In a move that will give a leg up for domestic mergers & acquisitions, the Reserve Bank of India (RBI) is planning to allow commercial banks to extend funding to “listed” Indian corporates for acquiring equity stakes in domestic companies, including PSUs under the Government’s disinvestment programme, or foreign companies as strategic investments.
The central bank, in its “Reserve Bank of India (Commercial Banks – Capital Market Exposure) Directions, 2025”, noted that commercial banks should support such strategic investment by India Inc. which are driven by the core objective of creating long-term value for the acquirer through potential synergies, rather than mere financial restructuring for short-term gains.
Prudential limits set
RBI, which has invited public/stakeholder comments on the draft guidelines by November 21, 2025, said the aggregate exposure of a bank to acquisition finance shall not exceed 10 per cent of its Tier 1 (core) capital.
Acquisition finance can be extended directly to the acquiring company, or to a step-down special purpose vehicle (SPV) set up by the former specifically for acquiring the target company, according to the guidelines, which shall come into force from April 1, 2026, or an earlier date when adopted by a bank in its entirety.
RBI said the acquiring company should be a listed entity with a satisfactory net worth and profit-making for the last three years.
Further, the target company’s annual returns should be available for at least the previous three financial years. The acquiring and target companies cannot be related parties.
A bank may finance up to 70 per cent of the acquisition value, with at least 30 per cent to be funded by the acquiring company in the form of equity using its own funds, per the Draft Directions.
RBI said shares of the target company shall fully secure acquisition finance as primary security. Assets of the acquirer and/or target company, or other securities held by the acquiring company, may be taken as collateral security as per the bank’s policy.
The acquiring company and the SPV set up by it, wherever applicable, must be bodies corporate and shall exclude financial intermediaries such as NBFCs, Alternate Investment Funds (AIFs), etc.
Post-acquisition, the debt-to-equity ratio at the acquiring company level or the SPV/target company level, as applicable, shall be within the prudential limits set by the financing banks, subject to a maximum of 3:1, RBI said.
Bank finance for PSU disinvestment
RBI said that Banks may provide finance for the acquisition of shares of a PSU (public sector undertaking) under a disinvestment programme approved by the Government of India, including the secondary-stage mandatory open offer, wherever applicable.
Acquisition financing in such cases is subject to the companies, including the promoters, to whom bank finance is to be extended, having adequate net worth and an excellent track record of loan servicing.
Further, there are no constraints on the pledgee (Bank) to liquidate the shares, even during the lock-in period that may be prescribed in respect of such disinvestments, in case of a shortfall in margin requirements or default by the borrower.
Published on October 24, 2025
