RBI’s New Framework Enables Banks to Fund M&As
The Reserve Bank of India (RBI) has made a significant shift by permitting banks to lend money for Indian corporations to engage in mergers and acquisitions (M&As). In the past, banks were prohibited from financing these kinds of purchases, forcing businesses to turn to non-banking financial institutions or overseas lenders. In order to facilitate bank lending for these transactions, the RBI will provide a framework, particularly for listed corporations where regulations and transparency are more apparent.
MARKET NEWS
10/2/20252 min read
A major policy change that permits Indian banks to finance mergers and acquisitions (M&As) by Indian corporations was announced by the Reserve Bank of India (RBI). The banking industry has long called for this action, which broadens the banks' capital market lending capabilities and attempts to increase credit flow to the business sector, which previously relied on foreign lenders, private equity firms, or non-banking financial corporations (NBFCs) for acquisition financing.
Among the RBI's announcement's main points are:
The creation of a structure that allows Indian banks to finance local corporations' acquisitions. During the bi-monthly monetary policy announcements, RBI Governor Sanjay Malhotra emphasized this action.
To mitigate risks such as hostile takeovers, the framework is expected to begin with listed firms first, as these transactions are more transparent and approved by shareholders.
The regulatory cap on lending against listed debt securities has been lifted.
Bank loan limits against shares have increased from Rs 20 lakh to Rs 1 crore per individual.
The initial public offering (IPO) funding cap has been raised from Rs 10 lakh to Rs 25 lakh per investor.
The 2016 framework, which prohibited banks from lending to very big borrowers (credit limits of Rs 10,000 crore and above), was removed.
By striking a balance between protecting banks from financial mismanagement and promoting corporate expansion, the RBI is demonstrating its proactive support for market expansion and corporate consolidation.
It is anticipated that this regulatory change will open up new funding options for Indian businesses, facilitating more strategic acquisitions and general expansion while also perhaps significantly increasing M&A activity. Analysts anticipate that this will improve India's banking industry's alignment with international acquisition finance standards and reduce the cost of capital for Indian companies.
Acquisition finance was formerly limited to more costly private sources like NBFCs or overseas lenders because Indian banks were typically prohibited from funding for equity acquisition or leveraged buyouts. This barrier is removed by the RBI's new framework, which opens up a potentially sizable credit growth market valued at over Rs 1 lakh crore, according to some sources.
All things considered, the RBI's action is regarded as a significant market reform that will improve liquidity, expand access to credit, and promote greater involvement in India's corporate acquisition and equity markets.