RBI’S Strategic Liberalisation of Acquisition Finance, Lending Against Securities And Capital Market Exposure
I. Introduction
The Reserve Bank of India has issued the Reserve Bank of India (Commercial Banks – Credit Facilities) Amendment Directions, 2026 together with corresponding amendments to the Reserve Bank of India (Commercial Banks – Concentration Risk Management) Directions, 2025 (collectively “the Directions”). These amendments put in place a new, omnibus framework for banks’ capital market exposures, with three key pillars:
First, a codified and substantially liberalised regime for “acquisition finance” to Indian corporates;
Second, a rationalised framework for loans against eligible marketable securities (including equity, listed debt, REITs and InvITs) with specified loan-to-value (LTV) and exposure ceilings; and
Third, a more principle-based, risk-sensitive regime for credit facilities to capital market intermediaries (CMIs).
The Directions will come into force from April 1, 2026, or an earlier date on which a bank chooses to adopt them in their entirety; legacy loans and guarantees may run to maturity, but all fresh and renewed facilities after adoption must comply with the new regime.
II. Commercial imperative for the new framework
The revised Directions respond to long-standing market feedback that the earlier capital market exposure norms were fragmented, heavily prescriptive and not aligned with India’s growing need for bank-led support to domestic M&A and capital markets. By expressly recognising “acquisition finance” as a distinct product, and permitting banks to fund both onshore and offshore acquisitions by Indian non‑financial companies up to a calibrated cap within the overall Capital Market Exposure (“CME”) ceiling, the RBI is facilitating strategic consolidation and outbound expansion while containing leverage through minimum equity contributions, valuation safeguards and debt–equity caps.
Simultaneously, the removal of a regulatory ceiling on lending against listed debt securities, the enhancement of loan limits against equity, units of REITs and InvITs, and a more nuanced treatment of exposures to CMIs are aimed at deepening secondary market liquidity while curbing excessive bank-funded speculative activity. The shift to a consolidated CME definition, with a 40 per cent of eligible capital base aggregate ceiling (and a 20 per cent sub‑limit for direct exposures as well as for acquisition finance), also reflects the RBI’s intent to give banks greater structuring flexibility within clear risk‑based guardrails, and to align capital market lending policies, intra‑day exposure management and collateralisation standards with the broader large exposure and capital adequacy frameworks.
III. Re‑defined capital market exposure and prudential ceilings
Under the amended Concentration Risk Management Directions, a bank’s CME now expressly aggregates both direct “investment exposures” and a broad set of “credit exposures” with links to equity and non‑debt mutual fund risks. Investment exposures include direct investments in equity and preference shares, convertible bonds and debentures, units of non‑debt mutual fund schemes, and units of REITs, InvITs and Alternative Investment Funds. Credit exposures swept into CME range from advances to individuals for investment in shares (including IPOs/FPOs/ESOPs), convertible instruments and units of non‑debt mutual funds, to any advances where such instruments constitute primary security or principal collateral, all credit facilities to CMIs, acquisition finance (including by overseas branches/subsidiaries), financing to non‑debt mutual fund schemes, bridge finance to meet upfront equity contributions in new companies, underwriting commitments for primary issues where the end‑use is acquisition finance or non‑debt mutual funds, irrevocable payment commitments (IPCs) to clearing corporations, and trade exposures as clearing members in equity/commodity derivatives.
The Directions impose a firm Quantitative Overlay on this expanded definition. On both solo and consolidated bases, aggregate CME must not exceed 40 per cent of the bank’s eligible capital base. Within this, direct capital market exposure, comprising the investment exposures described above, is capped at 20 per cent of eligible capital. A separate 20 per cent of eligible capital base sub-limit applies to acquisition finance exposures, again within the overall 40 per cent CME ceiling. Banks remain free to adopt lower internal ceilings in line with their risk appetite and strategy, and must maintain compliance with these limits on an ongoing basis. The framework also carves out specific exclusions from CME computation, including investments in own subsidiaries, joint ventures and sponsored RRBs, certain critical financial market infrastructure entities, portions of acquisition finance used purely to refinance existing target-company debt, investments in other banks’ regulatory capital instruments and CDs, and certain exposures to brokers outside commodity/equity segments or CMIs engaged predominantly in debt market making.
For purposes of computing CME, direct investments are taken at cost price. Credit exposures, fund-based and non‑fund based, are reckoned with reference to the higher of sanctioned limits or outstanding, save that fully drawn term loans without any re‑drawal option may be taken at outstanding. Intraday limits extended to address settlement timing mismatches where receivables are from a Qualified Central Counterparty (QCCP) are recognised at 30 per cent of the sanctioned limit for CME purposes, with any end‑of‑day outstanding fully counted. IPC exposures are measured on a net settlement obligation basis for each client within a settlement cycle, with 30 per cent recognition for T+1 intraday exposures and 50 per cent for overnight T+2 obligations, subject to conditions on clearing through the same clearing corporation and maintenance of an absolute lien over pay‑out securities. Banks may offset CME by recognised cash and Government securities collateral, subject to the standard regulatory haircuts. At the governance level, boards are specifically tasked with setting policies for intra‑day capital market exposure limits within these prudential ceilings.
