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Leading to the world of LBOs: RBI opens up acquisition finance

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Vinod Kothari, Payal Agarwal and Simrat Singh | finserv@vinodkothari.com

The RBI recently opened the avenues for banks to provide funding for acquisitions. For domestic banks, enabling changes were made vide Amendment Directions on Capital Market Exposure dated 13.02.2026, covered in our write up here, and for global banks, the enabling amendments were made in ECB Regulations by relaxing the end-use restrictions vide notification here, covered in our write up here.

This write up discusses what is acquisition finance, what are the global structures and risks, and whether India will now be ushered in the new, arguably risky world of leveraged finance.

What is acquisition finance?

Acquisition finance, known by various names such as M&A finance, leveraged finance, LBO finance, etc is globally practiced by banks. Wherever there are inflexibilities or restrictions on banks lending for acquisitions, the gap has given room for private credit lenders, special situation funds and alternative investment funds to chip in – which is what accounts for the sharp rise in private credit funds. See our  article on private credit AIFs here. 

LBO financing added to approximately US $214 Billion globally for 2024. As per a 2024 S&P report, banks funded only about 23% of LBO financing globally with private debt players covering the other 77%. The reasons for such reduced share for banks include intensive capital charge applicable to banks, lower profitability on such loans and over-leverage risks (see discussion below). 

Source: S&P Global

How is acquisition finance structured?

The end-use of acquisition finance is the control or significant holding over the target. Therefore, quite naturally, the collateral for acquisition finance are the shares of the target. Taking the collateral is intuitive, but the issue is, how is the loan repayment structured? The most logical way to structure an LBO is to align the loan repayment with the residual cash flows from the target. Hence, it is returns on equity from the target that pay the loan.

Lenders may quite structure the loan with the possibility of refinancing the acquisition, such that the initial funding term is not as long as the payback period of the target is. For example, a company borrows ₹500 Crores to acquire a business generating ₹100 Crores annually, repays only ₹20 Crores of loan each year for 5 years, leaving ₹400 Crores outstanding at maturity, which it then refinances with a new ₹400 Crores loan instead of fully repaying from operating cash flows. The key risk in such a case would be refinancing risk i.e. if credit markets tighten, the company may be unable to roll over the ₹400 Crores at maturity. There is also interest rate risk, as the new loan may be available only at a higher cost, increasing the debt burden.

Acquisition finance is quite risky, as it is funding the residual return which itself is impacted by all the risks of the target’s business; any downturn in performance directly impairs debt servicing capacity. It is a leverage created on structure, which itself is leveraged. Therefore, lenders may quite often be comfortable with the strength of the acquirer’s own business, etc. But the standalone strength of the cash flows of the target’s business is the ultimate comfort for an LBO investor.

Debt tranching in acquisitions

Usually a LBO is undertaken by multiple lenders so as to cut down on individual exposure and risk further and in such cases each lender may have varying risk and return expectations. In such a multi-lender LBO, instead of issuing one big, uniform loan, the capital stack is layered into tranches with different priority, pricing, maturity and covenants. Therefore, there can be senior and mezzanine debt, with tranches itself within these such as high-yield debt within the mezzanine tranche. The senior tranche typically ranks first in repayment and is secured against the company’s assets and cash flows, carrying lower interest with tighter covenants and amortization requirements. 

Below this sits the mezzanine or subordinated debt, which ranks junior in the repayment waterfall, bears higher interest to compensate for greater risk. This is usually provided by non-banks and is secured by second-lien and may also be partially unsecured.. 

Equity sits at the bottom of the capital structure and represents the residual ownership in the company. It has no fixed repayment or guaranteed return; instead, equity holders receive whatever value remains after senior and mezzanine debt are fully repaid. Because it is last in priority, equity bears the highest risk and absorbs first losses if the company underperforms.

However, equity also captures all upside beyond debt obligations. As leverage increases, the amount of equity invested decreases, which magnifies potential returns if the company performs well and is sold at a higher value.

Sometimes, subordinated tranches may also carry a PIK or pay-in-kind feature, which implies that the periodic interest will not be serviced, but will be added to the outstanding exposure.

