Mumbai: The Reserve Bank of India (RBI) On Friday, released a series of draft rules for banks that want to lend money for acquisitions. These rules would limit the risk that lenders take on and make it harder for borrowers to qualify.
The draft says that banks can lend up to 70% of the total acquisition value, and the purchasing company must put in the other 30% of the money through its own equity. The central bank claimed that this step is meant to make sure that acquirers put up enough capital and that acquisition agreements don’t get too much leverage.
The exposure cap is 10% of Tier-1 capital.
The draft rules also say that a bank’s total exposure to acquisition finance shouldn’t be more than 10% of its Tier-1 equity.
The RBI indicated that the shares of the target company, which is the company being bought, will be the main security for the purchase financing. This step is meant to improve risk management and protect the banking system from possible defaults that could happen because of leveraged buyouts.
Only companies that are listed and make money can apply.
The RBI’s proposed regulations say that acquisition finance can only be given to public companies that have been producing money for at least three years. This requirement makes sure that only companies who are financially stable and have a good track record can get acquisition loans.
The rules further say that only the corporation that is buying the property or its special purpose vehicle (SPV) can get financing. These rules make it clear that intermediaries like Non-Banking Financial Companies (NBFCs) and Alternative Investment Funds (AIFs) cannot get purchase financing.
The draft also says that the firm buying the target company and the target company cannot be related, to avoid any conflicts of interest or misuse of purchase finance.
Timeline for Implementation and Public Feedback
The RBI is asking the public to give feedback on the draft guidelines until November 21, 2025. The final framework will be released after the feedback has been looked at.
The central bank said, “These directions will take effect on April 1, 2026, or an earlier date if a bank fully adopts them.”
The RBI made it clear that any purchase loans that were approved before this date will be permitted to continue until they are paid off. But any new loans or renewals made after April 2026 must completely follow the new rules for purchase financing.
The RBI is working to improve credit discipline, increase transparency, and lower concentration concerns in bank-led business acquisition financing. This framework is a part of that larger endeavor.