RBI Hikes Banks’ M&A Financing Limit to 20% of Tier-1 Capital

The Reserve Bank of India (RBI) has revised its draft guidelines on acquisition financing, allowing banks to fund mergers and acquisitions (M&A) up to 20% of their Tier-1 capital, doubling the earlier proposed cap of 10%. The move is expected to provide greater flexibility to banks and boost corporate deal-making in India.

Under the new draft directions, a bank’s aggregate capital market exposure (CME) — on both solo and consolidated basis — must not exceed 40% of its eligible capital base. Within this limit, the direct capital market exposure, including investment exposures, cannot exceed 20%. Importantly, the bank’s total exposure to acquisition finance is now capped at 20% of eligible capital, but still within the overall 40% CME ceiling.

Funding Cap and Conditions

Banks will be allowed to finance up to 75% of the acquisition value, covering both listed and unlisted entities, subject to regulatory norms. Additionally, the RBI has mandated a debt-equity ratio of 3:1 for the acquiring company and the target entity on a consolidated basis.

The acquisition must result in the acquirer obtaining control of the target company either through:

• A single transaction, or
• A series of interconnected transactions completed within 12 months from the date of the acquisition agreement.

This clarification provides structured guidance on leveraged buyouts and corporate restructuring deals.

Expanded Lending Scope

The RBI has also broadened the scope of permissible lending by allowing banks to lend against:

• Government securities
• Sovereign Gold Bonds (SGBs)
• Shares and Non-Convertible Debentures (NCDs)
• Mutual funds
• Exchange-Traded Funds (ETFs)
• Infrastructure Investment Trusts (InvITs)

Loan-to-Value (LTV) ratios have been specified as:

• 75% for mutual funds
• 60% for shares and NCDs
• 85% for debt mutual funds

Impact on Corporate M&A

Experts believe the move opens doors for leveraged buyouts (LBOs) and enables banks to directly finance acquisition of control stakes, including overseas acquisitions, instead of routing such funding under general corporate purposes.

By raising the financing limit and clarifying exposure norms, the RBI aims to balance risk management with business growth, ensuring stronger regulatory oversight while supporting India’s expanding corporate and capital markets ecosystem.

MCQ’s

Q1. What is the revised limit for banks’ acquisition financing as a percentage of Tier-1 capital under RBI’s draft guidelines?
(a) 10%
(b) 15%
(c) 20%
(d) 25%

Q2. What is the maximum aggregate Capital Market Exposure (CME) allowed for banks under the new draft norms?
(a) 30% of eligible capital base
(b) 35% of eligible capital base
(c) 40% of eligible capital base
(d) 50% of eligible capital base

Q3. Banks can fund up to what percentage of the acquisition value under the revised RBI guidelines?
(a) 60%
(b) 65%
(c) 70%
(d) 75%

Q4. What is the prescribed debt-equity ratio for the acquiring company and target company on a consolidated basis?
(a) 2:1
(b) 3:1
(c) 4:1
(d) 5:1

Q5. Within how many months must interconnected acquisition transactions be completed to obtain control?
(a) 6 months
(b) 9 months
(c) 12 months
(d) 18 months

Q6. What is the maximum Loan-to-Value (LTV) ratio permitted against mutual funds?
(a) 60%
(b) 70%
(c) 75%
(d) 85%

Q7. What is the LTV ratio set by RBI for loans against shares and NCDs?
(a) 50%
(b) 55%
(c) 60%
(d) 65%

Q8. What is the LTV ratio allowed for debt mutual funds under the new norms?
(a) 75%
(b) 80%
(c) 85%
(d) 90%