RBI issues draft circular on acquisition financing and also proposes new limit on bank exposure to CME

In October 2025, the Reserve Bank of India (RBI) issued the draft circular on acquisition financing that proposes to allow banks to finance as much as 70% of the acquisition value.

• The RBI also released a draft circular proposing limits on banks’ exposure to capital markets and acquisition finance.

Funding Acquisitions

The draft framework, “RBI (Commercial Banks – Capital Market Exposure CME)) Directions, 2025” has proposed to allow banks to finance corporate acquisitions in India and abroad.

New Norms: Under the proposed framework, banks will be permitted to fund up to 70% of the acquisition value, with the remaining 30% to be contributed by the acquiring company.

• This means if the acquisition cost is Rs 10,000 crore (cr), banks can lend up to Rs 7,000 cr to fund the acquirer.

Policy on Acquisition Finance: The banks are required to put in place a policy on acquisition finance, which defines the overall limit under the ‘direct capital market exposures’, eligibility of borrowers, security, margin, risk management and monitoring norms, among others.

Cap on Tier-1 Capital: The RBI has proposed that the aggregate exposure of a bank to acquisition finance shall not exceed 10% of its Tier-1 Capital.

Acquiring Company: It must be a listed entity with a satisfactory net worth and a profit-making track record for the last three years.

• Banks may extend loans either directly to the acquiring company or to a special purpose vehicle (SPV) set up exclusively for the acquisition.
• The draft also specified that the post-acquisition debt-to-equity ratio at the acquirer or SPV level must be “within prudential limits set by the financing bank, subject to a maximum of 3:1.”

Valuation Checks: The acquisition value of the target company be determined by two independent valuations in accordance with Securities and Exchange Board of India (SEBI) regulations.

Primary Security: The draft also stated that, acquisition finance shall be fully secured by shares of the target company as primary security.

• The bank may take assets of the acquirer and/or target company, or other securities as collateral as per policy.

Bank Finance for PSU Disinvestment

Purpose: The RBI has also permitted financing for acquisition of shares of public-sector undertakings (PSUs) under a government-approved disinvestment programme, including the secondary stage mandatory open offer.

Conditions: Bank finance may be extended subject to compliance with the following conditions:

• The companies and the promoters should have adequate net worth and an excellent track record of servicing loans.
• There are no constraints for the pledgee to liquidate the shares, even during lock-in period.
• Such exposures secured by the shares of the disinvested PSUs or any other shares, shall be reckoned as direct CME (Capital Market Exposure).

RBI’s new CME rules

The RBI proposed the framework, “The Capital Market Exposure Directions, 2025” seeking to redefine how banks engage with capital markets while ensuring prudential risk control.

Effective: These directions will come into effect from April 1, 2026, or an earlier date when adopted by a bank in entirety.

Capital Market: The RBI in the draft guidelines, stated that banks’ total direct investments in capital markets and acquisition finance must not exceed 20% of their tier 1 capital.

• Additionally, the RBI proposed that the aggregate capital market exposure of banks should not exceed 40% of their tier 1 capital.

RBI to implement ECL framework, Full Basel – III Norms

Expected Credit Loss (ECL) framework: The ECL model moves away from the traditional incurred-loss approach to a forward-looking method, requiring banks to provision for possible future losses based on detailed credit risk assessment and broader data signals.

• The RBI proposed that the framework is proposed to be made applicable to all Scheduled Commercial Banks (excluding Small Finance Banks (SFBs), Payment Banks (PBs), Regional Rural Banks(RRBs)) and All India Financial Institutions (AIFIs) with effect from April 1, 2027.
• It also gives a glide path of nearly four years to smoothen any impact from higher provisioning.

Basel –III: It is proposed to make the revised Basel III capital adequacy norms effective for commercial banks (excluding SFBs, PBs and RRBs) from April 1, 2027.

Note:

Basel – III: India’s Basel III capital ratios are higher than the global minimum Basel III norms. Under the Basel III framework globally, the minimum capital adequacy ratio (CAR) is 8%, plus a capital conservation buffer of 2.5%, totaling 10.5%. In contrast, the RBI mandates a higher minimum CAR of 9% and including CCB it is 11.5%.