India’s central bank has eased restrictions on acquisition financing, allowing lenders to fund deals up to 20 per cent of their eligible capital base, doubling the limit initially proposed in draft rules. The move opens a new growth avenue for domestic banks while reshaping their exposure to capital markets activity.
In its final guidelines, the Reserve Bank of India accepted industry requests to raise the cap from the 10 per cent of tier-1 capital outlined last year. Banks will now be permitted to lend up to 75 per cent of an acquisition’s value. Previously, Indian lenders were barred from financing acquisitions, a constraint that left them at a disadvantage compared with foreign banks and investment funds active in leveraged transactions.
The revised framework permits financing for purchases of both listed and unlisted companies. Acquisitions may be structured through common equity shares, compulsorily convertible debentures, or a combination of the two. The central bank has also authorised lending where an existing shareholder seeks to increase a stake, a provision excluded from the draft rules. Acquisition finance may include refinancing of existing debt.
While loans must be secured against the acquired equity or debentures, additional collateral will be accepted. However, a corporate guarantee from the acquiring company, its parent or group holding entity is mandatory, underscoring the regulator’s emphasis on credit discipline as banks expand into this segment.
The RBI also broadened rules governing capital market exposures. Banks can provide enhanced funding for initial public offerings, with a limit of 2.5 million rupees per individual investor. They may also extend finance to capital market intermediaries for market-making activities in equity and debt securities. The changes come as India ranks as the world’s second-largest primary equity issuance market in 2025, raising nearly $22bn, positioning banks to play a larger role in a buoyant deal environment.
