BENGALURU: The Reserve Bank of India released a draft circular on Friday, proposing that banks’ total direct capital market and acquisition finance exposures must not exceed 20% of their tier 1 capital.
The RBI also proposed that the aggregate capital market exposure of banks to not exceed 40% of their tier 1 capital.
Tier 1 capital, the highest-quality capital of a bank, includes equity, retained earnings, and certain instruments that can absorb losses.
Earlier this month, the regulator allowed banks to fund acquisitions and raised the cap on loans for buying shares at initial public offerings, as part of a raft of measures to boost bank lending in the world’s fifth-largest economy.
RBI proposed that the aggregate exposure of a bank towards acquisition finance shall not exceed 10% of its tier 1 capital.
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In its proposed rules for acquisition finance, it said that banks may finance a maximum of 70% of the deal value, with at least 30% to be funded by the acquiring company.
It added that commercial banks can offer acquisition finance only to listed entities that have a satisfactory net worth and been profitable for the last three years.
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