This layered structure allows risk to be allocated according to each lender’s appetite, reduces the overall cost of capital by pricing safer debt more cheaply and increases total borrowing capacity without overexposing any single lender. 

The following chart is an illustration of a typical LBO capital structure with a bank (senior) debt of 50%, high yield debt is 15%, mezzanine is 15% and common equity is 20%. (source: hold.co):

Risks in acquisition finance

Acquisition finance is risky because it combines ownership transition, financial leverage and forward-looking projections all in one. The risks are interlinked; operational underperformance quickly becomes financial stress. Few of the risks for the lender are as follows:

Over-leverage risk: The acquisition is funded with high debt relative to cash flows. A small decline in earnings can disproportionately hurt repayments. For example, a company acquired at 6x EBITDA (₹600 debt on ₹100 EBITDA). EBITDA drops 20% to ₹80. Leverage jumps from 6.0x to 7.5x overnight.

Acquisition finance combines operating leverage (extent of fixed costs in the operating cashflows, from which the residual cashflows will arise) and financial leverage (such residual cash flows being financed by debt which carries fixed interest burden). That is what makes acquisition finance a bunch of two mutually exacerbating risks. Typically, the presence of operating leverage is balanced by keeping the financial leverage low: however, in this case, the two forms of leverage co-exist.

Projection/business case risk: Acquisition pricing may be based on forecasted synergies,  ie , the combined disproportionate increase when the target comes into the group as well as growth, or margin expansion that may not materialize.

Beyond the above, financially, acquisition finance also faces valuation and cyclicality risk if the business was acquired at peak multiples or during an economic upcycle. Operationally, some of the risks in a typical M&A deal may also loom for the lender such as inadequate due diligence, top-talent attrition and integration issues.

Acquisition finance versus leveraged finance:

The two terms quite often overlap, but both refer to distinct aspects of a lending transaction. Acquisition finance specifically refers to purpose; leveraged finance, though mostly used for acquisitions, refers to the prevalence of high leverage, lower rating and cashflow-based funding structure.

Some definitions of “leveraged finance” may be pertinent, for instance, a 2021 thematic note by EBA on leveraged loans refers to a loan as ‘leveraged’, if some of the given conditions are met:

  • high indebtedness of the borrowing firm (e.g. debt to earnings before interest, taxes, depreciation and amortisation (EBITDA) ratio of four times (4x) or higher); 
  • below investment grade credit rating for the loan (or borrower) (i.e. below BBB); 
  • loan purpose to finance an acquisition (e.g. leveraged buyouts); 
  • presence of a private equity sponsor (e.g. financing of borrowers owned by financial sponsors); 
  • high loan spread at issuance.

This is based on a combination of definitions used by various regulators and data providers. 

A definition based on combination of various aspects as per the policies prevalent in the financial sector industry was also given in the 2013 guidelines published by the US FRB as follows: 

  • Proceeds used for buyouts, acquisitions, or capital distributions.
  • Transactions where the borrower’s Total Debt divided by EBITDA (earnings before interest, taxes, depreciation, and amortization) or Senior Debt divided by EBITDA exceed 4.0X EBITDA or 3.0X EBITDA, respectively, or other defined levels appropriate to the industry or sector.
  • A borrower recognized in the debt markets as a highly leveraged firm, which is characterized by a high debt-to-net-worth ratio.

Transactions when the borrower’s post-financing leverage, as measured by its leverage ratios (for example, debt-to-assets, debt-to-net-worth, debt-to-cash flow, or other similar standards common to particular industries or sectors), significantly exceeds industry norms or historical levels.

The end-use of leveraged finance are variegated: including mergers, acquisitions, re-capitalizations, refinancings, and equity buyouts, as well as for business and product line buildouts and expansions, whereas, acquisition finance has limited end-use.   

Waves of regulatory concerns on leveraged finance: 

Regulatory concerns on leveraged finance have been coming in waves – they come and recede.
The oft-quoted “warning” was issued by the IMF in 2018 in its Global Financial Stability Report. The concerns lie in the ever-increasing volume of leverage loans coupled with deteriorating underwriting standards and credit quality as well as strong investor demands, resulting in fewer investor protection covenants. The BIS also raised concerns on the rise of the leveraged loans causing an increasing default rate in the US.

