Banks Get Green Light for Acquisition Financing Under Revised RBI Capital Market Rules

The Reserve Bank of India has issued a revised framework on banks’ capital market exposure that is expected to allow lenders to actively participate in corporate takeovers, mergers and acquisitions, and leveraged buyouts while tightening risk controls across the financial system.

According to a report by JM Financial, the new rules will allow banks to fund acquisition deals while keeping risks under control by setting limits on the debt-to-equity ratio after acquisition and capping capital market exposure.

It added that only financially stable companies will be able to access bank funding, thereby helping to reduce systemic risk and lowering the chances of financial instability in the banking system.

The report stated, "We believe the new rules will allow banks to actively participate in corporate takeovers, M&A, leverage buyouts, etc....... Meanwhile, enhanced limits for loans against securities for individuals should provide deeper liquidity."

RBI issued the new directions on February 13, 2026, and they will come into effect from April 1, 2026, or earlier if banks adopt them sooner.

How will RBI’s revised framework allow banks to fund up to 75% of acquisition costs?

Under the revised framework, banks can fund up to 75 per cent of the cost when one company seeks to acquire another, a facility known as acquisition financing.

Eligibility has been restricted to strong and financially stable companies with a net worth of more than Rs 5 billion, profitability in the last three financial years, or a good credit rating.

Post-acquisition, the company’s total debt must not exceed three times its own capital in order to prevent excessive leverage and reduce financial risk.

The framework also expands lending against financial investments. Banks can now extend loans to individuals against shares, mutual funds, ETFs, REITs and InvITs, with these assets acting as security.

The maximum loan limit for individuals has been set at Rs 10 million, of which up to Rs 2.5 million can be used to buy shares from the stock market.

How will RBI’s new capital market exposure rules impact loans for IPOs, FPOs and ESOP investments?

Banks can additionally provide loans of up to Rs 2.5 million to individuals for investments in IPOs, FPOs and ESOPs.

According to the report, these changes will help companies secure funds for acquisitions and increase liquidity in the market, enabling smoother buying and selling of shares.

At the same time, the central bank has retained prudential ceilings to control risks. A bank’s total capital market exposure cannot exceed 40 per cent of its Tier 1 capital on both a solo and consolidated basis, while direct capital market exposure, including certain investment exposures and acquisition finance, remains capped at 20 per cent of Tier 1 capital.

Within the broader limit, only 20 per cent can be used for acquisition financing.

Separately, the RBI will tighten norms governing bank lending to capital market intermediaries from April 1, 2026, requiring all such credit facilities to be fully backed by eligible collateral and subject to stricter monitoring.

What activities can banks fund and restrict under the RBI’s capital market exposure rules for intermediaries?

The revised framework will change how banks structure funding lines to brokers, clearing members and other securities firms that rely on short-term credit for settlement obligations, margin funding and market-making activities.

Under the new norms, banks must extend credit facilities to capital market intermediaries strictly on a fully secured basis, value collateral in line with prescribed norms and apply asset-specific haircuts.

They must also continuously monitor collateral values and ensure that exposure remains fully covered after adjusting for haircuts.

If collateral values fall, banks will be required to seek additional security or reduce the facility. The directions prohibit banks from financing proprietary trading or investments undertaken by intermediaries, though need-based facilities for working capital, settlement timing mismatches, margin trading funding and market-making activities will be permitted.

The framework also mandates banks to set internal counterparty limits, adhere to large exposure norms and strengthen monitoring of end-use of funds.

How will RBI’s new capital market exposure rules impact broker funding and leverage?

Broker funding from banks supports margin trading, settlement obligations and liquidity management, and by mandating full collateralisation and uniform haircuts, the RBI has effectively tightened leverage conditions in the system.

The report noted that stricter rules for brokers, including the requirement for full collateral and lower valuation of shares used as security, may make bank funding harder and costlier for them.

The RBI said the changes were introduced to align capital market exposure rules with evolving market practices and strengthen risk management.

Fresh and renewed facilities must comply with the revised directions from April 1, 2026, while existing exposures may continue until maturity.

In addition, the central bank has proposed draft rules to allow banks to fund Real Estate Investment Trusts and Infrastructure Investment Trusts that invest in real estate and infrastructure projects.

Only listed trusts with at least three years of operations and stable cash flows will be eligible. RBI has invited feedback on these draft rules till March 6, 2026, and the final rules will come into effect from July 1, 2026.

Overall, the report said the new RBI rules are expected to improve funding access for companies, deepen market liquidity and increase stock market activity while keeping financial risks under control.

(With inputs from ANI)