Acquisition finance under rbi’s draft capital market norms

The Reserve Bank of India’s draft capital market exposure directions, 2025 (“directions”) establish a single, harmonised regulatory framework governing how banks may take exposure to the capital markets. One of the significant components of this framework is the treatment of acquisition finance, recognised as a specific form of direct capital market exposure. Once effective on April 1, 2026, these directions will replace the earlier collection of circulars and guidelines, bringing all relevant standards for bank-financed acquisitions under a unified structure.

Scope and Definition

Under the draft directions, acquisition finance refers to the lending extended by banks to an Indian company or to a special purpose vehicle (“SPV”) created by it for the purpose of purchasing equity stakes in companies located in India or abroad. The financing must be associated with strategic acquisitions designed to deliver long-term benefits and operational or business synergies, rather than short-term leveraged transactions or purely financial structuring.

Eligibility Requirements

Before a bank can sanction acquisition finance, the directions require satisfaction of several eligibility benchmarks, including:

1. The acquirer must be a listed entity with a sound net worth and a stable record of profitability over the preceding three financial years.
2. The target entity must have a minimum of three years of available audited financial results.
3. The acquirer and target must not fall within the definition of related parties under Section 2(76) of the Companies Act, 2013.
4. The acquisition must be priced based on two independent valuations that comply with SEBI’s valuation standards.

Financing Structure and Limits

The draft norms also specify the boundaries within which banks may structure acquisition finance. These parameters include:

1. Bank funding is capped at 70% of the acquisition value, and the acquirer must contribute at least 30% from its own funds.
2. After the acquisition, the combined debt-to-equity ratio of the acquirer and target or of the SPV, if used, must not exceed 3:1.
3. Shares of the target company must be provided as the primary security for the loan, with scope for further collateral in line with the lending bank’s internal credit policies.
4. A bank’s overall exposure to acquisition finance cannot cross 10% of its Tier 1 capital, and its total direct capital market exposure, inclusive of acquisition finance, must stay within a ceiling of 20% of Tier 1 capital.

Risk Controls and Monitoring Expectations

The directions mandate that banks adopt rigorous oversight and monitoring systems for acquisition finance. These responsibilities include:

1. Creating a board-approved policy on acquisition finance that sets out eligibility norms, valuation requirements, margin rules, and internal controls.
2. Undertaking credit evaluations using combined financial information of both the acquiring and target companies.
3. Conducting continuous oversight of acquisition finance exposures through early-warning indicators, periodic stress tests, and adherence to prudential exposure and disclosure obligations.

Regulatory Impact and Significance

By formalising a dedicated prudential regime for acquisition finance within the larger capital market exposure framework, the directions provide clarity and predictable rules for both lenders and corporate acquirers. The regulatory approach aims to support legitimate, value-driven acquisitions while ensuring that banks remain within prudent exposure limits. This framework is expected to improve transparency, enhance risk discipline, and promote sustainable acquisition-driven growth in the corporate sector.