In a landmark move set to reshape corporate financing in India, the Reserve Bank of India (RBI) has decided to allow banks to fund mergers and acquisitions (M&A) by Indian corporates. The enabling framework, announced after the monetary policy committee (MPC) meeting, marks a significant shift in banking policy and aligns Indian practice more closely with global standards.
According to Sanjay Malhotra, governor, RBI, the decision is part of a broader overhaul of capital market exposure guidelines for banks and regulated entities. It is designed to improve the flow of credit, support corporate expansion and provide Indian banks with a deeper role in capital market activities.
He says the framework for acquisition financing would be released shortly, following long-standing demands from the banking industry. The move comes particularly after the State Bank of India (SBI), the country's largest lender, pressed for regulatory clearance to allow acquisition funding, citing the global precedent where banks routinely support corporate consolidation.
Higher Lending Limits & Relaxed Rules
Alongside acquisition financing, RBI announced sweeping changes to lending norms. The ceiling on loans against listed debt securities has been removed altogether, while the individual limit for loans against shares has been raised five-fold from Rs20 lakh to Rs1 crore. For initial public offering (IPO) financing, the limit has been increased from Rs10 lakh to Rs25 lakh per person.
These changes would especially benefit high net worth individuals (HNIs) seeking larger allocations in public offerings, while also easing liquidity for investors and corporates.
Boost for Infrastructure Financing
In a separate move, RBI has introduced a principle-based framework to reduce risk weights on loans extended by non-banking financial companies (NBFCs) to operational, high-quality infrastructure projects. This is expected to lower the cost of capital and attract more participation in infrastructure funding which is critical for India’s growth trajectory.
Ajay Kumar Srivastava, managing director and chief executive officer (MD&CEO) of Indian Overseas Bank, says the measures, including easing of risk weights for MSME and real estate lending, alongside the enabling framework for acquisition financing, “are expected to further increase credit flow in the market and promote inclusive growth.”
Withdrawal of 2016 Rule & More Flexibility for Banks
RBI also withdrew the 2016 'guidelines on enhancing credit supply for large borrowers' that discouraged lending to corporates with aggregate bank exposure exceeding Rs10,000 crore. Analysts noted that this step will free up capital and ease lending restrictions on large borrowers, boosting overall credit availability in the system.
Anil Gupta, senior vice president and co-group head at ICRA, says, “The expanded lending scope allowing banks to finance corporate acquisitions marks a step in deepening their role in capital market activities. Relaxation of norms on lending against securities and IPO financing will further empower banks in supporting market growth.”
Part of 22 Reform Measures
RBI emphasised that these initiatives are part of 22 measures aimed at strengthening resilience and competitiveness of the banking system, simplifying regulations, enhancing consumer satisfaction and further internationalising the Indian rupee.
Other measures include:
- A new expected credit loss (ECL) framework for provisioning, to be implemented from 2027.
- Draft guidelines on the Basel III standardised approach for credit risk.
- Introduction of a risk-based premium model for deposit insurance which will benefit stronger banks.
- Consolidation of hundreds of regulatory circulars into simplified master directions.
- Easing restrictions on current accounts and other transaction accounts for better credit discipline.
- A discussion paper on licensing of new urban co-operative banks after two decades.
A Turning Point for Corporate Lending
Industry observers see RBI’s approval for acquisition financing as a turning point. Until now, Indian corporates have relied heavily on non-banking channels, overseas borrowings, or private equity funds for acquisitions. Allowing banks to participate is expected to deepen domestic financing options, though experts caution that risks will need to be carefully monitored.
Recently, CS Setty, chairman of SBI, had argued that permitting banks to fund acquisitions, especially in transparent, shareholder-approved cases, would minimise risks such as hostile takeovers and bring India on par with global practices.
RBI’s latest steps are expected to balance this demand with regulatory oversight, aiming to spur corporate activity without undermining financial stability.