Since the Global Financial Crisis in 2008, regulators have, time and again, taken policy decisions to regulate the risks emanating from leveraged lending. In the context of US, reference may be made of a 2013 Interagency Guidance on Leveraged Lending read with the 2014 FAQs thereon setting out the expectations from financial institutions w.r.t. leveraged loans. In fact, guidelines for leveraged financing were issued in the US as early as in April 2001, subsequently replaced by the 2013 version. 

Regulatory directives have been issued by the EU, coupled with a 2017 Guidance on Leveraged Transactions by the European Central Bank to address the risks of excessive leverage. The ECB Guidance lays down the minimum expectations from the credit institutions on leveraged transactions. A March 2019 briefing states that the 2017 guidance issued by ECB seems less effective than expected. It also refers to the warnings issued by international institutions as well as the US and EU authorities in relation to the potential risks of leveraged finance. 

However, come the end of 2025, at least the US regulators have withdrawn their regulatory statements on leveraged finance, leaving it for banks to use their own prudence. The agencies, in fact, went to term leveraged finance as vital: “Leveraged lending plays a vital role in the U.S. financial system. It provides a wide range of businesses, including those that are highly indebted or highly leveraged or that have low obligor ratings..” It said the 2013 guidelines were overly restrictive and led to reduced activity by US banks. 

The 2025 Global Financial Stability Report, however, continues to highlight the vulnerabilities associated with leveraged financing and the degrading credit quality: “Despite the wave of restructurings, liquidity remains strained among the more vulnerable borrowers in the leveraged loan and private credit markets. This has contributed to an increase in borrower downgrades”. “In reality, default rates, especially for leveraged loans, have been climbing, even though some of the defaults are voluntary liability management exercises, including debt exchanges…”

Impact of the RBI move

Are banks bracing up to jump into acquisition finance? Therefore, is the growing segment of the AIF market, private performing credit, going to be put to challenge?

In our estimate, it will be quite sometime before banks will really pose a competition to the fund industry. At the end of the day, banks are highly rule-driven, with multiple layers of approval processes and very tight corporate governance structures. Banks have RBI supervisors breathing down the neck. Acquisition finance needs flexibility, fast turnaround, structuring skills and bespoke terms which may be difficult for banks to match. At the same time, it is also important to note that most of the private credit funds also have a bank behind. Therefore, the move surely adds to the funding muscle that private credit funds will now enjoy – they will be able to “syndicate” acquisition finance by roping in bank lenders to take a share. In essence, it is a cake that will be shared. We also see distinct possibilities of structured funding transactions with banks taking a senior slice, and AIFs taking the role of a deal maker and risk taker.

Will the RBI move set the sails for leverage financing in India? There are several reasons to contend that the RBI’s move is far more conservative than expected by the typical leveraged finance landscape:

  • First, the RBI expects the acquirer’s rating to be at least BBB- (where the acquirer is an unlisted company),  whereas leveraged finance is mostly below investment grade;
  • Second, the RBI has put a limit of D/E at consolidated level of 3: 1,  leveraged finance, definitionally as well as by its very structure, works on higher levels  of leverage;
  • Third, Section 19(2) of the Banking Regulation Act, 1949 imposes a limitation on banks by restricting them from holding shares in any company, whether as owner, pledgee or mortgagee, beyond 30% of the company’s paid-up share capital or 30% of the bank’s own paid-up capital and reserves, whichever is lower. Since leveraged buyouts commonly involve acquisition of controlling stakes with shares offered as primary security, this statutory cap constrains the extent to which banks can take equity as collateral, thereby further tempering the scope for large-ticket LBO financing.
  • Lastly, the apparent text of the RBI regulations on acquisition finance suggest that acquisition finance is permitted only to non-financial companies which also excludes a Core Investment Company (CIC) hence barring CICs from availing acquisition finance under the RBI framework.

