RBI Boosts M&A: Banks Can Fund Acquisitions Up to 20% of Capital

Introduction to New Acquisition Financing Norms

The Reserve Bank of India (RBI) has finalized a comprehensive framework for acquisition financing, marking a significant policy shift that permits Indian banks to fund corporate mergers and acquisitions (M&A). In its final guidelines released on February 13, 2026, the central bank set the lending cap for acquisition finance at 20% of a bank's eligible capital base. This move, which doubles the initially proposed limit of 10% of Tier-1 capital, is expected to create new growth opportunities for lenders and stimulate corporate consolidation across the country. The new regulations are scheduled to become effective from April 1, 2026.

Key Exposure Limits and Funding Caps

Under the revised framework, a bank's total exposure to acquisition finance is capped at 20% of its eligible capital base. This limit is part of a broader ceiling on Capital Market Exposure (CME), which cannot exceed 40% of the bank's eligible capital on both a solo and consolidated basis. Within this overall CME limit, direct capital market exposure, which includes investments, is restricted to 20%.

For individual transactions, banks are permitted to finance up to 75% of the acquisition's value. This condition ensures that the acquiring company has a significant stake in the deal, mandating them to contribute a minimum of 25% of the transaction value from their own equity or internal accruals. This applies to the acquisition of both listed and unlisted companies through common equity shares or compulsorily convertible debentures (CCDs).

Stringent Borrower Eligibility Criteria

To ensure financial stability and mitigate risks, the RBI has established strict eligibility criteria for companies seeking acquisition finance. A listed acquiring company must have a minimum net worth of Rs 500 crore and must have reported a net profit in each of the three preceding consecutive financial years.

For unlisted acquiring companies, the same financial parameters apply. Additionally, they must secure an investment-grade credit rating of BBB- or higher from a recognized credit rating agency before the loan is disbursed. The framework also allows financing for an existing shareholder looking to increase their stake, specifically for crossing material thresholds from 26% up to 90%.

Leverage, Security, and Syndication Mandates

To prevent excessive leveraging, the RBI has mandated that the post-acquisition debt-to-equity ratio for the acquiring company, on a consolidated basis, must not exceed 3:1. This ratio must be maintained on a continuous basis.

To secure the lending, the financing must be secured by the acquired equity shares or CCDs of the target company. Banks are also permitted to take additional collateral, such as other unencumbered assets of the acquirer or target company, and a personal guarantee from the promoter. A corporate guarantee from the acquiring company or its parent entity is mandatory.

For overseas deals, the RBI has capped the participation of Indian banks in syndicated acquisition financing arrangements. The funding contribution of a single Indian bank, across all its overseas branches, cannot exceed 20% of the total funding for a particular deal.

Summary of New RBI Acquisition Finance Norms

Impact on the Broader Market

This regulatory overhaul is a catalyst for the Indian corporate sector. By allowing domestic banks to enter the acquisition finance market, the RBI has leveled the playing field with foreign banks and investment funds, which previously dominated this space. The move is expected to increase the availability of capital for strategic acquisitions, including leveraged buyouts (LBOs), and potentially lower the cost of funding for Indian corporations. This enhanced access to credit could drive a new wave of M&A activity, leading to greater market consolidation and efficiency.

Revised Limits for Retail Investors

The RBI's review of capital market exposure also included significant changes for retail borrowers. The central bank increased the limit for loans against shares for individuals from Rs 20 lakh to Rs 1 crore. Within this enhanced ceiling, individuals can borrow up to Rs 25 lakh specifically for purchasing securities in the secondary market.

Furthermore, banks can now lend up to Rs 25 lakh per individual for subscriptions to Initial Public Offerings (IPOs), Follow-on Public Offers (FPOs), and Employee Stock Option Plans (ESOPs). This is subject to the borrower providing a minimum cash margin of 25%, meaning the loan-to-value (LTV) ratio cannot exceed 75%.

Conclusion and Forward Outlook

The RBI's finalized guidelines on acquisition financing represent a balanced approach, aimed at fostering business growth while maintaining robust risk management standards. By setting clear and prudent limits, the central bank is supporting the expansion of India's corporate and capital markets ecosystem. As the April 1, 2026 implementation date approaches, banks will need to establish board-approved policies and internal frameworks to align with these new directions. The industry will be closely watching how these changes reshape India's M&A landscape in the coming years.