The focus keyword RBI banks acquisition financing comes into play today as the Reserve Bank of India (RBI) has introduced a landmark proposal. Under the draft guidelines issued on 24 October 2025, banks will be allowed to finance acquisitions — both within India and abroad — for eligible Indian corporates. This article explains what the new norms are, why they matter, and what the likely outcomes will be.
What exactly is the change?
The RBI’s draft circular titled “Reserve Bank of India (Commercial Banks – Capital Market Exposure) Directions, 2025” outlines the new framework for acquisition financing.Key elements include:
- Banks will be permitted to fund equity acquisitions by an Indian listed company in either domestic or foreign target firms, provided the acquisition is a strategic investment aimed at creating long-term value (not just short-term restructuring).
- The acquiring company must be listed, have a satisfactory net worth, and have been profitable for the preceding three years.
- Banks may finance up to 70% of the acquisition value, requiring the acquirer to contribute at least 30% equity.
- A bank’s total exposure to acquisition finance must not exceed 10% of its Tier-1 capital.
- Broader capital market exposure limits: Direct exposures (including acquisition financing) capped at 20% of Tier-1; overall, including indirect channels, capital market exposure capped at 40% of Tier-1. Reuters
- The guidelines are proposed to take effect from April 1, 2026, after stakeholder consultation (comments open until 21 November 2025).
Why this is an important shift
1. Opens new funding avenues
For the first time, Indian banks can directly fund M&A (mergers & acquisitions) deals by domestic companies in both the domestic and overseas space. Historically, banks were prohibited from this kind of acquisition finance in many cases. The Economic Times+1
2. Boost for India Inc and consolidation
With bank support, Indian corporates may accelerate their expansion, consolidation, or global footprint. This could lead to increased deal-activity domestically and abroad.
3. Banks get new business lines
For banks, acquisition finance becomes a new credit segment — potentially higher margin, strategic financing rather than traditional retail or project lending.
4. Risk management upgrading
By including caps (10% of Tier-1) and requiring strict eligibility and security norms, RBI is balancing growth with prudence. This is consistent with global best practice around banks’ exposures to capital markets and corporate acquisitions.
5. Aligns with global norms
Globally, banks often finance acquisition deals (especially in developed markets). India’s regulatory framework is now adapting to allow a similar role for banks
Key eligibility & safeguards
To mitigate risk, the draft guidelines impose the following conditions:
- Only listed acquirers with three years of profit and adequate net worth can access acquisition finance from banks.
- Target valuations must be determined by two independent valuers (as per Securities and Exchange Board of India norms) when acquiring target companies. The Indian Express
- The post-acquisition debt-to-equity ratio of acquirer or SPV/target must be within bank-set limits, max 3:1.
- The acquisition finance must be fully secured by shares of the target company as primary security; banks may take other collateral as per policy.
- Banks must set internal policies defining borrower eligibility, margins, collateral, monitoring mechanisms, early warning systems, stress testing.
Implications for different stakeholders
For corporates
- Strategic expansion becomes easier: Indian firms targeting overseas acquisitions or domestic consolidation can now tap bank finance.
- Greater competition: With more funding sources available, acquisition activity may pick up — putting pressure on weaker players.
- Enhanced valuation discipline: The valuation and risk norms may force firms to be more cautious in selecting targets.
For banks
- New growth segment: Acquisition finance gives banks a new business line beyond standard corporate/retail lending.
- Risk & compliance burden: Banks must upgrade policies, monitoring, and exposure management to handle these deals safely.
- Exposure limits: With a 10% Tier-1 cap for acquisition finance and 20% for direct capital market exposure, banks must assess how much balance sheet to allocate.
For the economy & market
- M&A boost: Could catalyse deal-flow in Indian corporate sector, including global deal making.
- Financial stability: By capping exposures and tightening norms, RBI aims to avoid systemic risk from uncontrolled acquisition financing.
- Foreign investment environment: The move might make Indian companies more active globally, improving India’s outward investment footprint.
Risks & watch-points
- Even with safeguards, acquisition financing carries higher risk — large ticket deals, integration risk, overseas currency/regulatory risk.
- Banks may face concentration risk if too many large deals cluster in certain sectors or targets.
- Timing: The final guidelines are still draft and subject to change. The effective date (April 2026) gives time — but also uncertainty.
- Implementation: Banks must build internal capacity (valuation, risk-monitoring) and corporates must meet stricter eligibility.
What happens next?
- The public comment period is open until November 21, 2025, after which RBI will finalise the circular.
- From April 1, 2026, the rules are intended to take effect — enabling banks and corporates to plan accordingly.
- Both banks and acquiring firms will start drafting policies and frameworks to align with the norms (eligibility checks, internal approval policy, collateral frameworks).
- The deal-market may start responding — corporates may evaluate M&A scenarios earlier to leverage this new funding route.
Conclusion
The policy shift under the focus keyword RBI banks acquisition financing marks a major turning point in India’s financial and corporate landscape. By permitting banks to fund domestic and overseas acquisitions — under well-defined safeguards — the RBI is unlocking a new funding channel for growth while maintaining prudence. The success of this reform will hinge on how banks and corporates implement the new norms, manage risks, and seize the opportunity for strategic expansion.
