RBI to cap bank lending for corporate takeovers at 70% of deal value

The move follows RBI Governor Sanjay Malhotra’s announcement during the October 1 monetary policy, in which he said banks would now be permitted to finance corporate takeovers, an area previously off-limits due to regulatory concerns.

For decades, Indian banks were barred from directly funding takeovers amid fears that promoters could misuse borrowed funds to gain control of companies rather than invest in genuine business expansion. Limited exceptions were made in recent years, mainly for acquisitions carried out under the Insolvency and Bankruptcy Code (IBC) process.

The RBI has now asked banks to formulate a comprehensive policy on acquisition financing. This must include clear norms on borrower eligibility, security and margin requirements, risk management, monitoring mechanisms, and overall exposure limits. The move is expected to deepen India’s credit market, improve liquidity for mergers and acquisitions, and give banks a greater role in shaping corporate restructuring while maintaining regulatory safeguards against misuse.

The RBI said banks should comply with the rule that the acquiring company and the SPV set up by it, wherever applicable, should be a corporate body and should exclude financial intermediaries such as NBFCs and Alternate Investment Funds (AIF).

“(The) Acquiring company should be a listed entity, having a satisfactory net worth and profit making for the last three years. The annual returns of the target company should be available for at least the previous three financial years,” the central bank said in its Draft Reserve Bank of India (Capital Market Exposure) Directions, 2025.

The aggregate exposure of a bank towards acquisition finance should not exceed 10 per cent of its Tier 1 capital, the central bank said.

Further, the acquiring company and the target company should not be related parties, where a ‘related party’ is as defined in Section 2 (76) of the Companies Act 2013.

The credit assessment should be based on the combined balance sheet of the acquirer company and the target company, it said. Post-acquisition debt-to-equity ratio at the acquiring company level or the SPV/target company level, as applicable, should be within prudential limits set by financing banks, subject to a maximum of 3:1, the RBI said.

The acquisition finance should be fully secured by shares of the target company as primary security, the RBI said. Assets of the acquirer and/or target company, or other securities held by the acquiring company, may be taken as collateral security as per the bank’s policy. “Banks should put in place rigorous and continuous monitoring of acquisition finance exposures to manage the risks, with early warning systems and regular stress testing to detect and address any signs of stress in the portfolio,” it said.

Meanwhile, the RBI said the aggregate capital market exposure (CME) of a bank, on a solo basis, should not exceed 40 per cent of its Tier 1 Capital as on March 31 of the previous financial year. “The aggregate CME exposure of a bank, on a consolidated basis, should not exceed 40 per cent of its consolidated Tier 1 Capital as on March 31 of the previous financial year,” the RBI said.