The much-awaited capital market exposure (CME) norms, finalised after stakeholder feedback on a draft released in October last year, open the door for banks to fund mergers and acquisitions (M&A) for the first time under a clear regulatory framework. The new rules will come into effect from the next financial year (FY27).
75% Funding Cap, 25% Equity Skin in the Game
Under the new framework, banks can finance up to 75% of the acquisition value. The acquiring entity must bring in at least 25% of the deal consideration from its own equity, ensuring meaningful promoter skin in the game.
Acquisition finance will be available only to companies with a minimum net worth of ₹500 crore. In addition:
- Listed acquirers must have posted profits in the last three consecutive financial years.
- Unlisted companies must carry a minimum credit rating of BBB-minus or higher.
The RBI has also mandated that the acquisition must result in control within a 12-month period. Post-acquisition, the consolidated debt-to-equity ratio of the group cannot exceed 3:1. A corporate guarantee from the acquiring entity will be mandatory.
The safeguards signal the regulator’s intent to enable deal financing while containing excessive leverage and balance sheet risk.
Acquisition Finance Within Capital Market Exposure Limits
The RBI has capped aggregate capital market exposure of banks at 40% of eligible capital at the system level. Within this:
- Direct exposure is capped at 20% of eligible capital — nearly double the level proposed in the draft circular.
- Acquisition finance is capped at 20% within the overall CME limit.
Banks will also be required to set board-approved intraday exposure limits to manage market risk dynamically.
The calibrated expansion — coupled with tight leverage conditions — suggests the central bank is comfortable widening banks’ role in capital markets without diluting prudential oversight.
Overhaul of Capital Market Lending Norms
Alongside acquisition finance, the RBI has comprehensively revised rules governing loans against securities.
Banks can lend against shares, mutual funds, exchange-traded funds (ETFs) and real estate investment trusts (REITs), with differentiated loan-to-value (LTV) caps:
- Loans against listed shares and convertible debt: capped at 60%.
- Loans against equity mutual funds and ETFs: capped at 75%.
- Loans against debt mutual funds: capped at 85%.
Retail loans against eligible securities are capped at ₹1 crore per individual borrower.
Funding for IPOs, FPOs and ESOP subscriptions has been permitted up to ₹25 lakh per individual, subject to a minimum margin of 25%, consistent with the earlier draft proposal.
The structured LTV caps reflect a risk-weighted approach to retail leverage, particularly in equity-linked instruments.
Strategic Exemptions for Systemic Institutions
The RBI has carved out exemptions from the total CME limits for investments in systemically important financial institutions, including Life Insurance Corporation of India, National Payments Corporation of India, National Stock Exchange of India and BSE Limited.
The move ensures that capital support for key financial market infrastructure entities remains unhindered by exposure ceilings.
What This Means for Corporate India
The formal entry of banks into acquisition financing could reshape India’s M&A ecosystem.
Until now, deal financing has largely been the domain of non-banking financial companies, private credit funds and offshore lenders. With regulatory clarity in place, banks may now compete more actively in large domestic buyouts, sectoral consolidation plays and stressed asset acquisitions.
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At the same time, the 3:1 post-acquisition leverage cap, profitability track record requirement and rating filters effectively limit access to financially stable corporates, reducing systemic risk.
The norms, coming into force from the new financial year, could influence deal pipelines being structured for FY27, especially in infrastructure, manufacturing, financial services and capital-intensive sectors.
