RBI’s 10 % Tier‑I Cap on Acquisition Financing: Banks Seek More Flexibility:
The Reserve Bank of India (RBI) has stirred the financial sector with a draft proposal allowing banks to finance corporate acquisitions—domestically and internationally. While this marks a significant policy shift aimed at enabling Indian companies to scale strategically, the framework has triggered debates. With a cap on acquisition financing exposure set at 10% of a bank’s Tier-I capital, and a 30% equity contribution mandate from the acquiring firm, many bankers believe the proposed limits may hinder the very intent of driving bold mergers and acquisitions.Banks may fund up to 70% of the acquisition deal, provided the acquiring company contributes 30% in equity. The acquiring firm must be listed and profitable for three years, with a satisfactory net worth. Bank exposure for acquisition financing is capped at 10% of Tier-I capital, maintaining conservative lending norms. Overall capital market exposure is also limited: 20% for direct, and 40% for combined (direct + indirect) exposures.
