What Is the RBI’s Proposal?

New Draft Guidelines

• The RBI has put out draft “Commercial Banks – Capital Market Exposure Directions, 2025” to allow banks to finance mergers & acquisitions 
• These would come into effect from 1 April 2026 if adopted. 

Limits on Exposure

• A bank’s aggregate exposure toward acquisition financing is capped at 10% of its Tier-I capital. 
• There’s also a broader cap on capital market exposure: “direct” exposure (which includes acquisition financing) capped at 20% of Tier-I, and combined (direct + indirect) at 40%. 
• For any single acquisition deal, banks can lend up to 70% of the deal value, and the acquiring company must put in at least 30% of the value in equity. 
• The acquisition loan must be fully secured by the shares of the target company. 
• Post-acquisition, the debt-to-equity ratio (at acquirer or SPV) should not exceed 3:1.
• The acquiring company must be a listed entity with a profit-making track record for the last three years. 

Risk Management Requirements

• Banks need a board-approved acquisition financing policy (eligibility, security, monitoring, risk management). 
• They must stress-test acquisition exposures, have early-warning systems, and continuously monitor risk. 

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Why Banks Are Asking for More Flexibility (“Seek More Flexibility”)

While the new rules are a big shift (banks couldn’t do such financing earlier), many in the banking sector feel the 10% cap is too restrictive for large or strategic deals. Key arguments:

10% Is Too Low

• Some bankers argue that for large banks or big-ticket M&A, 10% of Tier-I capital may not provide enough headroom. 
• Financial Express reports that banks are pushing to raise this to 20%-40% of net worth to support larger transactions.

Definition of “Equity” Contribution

• Currently, the acquiring company is required to put in 30% as equity. Some bankers want a broader definition: not just common equity, but also preference shares, convertibles, and other hybrid capital instruments should count. 
• This flexibility would help structure deals better, especially when acquirers don’t want to dilute common equity too much.

Competitive Disadvantage for Domestic Banks

• There’s concern about regulatory arbitrage: If the 10% cap applies to onshore loans but not (or less strictly) on ECB (external commercial borrowings) financed deals, foreign branches or other routes might become more attractive. 
• That could push large M&A financing away from domestic banks, undermining the RBI’s stated aim of deepening domestic bank participation.

Deal Complexity and Risk

• M&A deals are inherently risky: valuations can go wrong, integration may fail, and cash flows may not materialize as expected.
• While RBI has built in safeguards (security, monitoring, D/E cap), banks argue that more headroom (both in exposure and in permissible instruments) would allow better risk-sharing and structuring.

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Implications & Importance

Strategic Growth for Indian Corporates

• If implemented well, this could enable more Indian companies to do larger strategic acquisitions, including internationally — earlier such deals were more dependent on private equity or foreign lenders. 
• This may accelerate consolidation in key sectors, boosting competitiveness.

Risk to Bank Balance Sheets

• Acquisition financing is riskier than traditional lending — due to business risk, integration risk, valuation risk.
• The 10% cap is a risk-management tool, ensuring banks don’t overconcentrate on M&A loans.

Regulatory-Policy Trade-Off

• RBI is trying to strike a balance: enable growth (domestic M&A) vs protect financial stability (not letting banks get overexposed).
• The debate over cap size and eligible equity instruments reflects this trade-off.

Potential Boost to Banking Sector

• If banks get more freedom (higher cap, more flexible equity), they could generate a new lending business line, potentially earning higher spreads.
• Could also deepen the role of banks in India’s economic growth story.

Supervisory Role

• Even if cap is loosened, RBI’s requirement for policies, monitoring, stress tests, early warning systems suggests it will retain a strong supervisory grip.

Macro-Economic Impact

• RBI Governor has said lifting curbs will support the “real economy” — more M&A means more consolidation, potentially more efficient firms, and possibly more investments. 
• But missteps could lead to bad loans, especially if acquisitions are poorly structured or acquirers over-leverage.