IV. Acquisition finance – enabling framework and conditions
The Directions introduce a detailed chapter on “Acquisition Finance”, which is defined as financial assistance provided to an eligible borrower for acquiring equity shares or compulsorily convertible debentures (CCDs) in a target company or its holding company, resulting in the borrower acquiring “control” as per the Companies Act. The definition also captures refinancing of existing debt of the target company where such refinancing is integral to the acquisition finance. Banks may now extend acquisition finance to an Indian non‑financial company making strategic equity investments in domestic or foreign targets, provided the primary objective is long‑term value creation through operational synergies, and not a purely financial restructuring for short‑term gains. Banks must adopt a board‑approved acquisition finance policy, which sets underwriting benchmarks tailored to the structural complexity of these transactions, including exposure limits, minimum equity contribution thresholds, leverage multiples and cash‑flow certainty standards.
On the borrower side, acquisition finance may be extended directly to the acquiring non‑financial company, to an existing non‑financial subsidiary of the acquirer, or to a step‑down special purpose vehicle established by the acquirer specifically for the transaction, without prejudice to norms applicable to Core Investment Companies. The acquiring company (or, where an SPV or subsidiary is used, the controlling acquiring company) must have a minimum net worth of ₹500 crore and must have reported net profits after tax in each of the three preceding financial years. Listed acquirers are required to meet only these financial tests, whereas unlisted acquirers must additionally hold an investment‑grade rating (BBB‑ or above) from a credit rating agency; where such rating is not available at sanction, it must be obtained before disbursement.
A central condition is that the acquisition must result in the acquirer obtaining “control” of the target—either through a single transaction or a series of inter‑connected transactions completed within 12 months from the acquisition agreement. Where the acquirer already holds control, acquisition finance can be used only for additional stake purchases that cross specified voting-right thresholds of 26 per cent, 51 per cent, 75 per cent or 90 per cent, each threshold reflecting materially enhanced governance or control rights under applicable law. In Indirect Acquisitions, where control is obtained via acquisition of a holding or intermediate company, banks must assess the financing on the basis of ultimate control of the underlying target, subject to the same conditions. Ordinarily, the acquiring and target companies cannot be “related parties” as per the Companies Act or through common control, management or promoter group, except where the financing is for the additional stake acquisitions permitted under the specific carve‑out. Refinance of pre‑existing acquisition finance transactions is permitted, but must comply with these Directions as well as the prudential norms under the stressed assets resolution framework.
Financing parameters are set to ensure meaningful equity at risk. Total bank financing cannot exceed 75 per cent of the acquisition value, which must be independently assessed by the financing bank. For listed targets, valuation is to be conducted by one independent valuer in accordance with the SEBI SAST Regulations parameters for infrequently traded shares. For unlisted targets, the lower of the valuations furnished by two independent valuers, again applying SAST-consistent metrics, must be adopted. The acquirer must fund the balance 25 per cent from its own funds, including internal accruals or fresh equity issuance. A corporate guarantee from the acquiring company, its parent or group holding entity is mandatory, and post-acquisition, the consolidated debt–equity ratio at the acquiring company’s consolidated balance sheet level must not exceed 3:1 on a continuous basis.
Security creation is tightly prescribed. Acquisition finance must be secured by the acquired equity shares or CCDs of the target company, which must be free from encumbrances at the time they are charged. Other unencumbered assets of the acquirer and/or target, as well as promoter personal guarantees, may be taken as additional collateral in accordance with the bank’s policy, and the structure must comply with Section 19(2) of the Banking Regulation Act on shareholding limits. For listed acquirers, bridge finance may be used to meet the 25 per cent own‑fund requirement, but only where there is a clearly identified repayment source (such as an equity issue or asset sale) to replace the bridge with equity within a maximum of 12 months, where any bank‑provided bridge is itself fully secured, and where such bridge does not dilute the security coverage available for the acquisition finance.
From a concentration perspective, banks must set internal limits for aggregate acquisition finance exposures within the regulatory CME framework, but in a significant liberalisation the cap on acquisition finance has been raised to 20 per cent of the bank’s eligible capital base, subject to the overall 40 per cent CME ceiling. In addition, a limited carve‑out is provided for acquisition finance extended by overseas branches of Indian banks under syndication arrangements, which is exempt from the detailed prudential requirements of the acquisition finance chapter, provided the aggregate participation of all overseas branches of that bank in the particular deal remains below 20 per cent of total debt funding.
