RBI nod for leveraged buyouts fails to evoke banker enthusiasm; mixed response to broker lending norms

Stricter rules for lending to brokers for leveraged trading elicited a mixed response. The rules are guardrails against the impact of elevated market volatility. While some expect an impact on volumes, others don’t, citing that prop traders tendeto be well-heeled than most individual investors.

In its final guidelines on acquisition financing released late 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 prior to disbursement, the RBI said.

The central bank has also raised the cap on acquisition financing exposure to 20% of a bank’s eligible capital base from 10% proposed of Tier-1 capital in the draft guidelines.

The RBI first proposed the rules in October. Mint reported earlier that loans extended by banks to help companies buy controlling stakes in other firms had so far operated in a relatively grey area, governed mainly by broad prudential limits on capital market exposure.

On Friday, RBI said many ‘entities’ sought an increase in the acquisition finance cap of 10% originally proposed in October, adding that it has accepted the request.

The higher leeway of 20% rather than the 10% in the draft guideline is much more accommodative and that is what banks wanted, said Sanjay Agarwal, senior director at Care Ratings said. “And then they have allowed 75% to be funded by the banks, while 25% has to come from the equity contribution of the acquirer, which really gives a very soft approach to start with.”

The guidelines seem pretty reasonable, Agarwal said. “While they accommodate the bank’s request, they are putting in guardrails so that the stakeholders can plan accordingly while risks are contained.”

While some bankers said this would give lenders more freedom on such transactions, others are wary of too many conditions.

“I don’t know how they (RBI) are approaching it. If you want to do it, then you have to rely on the banks; you can’t be so prescriptive. You can put overall caps on the capital markets. You should have a board-approved policy, and you should monitor all your M&A financing,” a senior private sector banker said on the condition of anonymity.

“Every transaction is unique. You just can’t define that you can’t do these things and you can do the rest…We should have metrics on debt equity, promoter contribution as defined by each bank’s board policy. That’s the way to do it,” he said.

Overall, bankers believe that bank boards should have been given more freedom, and the RBI guidelines could have been broader. For instance, bankers had requested RBI to allow financing acquisition by non-bank financiers, which was not accepted by the regulator.

Bankers also believe that the detailed eligibility filters and exposure caps may require lenders to create specialised M&A teams with expertise in structuring, due diligence and risk evaluation.

“It will narrow the market a lot more… We are competing with foreign banks that have far more freedom, and private credit can also do it,” he said, suggesting that the restrictions would lead to fewer transactions that would qualify under RBI guidelines.

However, he said RBI’s objective is for Indian banks to get more involved with their clients even as it tightens guardrails around risk.

To be sure, India’s largest lender by assets, State Bank of India (SBI), has already created a team to work in coordination with SBI Capital Markets, the investment banking arm of the bank.

“We wanted to create the institutional capability….once the final guidelines come, we need a board-approved policy before we actually make the product available for our clients,” SBI chairman CS Setty said on 7 February.

The final guidelines will take effect in April.

Another public sector banker said they will have to create a separate team to look at M&A financing through a mix of internal resources as well as lateral recruitment. “We will have to skill our staff to be able to handle these complex transactions.”

Tighter broker funding rules

Separately, the RBI tightened collateral requirements for bank funding to brokers. Under the revised rules, bank guarantees must be supported by at least 50% tangible collateral, with a defined portion in cash (half) and the balance in high-quality liquid assets such as government securities, sovereign gold bonds, listed equities and mutual fund units.

In the case of proprietary trading exposure, bank finance must now be fully secured with clearly specified high-quality collateral. Unlike earlier structures where funding could rely more on bank guarantees, personal guarantees or corporate guarantees without detailed collateral composition norms, the RBI has now explicitly standardized and tightened collateral requirements.

This materially enhances the banking system’s resilience and reduces the likelihood of stress transmission during episodes of heightened market volatility, said a wealth manager.

“For large, well-capitalized brokers that already operate with prudent daily mark-to-market risk controls and maintain strong liquidity buffers, the impact on volumes is unlikely to be meaningful,” said Dhiraj Sachdev, chief investment officer at Roha Venture. “The transition period provides sufficient time for intermediaries to improve the quality and mix of collateral in line with the new standards. Overall, this is a proactive step that strengthens systemic stability without disrupting market activity.”

Kruti Shah, quant analyst at Equirus, said that most proprietary firms had “sufficient wherewithal” to trade without bank funds. “I don’t think there will be any second-order impact on market volumes,” he said, adding that most prop desks were well-capitalised, being backed by family-run brokerages which ran on a hybrid or client and prop model.

Proprietary or prop trading refers to whan brokers use their own capital to trade. Prop traders accounted for 29.7% share of gross turnover on the National Stock Exchange’s cash segment in 2025, second only to retail investors whose share stood at 33.6%, according to the bourse’s data.

In the highly liquid equity options segment, prop share by premium turnover stood at 50.8%, followed by retail traders at 37.1% last year.

K Suresh, president of broker forum Association of National Exchanges Members of India (AnMI), however, said market volumes could suffer from a reduction in activity by prop traders with collateral shifting from “identity-based” to “system-based”, referring to the fact that personal and corporate guaranteed will not be accepted anymore.

Shayan Ghosh contributed to the story.