RBI permits Leveraged Buy-Outs through Bank Finance

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– Conditions for acquisition finance, prudential limits and new LTV requirements for various capital market exposures

– Payal Agarwal, Partner | payal@vinodkothari.com 

– Updated on March 31, 2026

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. In a move to permit Leveraged Buy-Outs (LBOs), RBI issued Amendment Directions on Capital Market Exposures on 13th February, 2026, bringing amendments in various applicable Directions, covering, inter alia, conditions on acquisition finance, revised LTV limits for lending against various securities, structured requirements for funding Capital Market Intermediaries (CMIs), prudential limits on Capital Market Exposures (CMEs) etc. Through a press release on 30th March 2026, RBI has deferred the applicability of the Amendment Directions, and has issued revised Directions to clarify on certain aspects relating to acquisition finance and exposures to capital market intermediaries.

The amendments were based on the Draft Reserve Bank of India (Commercial Banks – Capital Market Exposure) Directions, 2025 issued on 24th October, 2025. See an article on the Draft Directions here.

Effective Date

The applicability of the Amendment Directions have been deferred to 1st July, 2026 (from its original effective date of 1st April, 2026), however, may be adopted by a bank prior to that as well in its entirety.

Outstanding loans/ guarantees are permitted to run-down till maturity, however, any fresh loans/ guarantees or renewal of existing loans/ facilities shall be governed by the Amendment Directions.

Navigating through the Amendments

The amendments w.r.t. CMEs have been effected through issuance of the following Amendment Directions:

RBI (Commercial Banks – Credit Facilities) Amendment Directions, 2026 [“CF Amendments”] Conditions w.r.t. Acquisition Finance, Loan against eligible securities, and funding Capital Market Intermediaries
RBI (Commercial Banks – Concentration Risk Management) Amendment Directions, 2026 [“CRM Amendments”] Components of investment exposures and credit exposures in CME and prudential ceilings, exclusions from CME ceilings and 
RBI (Commercial Banks – Financial Statements: Presentation and Disclosures) – Third Amendment Directions, 2026 [“FS Amendments”] Revised format of disclosure of exposure to capital markets
Reserve Bank of India (Commercial Banks – Undertaking of Financial Services) – Amendment Directions, 2026 [“UFS Amendments”] Applicability of conditions on acquisition finance and lending against securities to NBFCs/ HFCs within a bank group. Also see an article on the same here

Permitting Acquisition Finance by Banks

Chapter XI of the extant CF Directions dealt with “Acquisition Finance”. The existing provisions of the said chapter have been omitted and new provisions w.r.t. Acquisition finance has been incorporated therein, prescribing eligibility conditions and compliance requirements w.r.t. Acquisition Finance.

Meaning and Conditions for Acquisition Finance

Acquisition Finance has been defined as:

“Acquisition Finance” shall mean a financial facility or assistance provided to an eligible borrower entity for the purpose of acquiring control in a target company, (including through a scheme of amalgamation or merger). Such funding may also involve refinancing of existing debt of the target company if the refinancing is integral to the acquisition finance. [Para 4(1)(ia)]

The Revised Directions clarify that acquisition finance may be availed with respect to mergers and acquisitions as well.

The operating conditions are laid down in Chapter XI from Para 170A onwards.

Eligibility conditions: Acquiring company and Target company

Acquiring company*

Target company

Financing Parameters

● Indian non-financial company,

● May be listed or unlisted,

● Networth > Rs. 500 crores

    ○ As per sec 2(57) of CA, 2013

●  3 years’ track record of PAT

●  Investment grade rating (BBB- or above) from a CRA [in case of unlisted Acquiring company]

 

Financial criteria to be satisfied at a standalone and consolidated basis

● Domestic or foreign company

● Non-financial company

● Shall not be Related Party to Acquiring company (in case of first-time acquisition of control)

   ○ u/s 2(76) of CA, 2013

   ○ includes entities under common control, common management, or common promoter group, whether directly or indirectly

● Credit assessment based on combined balance sheet of Acquiring co and target co.

● Max 75% of acquisition value can be financed,

● Remaining  by Acquiring company using own funds.

  ○ shall mean internal accruals, sale of assets or redemption of investments, or issuance of fresh equity

  ○does not include Proceeds of any borrowing; instruments having  fixed repayment obligation or put option, any intragroup funding from borrowed funds

● Instruments through which control acquired by Acquiring company shall be free from any encumbrance

● Nature and extent of security cover to be determined by bank

● Post acquisition consolidated debt-equity ratio of Acquiring company shall not exceed 3:1 on a continuous basis

 

*Acquisition finance may be extended to the subsidiary or SPV set up by the Acquiring company, based on the strength of the Acquiring company. In such cases, corporate guarantee from the Acquiring company shall be mandatory.

