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MUMBAI, Feb 13 (Reuters) – Indian lenders will be allowed to finance acquisitions up to 20% of their eligible capital base, the Reserve Bank of India said in its final rules following a review of bank exposure to capital markets.
The RBI had suggested a cap of 10% of a bank’s tier-1 capital for acquisition financing in its draft rules published last year, but lenders asked for a higher cap. The central bank on Friday said the recommendation from banks has been accepted.
Up until now, Indian banks were not allowed to finance acquisitions, leaving them at a disadvantage compared to foreign banks and investment funds. The permission to enter the acquisition finance market opens up a new avenue of credit growth for Indian banks.
Banks will be permitted to lend up to 75% of the acquisition value, the RBI said.
Acquisition finance will be permitted for the purchase of both listed and unlisted companies. The acquisition of stake can be via common equity shares or compulsorily convertible debentures (CCDs) or both, the rules said.
The central bank has also permitted bank financing in cases where a shareholder wants to increase an existing stake in a company, previously not permitted as per its draft rules.
Acquisition finance may also involve refinancing of existing debt, the RBI said.
It added that while acquisition finance shall be secured by the acquired equity shares or debentures of the target company, other assets would also be accepted as additional collateral.
“However, a corporate guarantee from the acquiring company, or its parent or the group holding entity, shall be mandatory,” the RBI said.
FINANCING IPOs
The RBI’s new rules also allow banks to provide more financing for initial public offerings (IPOs).
A limit of 2.5 million Indian rupees has been set for each individual, as per the rules.
The change comes at a time when India’s primary markets are booming. It is ranked as the world’s No. 2 primary equity issuance market in 2025 with nearly $22 billion raised, according to LSEG data.
The RBI has also expanded the scope of funding by banks for capital market intermediaries such as brokerages.
A bank may extend finance to a capital market intermediary for market making in equity and debt securities, the RBI rules said.
(Reporting by Gopika Gopakumar and Ira Dugal in Mumbai; Editing by Eileen Soreng)