RBI Draft Allows Banks to Finance Corporate Acquisitions, Sets Strict Conditions
The Reserve Bank of India (RBI) has proposed allowing banks to provide loans to Indian companies for acquiring full or controlling stakes in domestic and foreign firms, provided the deals create long-term strategic value rather than serve short-term restructuring purposes. According to the draft circular issued on Friday, such financing will only be extended to listed companies with satisfactory net worth and a record of profitability over the past three years.
Under the proposed guidelines, banks can finance up to 70 per cent of the acquisition cost, while the remaining 30 per cent must come from the acquiring company’s equity. The RBI also suggested capping a bank’s total exposure to such acquisition finance at 10 per cent of its Tier-I capital. Lending can be made either directly to the acquiring firm or through a special purpose vehicle (SPV) created for the transaction, but the acquirer and the target company must not be related parties. Additionally, the post-acquisition debt-to-equity ratio cannot exceed 3:1, and valuations must be based on two independent assessments as per SEBI norms.
The central bank has further permitted financing for acquisitions under government-approved disinvestment programmes and loans for individuals to subscribe to IPOs, FPOs, or ESOPs up to ₹25 lakh. Banks will also be allowed to extend need-based credit to capital market intermediaries for operational requirements. The RBI has stressed rigorous risk management, early warning systems, and regular stress testing to monitor acquisition finance exposures effectively.
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