The Reserve Bank of India has introduced a structured framework permitting banks to finance corporate acquisitions — a move widely viewed as a structural shift for India’s mergers and acquisitions (M&A) ecosystem.

The revised Capital Market Exposure (CME) norms, finalised after stakeholder consultations on last year’s draft proposal, provide regulatory clarity for banks to fund takeover transactions. The new rules will take effect from FY27.

Key Features of the New Acquisition Finance Framework

Under the updated norms:

• Banks can fund up to 75% of the acquisition value.
• The acquirer must bring in a minimum 25% equity contribution, ensuring promoter skin in the game.

Eligibility Conditions

To maintain financial discipline, access to acquisition financing is restricted to:

• Companies with minimum net worth of ₹500 crore
• Listed entities that have reported profits for the last three consecutive financial years
• Unlisted companies with a credit rating of BBB- or above

Additional Prudential Safeguards

• The transaction must result in control within 12 months
• Post-acquisition consolidated debt-to-equity ratio capped at 3:1
• Mandatory corporate guarantee from the acquiring entity

These conditions indicate RBI’s intent to facilitate deal financing while containing leverage and systemic risks.

Capital Market Exposure (CME) Limits

Banks’ total capital market exposure remains capped at 40% of eligible capital, with sub-limits structured as follows:

• Direct capital market exposure: Up to 20%
• Acquisition finance: Capped at 20% within the CME ceiling

Banks are also required to set board-approved intraday exposure limits to manage dynamic market risk.

This calibrated approach expands banks’ role in capital markets while maintaining prudential oversight.

Revised Lending Norms Against Securities

The RBI has simultaneously rationalised Loan-to-Value (LTV) norms:

Additional limits include:

• Retail loans against eligible securities capped at ₹1 crore per individual
• IPO, FPO, and ESOP financing allowed up to ₹25 lakh per individual, with a minimum 25% margin

Investments in systemically important institutions such as Life Insurance Corporation of India, National Payments Corporation of India, National Stock Exchange of India, and BSE Limited are excluded from total CME caps to ensure uninterrupted capital support for critical market infrastructure.

Implications for Corporate India

The entry of banks into structured acquisition financing marks a significant transition:

• Acquisition funding has historically been dominated by NBFCs, private credit funds, and offshore lenders.
• Regulatory clarity now enables banks to participate in large domestic buyouts, sector consolidation plays, and stressed asset resolutions.
• The 3:1 leverage cap, profitability requirements, and rating filters restrict access to financially sound corporates, limiting systemic risk.

The new norms, effective FY27, are expected to influence deal activity across infrastructure, manufacturing, financial services, and other capital-intensive industries.

Summary

The RBI has introduced a formal framework allowing banks to finance up to 75% of acquisition transactions, subject to strict eligibility, leverage, and exposure norms. With CME limits intact and structured LTV safeguards in place, the move signals a calibrated expansion of bank participation in India’s M&A market. Effective from FY27, the reform is poised to reshape corporate deal financing while maintaining financial stability safeguards.

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