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The Reserve Bank of India (RBI) has suggested that banks be allowed to lend money to Indian corporations so they can acquire full or controlling stakes in other Indian or foreign companies. This move aims to support strategic investments expected to create long-term value for the companies.

According to the proposed guidelines, only listed companies with a strong net worth and a profitable track record over the past three years will be considered for this type of financing. Banks may fund up to 70 per cent of the total acquisition cost, while the remaining 30 per cent must come from the company’s own equity contribution, IANS reported.

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The proposal also allows the use of a step-down special purpose vehicle (SPV) created specifically for the acquisition to receive funding, alongside the acquiring company. The RBI has asked banks to establish a comprehensive policy framework covering borrower eligibility, risk management, security, margins, and monitoring procedures for acquisition finance.

According to the draft circular, it is mandatory for the SPV and the purchasing firm to be corporate entities, while financial intermediaries such as alternative investment funds (AIFs) or non-banking financial companies (NBFCs) would not be allowed to take part. Family links between the acquirer and the target company are also prohibited as per the circular.

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According to Securities and Exchange Board of India (SEBI) regulations, two independent valuations must be conducted to determine the target company’s acquisition value. Similarly, banks are expected to assess credit risk using the combined balance sheets of both the acquiring and target companies.

Currently, there are not many banks that are involved in merger and acquisition financing deals. The RBI's proposal provides for wider access to such financing and at the same time upholds the responsible lending practices. Before the finalisation of the guidelines, stakeholders have been asked to share their views.