Tough rules on M&A finance spark caution

New RBI rules set strict conditions for banks to finance acquisitions

- Subhana Shaikh & Ram Sahgal

The Reserve Bank of India’s new rules on merger and acquisition financing may open doors, but too many conditions could deter banks and borrowers, experts said. Stricter rules for lending to brokers for leveraged trading have elicited mixed response. The rules are guardrails against the impact of elevated market volatility. While some expect an impact on volumes, others don't, stating prop traders tend to be more well-heeled than most individual investors.

On Friday, the Reserve Bank of India (RBI) allowed banks to provide funding when the acquirer already controls the target company and seeks to raise its stake beyond prescribed thresholds from 26% to up to 90%. For listed companies, borrowers must meet strict financial criteria, including a minimum net worth of ₹500 crore and three consecutive years of net profits. Unlisted entities need an investment-grade credit rating.