The Reserve Bank of India (RBI) has released a draft proposal permitting banks to finance Indian companies’ acquisitions of full or controlling stakes in other firms — both within India and abroad. The move is aimed at facilitating long-term strategic investments and supporting Indian corporates in expanding their global footprint.
Framework for Acquisition Financing
Under the draft circular issued on October 24, 2025, banks may extend loans either directly to acquiring companies or to special purpose vehicles (SPVs) formed specifically for such deals. However, the facility will not be available to financial intermediaries such as NBFCs or AIFs.
The RBI clarified that this framework is designed for strategic acquisitions, not short-term financial restructuring or speculative transactions.
Eligibility Criteria
Only listed companies with a strong net worth and a three-year record of profitability will qualify for such loans. The proposal emphasizes financial discipline and sustainable leverage, ensuring borrowers have sufficient capital backing and operational strength.
Lending Limits and Financial Structure
- Banks can fund up to 70% of the acquisition value.
- The acquiring company must contribute at least 30% equity.
- A bank’s total exposure to acquisition financing cannot exceed 10% of its Tier-I capital (which includes core equity and retained earnings).
The post-acquisition debt-to-equity ratio must stay within a 3:1 prudential limit to maintain balance sheet stability.
Valuation and Monitoring
Acquisition values must be determined through two independent valuations, in line with SEBI norms.
Banks will be required to:
- Assess creditworthiness on a combined balance sheet basis (acquirer + target).
- Conduct periodic stress testing and deploy early warning systems to track credit risks.
Additional Provisions
Banks may also:
- Extend loans for purchasing shares in public-sector undertakings (PSUs) under government disinvestment programmes.
- Lend up to ₹25 lakh per individual for participation in IPOs or employee stock options (ESOPs).
Implementation Timeline
The proposed norms are expected to take effect from April 1, 2026, after stakeholder feedback and final approval.
If implemented, this framework would mark a significant policy shift, enabling Indian banks to play a more active role in mergers, acquisitions, and global expansion of domestic corporates.
Disclaimer:
This article is intended solely for educational and informational purposes. The securities or companies mentioned are provided as examples and should not be considered as recommendations. Nothing contained herein constitutes personal financial advice or investment recommendations. Readers are advised to conduct their own research and consult a qualified financial advisor before making any investment decisions.
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