Note that, while the Directions allow funding of upto 75% of the acquisition value, the same is subject to a more stringent condition of the post-acquisition debt-equity ratio of 3:1. The ratio is based on the consolidated financial position of the Acquiring company together with the Target company, meaning, the same is not only based on the debt position of the Acquiring company, rather, the existing debt of the Target company is also required to be taken into account. This may, in effect, reduce the total amount of acquisition funding that may be availed by the Acquiring company.

Let us consider an example:

  • Target Assets : 1000; Equity: 333, Debt: 666
  • Acquirer buys 100% of Target company, and has no other assets. Debt: 250, Equity 83
  • Consolidated balance sheet Debt becomes 916 against assets of 1000, resulting in the debt-equity ratio breaching the limits

Therefore, the 75% of acquisition value will mostly not be possible, except in cases where the Acquirer has a lower than 3:1 debt-equity ratio.

Charge on acquired stake: operation of section 19(2) of BR Act

Acquisition Finance contemplates creation of security over the securities of the Target company acquired by the Acquiring company. However, section 19(2) of the Banking Regulation Act, 1949 puts a restriction on the creation of charge on a controlling stake in a company. The section reads as:

(2) Save as provided in sub-section (1), no banking company shall hold shares in any company, whether as pledgee, mortgagee or absolute owner, of an amount exceeding thirty per cent. of the paid-up share capital of that company or thirty per cent. of its own paid-up share capital and reserves, whichever is less:

Since acquisition finance is limited to acquisition of “control”, a substantial stake would be involved in every case, especially, where 100% of the Target company is being acquired. Assuming 75% of the acquisition value is being financed by the bank, the condition w.r.t. not holding more than 30% of the paid-up share capital of the (target) company may stand breached. Hence, the Directions use the term “without prejudice to section 19(2) of the BR Act, 1949”, thus, permitting a bank to create charge on as many securities of the entity as is possible without a breach of the requirements under the BR Act. Additional collateral may be sought on the other unencumbered assets of the acquirer and/or target company, and promoter’s personal guarantee, as per the bank’s policy.

Purpose of financing

Permitted for acquiring equity stakes as strategic investments, either leading to

  • acquisition of control through a single or a series of transactions within 12 months from first disbursal of acquisition finance, or
  • increase in stake towards acquiring control over the target company, or
  • acquisition of additional stake crossing substantial thresholds [26%, 51%, 75% or 90% of voting rights], in a target company where control already exists.

The meaning of control is to be taken from section 2(27) of CA, 2013 thus, meaning to include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner;

The Revised Directions clarify that the scope of acquisition of target company includes:

  • Acquisition by the Acquiring company directly, or
  • On-lending to its Indian or overseas non-financial subsidiary for such acquisition.

Indirect control through target company

With respect to indirect acquisition of control over subsidiaries or joint ventures, through acquisition of control over the holding target company, the Revised Directions clarify that the criteria w.r.t. creation of potential synergies for the acquirer must be suitably assessed considering all such companies.

Further, the acquisition finance cannot be extended towards acquisition of a target company having any financial entity as its subsidiary or JV.

Inconsistency between conditions for Acquisition Finance and purpose of Acquisition Finance

In the context of first-time acquisition of control, the CF Amendments require that the Target company and Acquiring company shall not be related parties. This would make an Acquiring company to raise funds through Acquisition Finance for acquiring control in its associate, where it already holds significant influence, but not control.

Further, the acquisition of “control” should, generally speaking, mean at least more than 50% of voting rights is acquired by  the Acquiring company, in which case, the 26% threshold as referred to as substantial stake in an existing controlled entity becomes meaningless.

While in case of NBFCs, a change in 26% shareholding is considered as change in control by the RBI, the same is not the case under CA, 2013 – which distinguishes between significant influence and control, and hence, the reference to the definition of control as per CA, 2013 in the CF Amendments has resulted in these inconsistencies. 

Bridge Finance

As regards Acquisition Finance, in case of a listed Acquiring company, the condition w.r.t. funding 25% of acquisition value through internal accruals may be met through bridge finance, subject to the specified conditions.

