Banks are aiming for a higher exposure limit for mergers and acquisitions

Bankers are also requesting the RBI to consider allowing banks to finance companies seeking to acquire a majority stake in an entity in tranches and not in a lump sum. | Photo credit: Vertigo3d; iStockphoto

“The regulator should consider allowing banks to finance takeovers of well-managed unlisted entities as several small listed entities have faced governance issues in the past,” said a senior banker seeking anonymity.

“Banks have improved their regulatory compliance standards and set internal ceilings on exposure to each segment. Limiting banks’ exposure to takeover financing to 10 percent of their Tier-I capital will not bring about meaningful change, and the RBI should consider increasing the exposure limit, perhaps to 30-40 percent of banks’ net assets or a higher ceiling,” they said.

Bankers are also requesting the RBI to consider allowing banks to finance companies looking to acquire a majority stake in an entity in tranches and not in a lump sum.

Exposure limit

Last month, the RBI issued draft guidelines proposing to limit a bank’s total exposure to takeover financing to 10 percent of its Tier-I capital. Tier 1 capital consists of equity, retained earnings and certain instruments that can absorb losses. Acquisition financing can only be provided to a listed entity that has satisfactory equity and has been profitable for the past three years, according to the draft guidelines.

Major M&A deals

Some of the major recent domestic M&A transactions include JSW Paints acquiring a 75 percent stake in Akzo Nobel India for $1.6 billion; Torrent Pharmaceuticals buys JB Chemicals & Pharmaceuticals for $3 billion; ONGC NTPC Green buys entire stake in Ayana Renewable Power Pvt Ltd for $2.3 billion; and Adani group to acquire Ambuja & ACC Cement for over $10 billion in 2022.

“The total Tier-1 capital of banks is around ₹28.4 lakh crore, largely vested in the top 10 banks. Therefore, the immediate funding availability for M&A would be slightly above ₹2.8 lakh crore. While this amount is quite small, given that these are the first steps taken by regulators to enable bank financing of M&A, it may be appropriate for the industry to move forward with this. Based on experiences and discussions it is likely that regulators would expand the preconditions,” said Sanjay Agarwal, Senior Director at CareEdge Ratings.

Additionally, State Bank of India Chairman CS Setty said the lender, in consultation with the IBA, will request the RBI to reconsider the 10 per cent Tier-I ratio ceiling for takeover financing.

Published on November 4, 2025