In a significant move aimed at boosting mergers and acquisitions (M&A) in the corporate sector, the Reserve Bank of India (RBI) is set to allow banks to finance corporate takeovers. Until now, banks have largely avoided funding acquisitions due to concerns that promoters might misuse bank credit to buy companies. “To expand the scope of capital market lending by banks, it is proposed to provide an enabling framework for Indian banks to finance acquisitions by Indian corporates,” the RBI said on Wednesday. Under existing regulations, Indian banks are generally restricted from directly financing the acquisition of corporate equity shares. Consequently, companies had to rely on alternative methods, such as using their own funds or arranging share swaps, to finance takeovers. The RBI’s proposal marks a clear shift in policy, providing a formal framework for banks to participate in corporate takeovers while managing the associated risks. Analysts say this move could unlock new avenues for financing in India’s corporate sector, enabling companies to pursue strategic acquisitions and expand operations more efficiently. There were some exceptions in the case of companies undergoing insolvency proceedings under the Insolvency and Bankruptcy Code (IBC). Funding for corporate takeovers has traditionally come from non-banking financial companies (NBFCs), Alternate Investment Funds (AIFs) or bonds issued by the acquiring firm. Recently, banks approached the RBI seeking approval to provide loans for acquisitions, particularly for large, listed companies. They argued that permitting such funding would not only boost mergers and acquisitions activity but also support capital expenditure and foster overall corporate growth. With the latest step, the central bank aims to strike a balance between facilitating growth and safeguarding banks from potential misuse of funds, signalling a more proactive role in supporting corporate consolidation and market expansion. The RBI has also proposed to withdraw the framework introduced in 2016 that disincentivized lending by banks to specified borrowers (with credit limit from banking system of Rs 10,000 crore and above). While the Large Exposure Framework since put in place for banks addresses credit concentration risk to a particular entity or group at an individual bank-level, concentration risk at the banking system level, as and when considered necessary, will be managed through specific macroprudential tools. Limit on lending against shares raised, IPO financing increased to Rs 25 lakh The Reserve Bank of India also announced key measures to boost funding for share purchases and support capital markets. In a major relaxation, the central bank proposed removing the regulatory ceiling on lending against listed debt securities. Under the revised norms, banks can now extend loans against shares up to Rs 1 crore per person, a sharp increase from the earlier limit of Rs 20 lakh. Similarly, financing for initial public offerings (IPOs) has been raised from Rs 10 lakh to Rs 25 lakh per investor. The move is aimed at expanding access to credit for investors and invigorating the IPO market, which is witnessing strong interest as a number of companies plan to raise funds in the coming months. The higher limits could encourage greater participation from retail and institutional investors alike, providing a timely fillip to equity markets, analysts said. By enhancing lending limits and removing restrictions on debt security financing, the RBI is signalling its intent to strengthen market activity while maintaining a measured approach to risk management. Meanwhile, in order to reduce the cost of infrastructure financing by NBFCs, the central bank has proposed to reduce the risk weights applicable to lending by NBFCs to operational, high quality infrastructure projects. Since 2004, licensing for Urban Co-operative Banks (UCBs) had been paused. Considering the positive developments in the sector during the last two decades and in response to the growing demand from the stakeholders, the RBI has proposed to publish a discussion paper on licensing of new UCBs.
