Draft RBI Directions: Banks may finance Acquisitions
– Conditions for acquisition finance, prudential limits and new LTV requirements for various capital market exposures
– Payal Agarwal, Partner | payal@vinodkothari.com
The Amendment Directions have been issued by RBI effecting changes as per the draft norms. See an article on the same here – https://vinodkothari.com/2026/02/rbi-permits-leveraged-buy-outs-through-bank-finance/
Capital markets are subject to higher fluctuations and volatility, and hence, Capital Market Exposures (CME) carry a higher risk, naturally requiring higher level of control and prudential norms by the regulator. The RBI recently released Draft Reserve Bank of India (Commercial Banks – Capital Market Exposure) Directions, 2025, consolidating and amending the regulatory directions pertaining to CMEs. The proposed amendments are significant, providing for a flexibility of financing “acquisitions” in the secondary market while also strengthening the prudential requirements in relation to CMEs.
Permitting Acquisition Finance by Banks
The extant Master Circular – Loans and Advances – Statutory and Other Restrictions, restricts banks from granting advances against primary security of shares and debentures, that is, against creation of security interest on the assets created out of the credit facilities [Para 2.3.1.8]. Such restriction has been retained in Para 194 of the RBI (Commercial Banks – Credit Facilities) Directions, 2025.
The proposed Draft Directions permit “acquisition finance”, subject to certain conditions and prudential requirements as below:
Meaning and Conditions for Acquisition Finance
- To: Acquiring company or SPV set up by Acquiring company
- For: Purchase of all or a controlling portion of target company’s shares, or assets to gain control over the target company and its operations.
- Nature of investments: equity stakes as strategic investments
- Primary Security: shares of target company
- Collateral Security (optional): assets of Acquiring/ target company, including other securities held by Acquiring company
Eligibility conditions: Acquiring company and Target company
| Acquiring company | Target company | Other conditions related to Acquisition Financing |
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Prudential limits and other compliances applicable on financing banks
- Prudential ceilings on Acquisition Finance – not more than 10% of Tier I capital
- Policy on Acquisition Finance – defining the overall limit, terms and conditions of eligibility of borrowers, security, margin, risk management and monitoring norms etc., in addition to the aforesaid mandatory conditions
- 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.
Lending against Securities to Individuals
| Loan-to-Value (LTV) requirements | ||
| Nature of security | Draft Directions | Existing Provisions |
| Government Securities. incl. T-Bills | As per Bank’s Policy | 75% in case of equity shares/ convertible debentures (50% if held in physical form) In other cases, determined by Bank itself |
| Sovereign Gold Bonds (SGBs) | As applicable to lending against gold/ silver collateral | |
| Listed shares and listed convertible debt securities | 60% | |
| Mutual Funds (excluding Debt MFs), Units of ETF (excluding commodity ETFs) and Units of REITs/InVITs | 75% | |
| Debt Mutual Funds | 85% | |
| Listed Debt Securities | 85% – AAA rated 75% – AAA-BBB rated | |
| Commercial Papers | 85% – A1 rated 75% – A2- A3 rated | |
| Prudential ceilings | ||
| Acquisition of securities in secondary market | Maximum upto Rs. 25 lacs | Upto Rs. 20 lacs (in case of dematerialised securities)Rs. 10 lacs (in case of physical) |
| Maximum cap on loans to individuals | Upto Rs. 1 crore for eligible securities other than G-Sec, listed debt and units of debt mutual funds | |
| IPO/ FPO/ ESOP financing | Rs. 25 lacs per individual, subject to 25% cash margin (upto 75% can be funded) | Rs. 20 lacs per individual, subject to 90% of acquisition value |
Lending to Capital Market Intermediaries (CMIs)
- Meaning of Capital Market Intermediaries:
- entities regulated by a financial sector regulator, providing broking, clearing, custody, market making, margin trading facility and other incidental services
- does not include Collective investment schemes such as mutual funds. AIFs, REITs, InvITs, etc.
- Eligibility criteria for CMIs: shall be registered and regulated by a financial sector regulator, and in compliance with the prudential norms of such regulator
- Conditions w.r.t. Security:
- facilities shall be fully secured, and the value of securities shall be adjusted for a haircut of 15-40% based on nature of securities involved
- eligible securities and cash pledged shall belong to borrower CMI
- securities in which market making operations are undertaken by the borrower shall not be accepted
- Purpose for which lending is not permitted: acquisition of securities, including proprietary trading or investments by CMIs.
Concluding Remarks
The proposed Draft Directions is a positive step towards facilitating bank finance for strategic acquisitions by Indian listed entities. Pursuant to the recent consolidation exercise of the RBI, the Guidelines for CMEs are currently contained in the RBI (Commercial Banks – Concentration Risk Management) Directions, 2025 read with the RBI (Commercial Banks – Credit Facilities) Directions, 2025. Once the proposed Draft CME Directions are released, amendments will also be required in these recently notified Directions to avoid any disconnect in the regulatory norms.
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