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Informist, Friday, Feb. 13, 2026

 

--RBI issues amendment directions on capital market exposure

--RBI: Amendment directions on capital market exposure effective Apr 1

 

MUMBAI – The Reserve Bank of India allowed banks to finance an eligible borrower to buy equity shares of compulsorily convertible debentures in a target company for the purpose of taking control over the latter. The regulator had first proposed allowing acquisition financing at the outcome of the Monetary Policy Committee meeting on Oct. 1 and issued a draft circular for comments on Oct. 24. 

 

Among the changes to project financing norms under banks' credit facilities, it also allowed banks to commence bridge financing for a period of not more than one year. While allowing these new areas of business, the regulator also imposed ceilings on a bank's capital market exposure. The new norms will be effective Apr. 1 or earlier, if the bank makes necessary changes beforehand.

 

The total exposure of a bank to capital markets shall not exceed 40% of its eligible capital, the RBI said. Direct capital market exposure is capped at 20% of the eligible capital base, with acquisition finance also allowed up to a limit of 20%.

 

"Within its aggregate CME limit, a bank shall have a separate sub-limit for intra-day exposure to a single counterparty, as well as an aggregate limit for all intra-day exposures," the revised norms said. 

 

Under the amended directions, capital market intermediaries would mean regulated entities undertaking trade execution and market infrastructure services in capital markets, including broking, clearing, custody, market making or other incidental services. This would not include standalone primary dealers and qualified central counterparties, it said. Under eligible securities, the RBI has included listed group-1 equity shares and preference shares, government securities, listed debt securities, units of exchange traded funds, excluding gold, silver and any other commodity exchange traded funds, and units of Real Estate Investment Trusts and Infrastructure Investment Trusts. 

 

Further, the RBI has also allowed banks to extend acquisition finance to an Indian non-financial company for acquiring equity stakes in domestic or foreign companies as strategic investments, that is, those investments which are driven by the core objective of creating long-term value for the acquirer through potential synergies, rather than mere financial restructuring for short-term gains.

 

The central bank further detailed that banks' acquisition financing can be extended to the acquiring company, being a non-financial company or directly, or an existing non-financial subsidiary of the acquiring company. It can also be extended to a step-down special purpose vehicle set up by the acquiring company specifically for the purpose. 

 

An acquiring company can only sanction the acqusition finance if it is listed on a recognised stock exchange in India, has a minimum net worth of INR 5 billion, and has reported net profit after taxes in each of the last three consecutive financial years, the RBI said. In case the acquiring company is unlisted, it should have an investment grade rating, BBB- or above, from a credit rating agency, a minimum net worth of INR 5 billion and net profit after taxes reported in each of the last three consecutive financial years. "If there is no rating available for the acquiring company at the time of sanction, it shall have to be obtained prior to disbursement of acquisition finance," it said. 

 

The central bank has also directed banks to put in place a board-approved policy on acquisition financing. Further, the central bank said that an acquisition can be done through a single transaction, or a series of inter-connected transactions but need to be completed within 12 months from the date of execution of the acquisition agreement. 

 

The RBI further said that an acquiring company and the target company cannot be entities under common control, management, or promoter group, whether directly or indirectly. Further, the RBI stated that banks cannot extend credit facilities against its own securities, partly paid shares, collateral of Indian Depository Receipts, commercial papers and non-convertible debentures of original or initial maturity up to one year, among others. 

 

The RBI has also directed banks to lay down loan-to-value ratios for loans against eligible securities to individuals. Under the policy, the central bank has directed banks to keep loan-to-value ceiling of 60% for listed shares and listed convertible debt securities and 75% for mutual funds, units of exchange traded funds and REITs/InvITs.

 

Under the amended norms, banks can grant loans to individuals for subscribing to shares under initial public offering, follow-on public offer, or under employee stock option plan up to INR 2.5 million per individual. However, the loan amount should not be over 75% of the subscription value or granted to the bank's own employees or Employees' Trust set up by the bank for purchasing its own securities under IPOs/FPOs/ESOPs or from the secondary market, it said. 

 

Banks are also directed to put in place counterparty as well as aggregate exposure limits for capital market intermediaries, within the overall prudential limits for capital market exposure, and relevant limits prescribed under the large exposures framework and intra-group transactions and exposures. 

 

"A bank may provide need-based credit facilities to CMIs (capital market intermediaries) to fund their day-to-day operations, including general working capital facilities and specific facilities such as financing for margin trading undertaken by stockbrokers; overdraft/credit line facility to stockbrokers/commodity brokers/clearing members to meet settlement related timing mismatches; and market making," the RBI said. 

 

Further, banks can also issue guarantees on behalf of brokers or professional clearing members and in favour of exchanges or clearing houses in lieu of security deposit to the extent it is acceptable in the form of bank guarantee as laid down by stock exchanges and margin requirements as per exchange regulations. "Such guarantees shall be secured by a minimum collateral of 50 per cent, out of which 25 percent shall be in cash.," it said.  End

 

Reported by Pratiksha and Aaryan Khanna

Edited by Akul Nishant Akhoury

 

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