The Reserve Bank of India (RBI) has released a draft framework titled “Commercial Banks – Capital Market Exposure Directions, 2025”, proposing to allow banks to finance corporate acquisitions under defined conditions. The move marks a major shift in lending policy and is expected to boost merger and acquisition (M&A) activity in India.

Key Highlights

• RBI proposes allowing banks to finance corporate acquisitions under strict exposure and eligibility norms.
• Draft permits up to 70% acquisition funding; final guidelines expected to take effect from April 2026.

According to the draft, banks may extend acquisition finance to Indian companies or special purpose vehicles (SPVs) set up for acquiring equity stakes in domestic or overseas firms, provided the investment is strategic in nature. Only listed companies with a satisfactory financial track record—positive net worth and profits for the past three years—will be eligible for such funding.

The RBI has proposed that banks can finance up to 70% of the acquisition value, while the acquirer must contribute a minimum 30% equity. To mitigate risk, the total exposure of a bank to acquisition financing must not exceed 10% of its Tier 1 capital. Additionally, the draft limits overall capital market exposure—direct and indirect—to 40% of Tier 1 capital, with a 20% ceiling on direct exposure.

Also Read: SEBI Bars Mutual Funds from Investing in Pre-IPO Placements

The draft circular also consolidates guidelines on loans for subscribing to IPOs, FPOs, and ESOPs, as well as loans against shares and debentures. The RBI has invited public feedback on the proposal until November 21, 2025, and plans to implement the final guidelines from April 1, 2026. The move aims to facilitate strategic corporate growth while ensuring prudent risk management across the banking system.

"The RBI’s decision to allow Indian banks to finance mergers and acquisitions marks a structural shift in the way India’s corporate economy can pursue growth. For decades, the absence of regulated acquisition financing has kept Indian dealmaking dependent on offshore borrowing, high-cost private credit, or promoter equity, effectively limiting participation to only the most cash-rich players", stated Kunal Gala, Partner, Deal Value Creation, BDO India.

"He further added "By opening the door for banks to fund up to 70 percent of acquisition value, the RBI is not just expanding credit access but actively signalling that inorganic growth is now a mainstream lever of corporate strategy. The timing is equally deliberate, India’s balance sheets are cleaner, leverage ratios are at decade-lows, and the domestic banking system is arguably strong enough to underwrite acquisition risk within defined limits.

"If executed prudently, this could become the single biggest enabler of India’s next M&A cycle. Sectors that have long awaited consolidation - manufacturing, renewables, logistics, and consumer goods now have a viable financing mechanism to act on strategic logic rather than capital availability. In essence, the RBI has created a financial catalyst that could push Indian M&A into its next phase, one driven less by opportunism and more by structured, value-creation discipline", said Kunal Gala.