The Directions define bridge finance as:

“Bridge Finance” shall mean financing a borrower for an interim period, not exceeding one year, for a legitimate business purpose where the borrower has a firm plan and capability to repay such loans by raising financial resources either through issuance of equity, debt or hybrid instruments or by divestiture/hive-off of a part of existing business/assets within the interim period.

The conditions for availing bridge finance are:

  • Repayment of bridge finance shall be done through internal accruals or an equity issue or sale of assets
  • Bridge finance provided by the bank shall be on a secured basis
  • Shall not result in dilution of security coverage for acquisition finance

Valuation requirements

  • Bank to independently assess acquisition value 
  • To be determined by bank-appointed valuer
  • Based on guidelines prescribed under Reg 8(2)(e) of SEBI SAST Regulations for shares not frequently traded, viz., using valuation parameters including, book value, comparable trading multiples, and such other parameters as are customary for valuation of shares of such companies [for both listed and unlisted company].
  • In case of unlisted company, based on lower of the valuation determined as above by two independent valuers

Prudential Norms and Other compliances applicable on Financing Banks

  • Board-approved Policy on Acquisition Finance – incorporating underwriting benchmarks that address the structural complexities of such transactions, in particular relating to exposure limits, equity contribution, leverage multiples, and cash-flow certainty.
  • Prudential ceilings on Acquisition Finance –  not more than 20% of Bank’s eligible capital base within the aggregate ceiling of 40% on CMEs, both on solo and consolidated basis [Para 98A of CRM Directions]. Bank may adopt a lower ceiling based on its overall risk profile and corporate strategy. 
  • Disclosure in financial statements – disclosure of various forms of CMEs of the bank separately, including acquisition finance, with further segregation of bridge financing for meeting own fund requirements by acquiring companies and financing by overseas branches of the Indian banks etc [Para 10(5)(iia) of FS Directions]

Lending against Eligible Securities

  • Board-approved Policy on lending against eligible securities – specify the criteria for selecting securities as collateral; determining portfolio-level as well as single borrower/group borrower limits; concentration limits for exposure to single securities; LTV/margins and haircuts for different securities; and rules for ongoing valuation and margin calls
  • Lending to individuals, including non-commercial HUFs
Loan-to-Value (LTV) requirements
Nature of security CF Amendments 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% – AA-BBB 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

#The aforesaid limits are applicable at a banking system level as clarified by the Revised Directions.

Lending to Capital Market Intermediaries (CMIs)

  • Meaning of Capital Market Intermediaries:
    • regulated entities undertaking trade execution and market infrastructure services in capital markets, including  broking, clearing, custody, market making or other incidental services
    • shall not include Standalone Primary Dealers and Qualified Central Counterparty (QCCPs)
    • 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 haircuts as appropriate based on nature of securities, with a minimum haircut of 40% for equity shares
    • Any guarantee issued shall be secured with minimum collateral of 50% including at least 25%  in cash
    • Eligible securities and cash pledged shall belong to borrower CMI

Restrictions on lending for proprietary trading

The Revised Directions clarify the scope and exclusions from the restrictions on lending to CMIs for acquisition of securities on its own account, including for proprietary trading and investments. The following are permitted on a fully secured basis:

  • Finance to approved market makers in equity and debt securities
  • Working capital finance for warehousing of debt securities, including Government Securities, upto a maximum period of 45 days for fulfilling firm demand/request from its clients
  • Other working capital facilities against a 100 percent collateral of cash, cash equivalents and Government Securities (including T-Bills)

Guarantee may also be issued by banks for proprietary trading subject to the facility being fully secured collateral of cash, cash equivalents and Government Securities (including T-Bills), out of which a minimum 50 per cent shall be cash or fixed deposits maintained with the lending bank. Banks to ensure that guarantees issued for non-proprietary purposes are not used to facilitate proprietary trading.

Concluding Remarks

The amendments are a positive step towards facilitating bank finance for strategic acquisitions by Indian companies, balancing the funding requirements for acquisitions with prudential norms for banks to provide for safeguards against ambitious risky funding exercises.s.

Draft RBI Directions: Banks may finance Acquisitions 

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– 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. 

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