakes in tranches rather than in a single go.
“The aggregate capital market exposure (CME) of a bank, on both solo and consolidated basis, shall not exceed 40 per cent of its eligible capital base. A bank’s direct capital market exposure, consisting of investment exposures, shall not exceed 20 per cent of eligible capital base, on both solo and consolidated basis. A bank’s aggregate exposure to acquisition finance shall not exceed 20 per cent of its eligible capital base, within the aggregate CME ceiling of 40 per cent, both on a solo and consolidated basis,” said the RBI.
acquisition value
Lenders can fund up to 75 per cent of the acquisition value, enabling acquisitions of both listed and unlisted entities, subject to different guidelines. Alongside the 75 per cent cap on acquisition value, the Directions require a debt-equity ratio of 3:1 on the acquiring company, along with the target company on a consolidated basis.
The acquisition shall result in the acquirer obtaining control of the target company through a single transaction, or a series of inter-connected transactions but completed within 12 months from the date of execution of the acquisition agreement.
Further, the RBI also allowed banks to lend against government securities, sovereign gold bonds, loan against shares, NCDs, mutual funds, units of ETFs and InvITS. The regulator has set 75 per cent loan to value (LTV) ratio against mutual funds, 60 per cent for loan against shares and NCDs and 85 per cent for debt mutual funds.
“The RBI has opened gates for leveraged buyouts, allowing banks to finance acquisition of control, including acquisition of substantial stake in already controlled entities by non financial acquiring companies. The directions permit acquisition of both domestic and overseas entities for up to 75 per cent of the acquisition value. With this, banks would be able to fund acquisitions directly without hiding it in the name of general corporate purposes,” said Payal Agarwal, partner, Vinod Kothari and Company.
Published on February 13, 2026