V. Loans against eligible securities – individuals and non‑individuals
The Directions replace the earlier fragmented regime with a dedicated section on “Loans Against Eligible Securities.” “Eligible Securities” are defined to include listed Group‑1 equity and preference shares, Government securities (including Treasury Bills and Sovereign Gold Bonds), listed debt securities (including convertible debt) rated BBB or higher, units of mutual fund schemes that are either listed or offer repurchase/redemption through the asset management company (with equity or debt underlying), units of exchange traded funds other than commodity ETFs, and units of REITs and InvITs. Banks must frame a policy that, at a minimum, covers criteria for selecting securities as collateral, portfolio‑level and single borrower/group borrower limits, concentration limits for single securities, LTVs, margins and haircuts for different collateral classes, and rules for ongoing valuation and margin calls.
Certain loans are expressly prohibited. Banks may not lend against their own securities, save that individuals may be granted loans against the bank’s long‑term infrastructure bonds under a separate board policy that prescribes adequate margins, permitted purposes, a per‑borrower ceiling (illustratively ₹10 lakh) and ensures the loan tenure does not exceed the bond maturity; banks are not permitted to lend against similar bonds issued by other banks. Banks may extend loans against their own certificates of deposit and buy back such CDs where these are held by mutual funds, subject to SEBI mutual fund regulations, but such finance, where provided to equity‑oriented mutual funds, continues to be treated as CME. Other prohibitions include loans against partly paid shares, securities subject to lock‑in, Indian Depository Receipts, securities of entities to which banks are otherwise prohibited from lending, loans to companies for buy-back of their own securities, and loans against commercial papers and non‑convertible debentures with original maturity up to one year.
In undertaking lending under this chapter, banks must monitor end‑use robustly to ensure funds are not diverted to speculative purposes, set risk limits that reflect security liquidity, price volatility and potential stress‑period corrections, ensure that the residual maturity of collateral securities (other than perpetuals) is at least equal to or longer than the loan tenor, comply with Section 19(2) in respect of shareholdings acquired through enforcement, respect prudential limits even where loans are made to joint holders of securities, and adhere to the statutory requirements for creation and invocation of pledges and liens over Government securities and SGBs. All such loans against eligible securities are included in the CME computation, except where specifically exempted elsewhere.
For individuals (including non‑commercial HUFs), banks may extend loans against eligible securities subject to defined LTV ceilings and prudential caps. LTV ceilings are to be set by each bank’s policy but cannot exceed prescribed maxima: loans against listed shares and listed convertible debt cannot exceed 60 per cent LTV; loans backed by mutual funds other than pure debt schemes, ETFs and units of REITs/InvITs are capped at 75 per cent LTV; loans against debt mutual funds and against listed debt securities rated AAA are permitted up to 85 per cent LTV, while those secured by listed debt rated between AA and BBB are capped at 75 per cent LTV. For Government securities and Treasury Bills, LTV limits are left to banks’ policy, and for SGBs the applicable norms for loans against gold and silver collateral apply. LTV must be monitored on an ongoing basis, and any breach must be rectified immediately and in any event within seven working days. Debt securities are to be valued in accordance with the RBI’s investment portfolio Directions, while listed shares and units of mutual funds/ETFs/REITs/InvITs must be valued at the lower of the average daily closing prices/NAVs over the previous six months or the immediately preceding trading day’s closing price/NAV.
Prudential amount ceilings apply in addition to LTVs. Banks may fix their own limits for loans to individuals against Government securities, listed debt securities and units of debt mutual funds. However, for loans secured by other eligible securities (such as equity, non‑debt mutual funds, ETFs, REITs and InvITs), the aggregate exposure to an individual borrower is capped at ₹1 crore. Within these ceilings, banks may grant up to ₹25 lakh per individual specifically for acquisition of securities from the secondary market.
For primary market exposures, banks are permitted to finance subscriptions by individuals to IPOs, FPOs and ESOPs up to ₹25 lakh per individual, subject to a minimum cash margin of 25 per cent of the subscription value (i.e., loan not exceeding 75 per cent of the subscription amount). Banks are prohibited from extending any loans, whether secured or unsecured, to their own employees or employee trusts to purchase the bank’s own securities in IPOs/FPOs/ESOPs or from the secondary market. In all cases, a lien must be created over the shares to be allotted, and upon allotment these shares must be pledged in favour of the lending bank.
For non‑individuals other than CMIs, banks may, under their approved policy, provide finance to non‑financial entities against eligible securities (alongside other collateral) for working capital and other productive business purposes, subject to the same LTV ceilings and strict end‑use monitoring to ensure that funds are not utilised for speculation. Banks may also put in place a board‑approved policy to provide bridge finance to non‑financial corporates against eligible securities held by them or immovable properties to fund promoters’ equity stakes in new companies. These facilities must respect the LTV ceilings and end‑use safeguards prescribed in the chapter.
