RBI Draft Acquisition Finance Norms: 10% Tier-I Cap Debated
Why in the news
RBI’s draft circular of 24 October 2025 reverses the earlier bar on bank lending for mergers and acquisitions. Bankers say the 10% Tier-I ceiling is too tight, while experts see the caution as justified.
Draft norms
| Parameter | Proposal |
|---|---|
| Purpose | Acquisitions (domestic or overseas) creating long-term strategic value, not mere financial restructuring |
| Bank funding | Up to 70% of acquisition cost |
| Acquirer’s share | 30% equity from own resources |
| Eligible acquirers | Listed companies with strong net worth and at least 3 years of profits |
| Exposure limit | 10% of Tier-I capital |
Bankers’ views
- The 10% cap is too low for large banks to back meaningful deals; some suggest roughly 30% for well-governed banks.
- The 30% equity should count preference shares, convertibles and other hybrid capital, not only pure equity.
- Corporate credit growth has slowed as firms turn to bonds, overseas loans and equity markets.
- Acquisition finance could grow like infrastructure finance: a few large banks lead, smaller ones take small shares.
Why RBI is cautious
- Deals can fail, turning an optimistic loan into a bad loan.
- Asset-liability mismatch: long-term loans funded by short-term money raise liquidity risk.
- Risk of over-exposure if rules are loosened too early.
Way forward
- Strengthen credit underwriting and risk assessment; set up dedicated acquisition finance teams and internal guardrails.
- Build a quality acquisition finance book, especially in mid-market deals, before seeking softer norms.
- EY notes the listed-only rule excludes profitable unlisted mid-market and family-owned firms; eligibility may need calibrated widening later.
Exam angle
- Draft date: 24 October 2025.
- Split: 70% bank finance, 30% own equity.
- Cap: 10% of Tier-I capital.