VI. Credit facilities to Capital Market Intermediaries
A new dedicated chapter governs bank lending to CMIs, which are defined as regulated entities engaged in trade execution and market infrastructure services in capital markets, including broking, clearing, custody, market making and incidental services. Standalone primary dealers and QCCPs are expressly excluded from the definition, and exposures to them are outside CME. Credit facilities may be extended only to CMIs that are registered and supervised by a financial sector regulator and are in compliance with the prudential norms set by that regulator. All exposures to CMIs, unless specifically exempted, must be treated as CME. Banks must set both counterparty‑level and aggregate limits for CMI exposures within the overall CME, Large Exposures Framework and intra‑group exposure limits under the Concentration Risk Management Directions.
The Directions recognise a range of permissible facilities. Banks may provide need‑based credit to CMIs for day‑to‑day operations, including general working capital lines, financing for margin trading facilities offered by stockbrokers to their clients under SEBI regulations, overdrafts and credit lines to brokers/clearing members to address timing mismatches in settlements, and funding for market‑making activities in equity and debt markets, including Government securities. Banks may also issue guarantees on behalf of brokers or professional clearing members in favour of exchanges and clearing houses, in lieu of security deposits or margin requirements, subject to exchange rules on the acceptability of bank guarantees. Such guarantees must be backed by collateral of at least 50 per cent of the guaranteed amount, of which at least 25 per cent must be in cash.
At the same time, there is a categorical prohibition on banks providing finance to CMIs for acquisition of securities on their own account, including proprietary trading and investment books. Narrow exceptions exist: banks may finance market making operations, provided they do not accept as collateral the very securities in which the CMI is making a market; they may extend short‑tenor working capital finance to support warehousing of debt securities for up to 45 days against firm client orders; and they may issue guarantees to support proprietary trading where such guarantees are fully backed by collateral comprising cash, cash equivalents and Government securities, with at least 50 per cent in cash.
Security coverage requirements for CMIs are stringent. As a general principle, all credit facilities to CMIs must be fully secured (100 per cent collateralised) by eligible securities or by other usual collaterals such as cash, other permissible financial assets (excluding short‑term CP and NCDs of up to one year), immovable property, receivables, bank guarantees and standby letters of credit. Intraday limits to CMIs to manage settlement shortfalls in centrally cleared client trades may be granted against a reduced collateral coverage of 50 per cent, but only where receivables are from a QCCP. Financing to brokers for margin trading facilities must be fully secured by cash, cash equivalents and Government securities, with at least 50 per cent of collateral in cash. Banks are required to impose appropriate haircuts on all eligible securities accepted as collateral, and in the case of equity shares the haircut cannot be less than 40 per cent.
The Directions also clarify interaction with the broader non‑fund based facilities framework. Notwithstanding the general prohibition on issuing bank guarantees favouring another regulated entity for the purpose of enabling that entity to extend fund‑based facilities, counter‑guarantees issued by other Indian banks and SBLCs from reputable foreign banks (including the foreign parent of a CMI) may be accepted as eligible non‑cash collateral wherever permitted in this chapter, subject to compliance with applicable FEMA regulations. Collateral coverage must be maintained on a continuous basis, and facility documentation must contain explicit provisions for margin calls and top‑ups where collateral values fall. As a rule, collateral is expected to belong to the borrower CMI; however, collateral provided by a promoter or group entity may be accepted if it is unencumbered, exclusively charged in favour of the lending bank and legally enforceable.
VII. Way Forward
For banks and their counterparties, these Directions fundamentally recast how capital market risks are measured, limited and priced. Product‑wise, they provide clear regulatory space for acquisition finance and bridge financing structures (including promoter stake funding for new ventures), allow more meaningful monetisation of capital market portfolios (particularly listed debt, REITs, InvITs and mutual fund units) and codify a range of operational facilities to CMIs, while simultaneously tightening conditions around own‑account trading finance, leverage at the acquirer level and retail leveraging of equity portfolios through calibrated LTV and quantum caps. Policy‑wise, boards will need to adopt or overhaul policies on acquisition finance, loans against financial assets (including eligible securities), bridge finance and CMI lending, recalibrate internal concentration and intra‑day exposure limits to align with the 40 per cent CME and 20 per cent acquisition finance ceilings, and build processes for continuous monitoring of LTVs, haircuts, valuation norms and control acquisition conditions.
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This Banking & Finance update is intended for general guidance only and does not constitute legal advice. For more information, please reach out to Shubham Sharma at 2636@cnlu.ac.in.
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