The Reserve Bank of India (RBI) issued the (Commercial Banks – Concentration Risk Management) Amendment Directions, 2026, on February 13, 2026. This legislative instrument, promulgated under Sections 21 and 35A of the Banking Regulation Act, 1949, establishes a new prudential framework for managing sectoral risks and institutional exposure.
The directions primarily serve to align the treatment of capital market exposures with the revised credit facility guidelines issued concurrently. By amending the 2025 Directions, the regulator has introduced a structured permissions model that replaces the traditional restrictive stance on share-linked lending with a risk-calibrated approach designed for the contemporary corporate environment.
Statutory Authority and Regulatory Context
The Reserve Bank of India derives its power to issue these directions from the Banking Regulation Act, 1949. Section 21 of the Act grants the central bank the authority to determine the policy in relation to advances to be followed by banking companies. This power allows the regulator to specify the purposes for which advances may or may not be made, the margins to be maintained, and the rates of interest to be charged.
Furthermore, Section 35A provides a broader mandate, permitting the issuance of directions to prevent the affairs of any banking company from being conducted in a manner detrimental to the interests of the depositors or the wider public interest.
The 2026 Amendment Directions are a direct consequence of a comprehensive review undertaken following the issuance of the Reserve Bank of India (Commercial Banks – Credit Facilities) Amendment Directions, 2026. The regulator identified a need for a unified approach to capital market exposure (CME) and acquisition finance, categories that have historically been restricted for domestic commercial banks.
For decades, Indian banks were largely prohibited from financing corporate takeovers or management buyouts, with limited exceptions made for the infrastructure sector. The current amendment signals a departure from this restrictive era, replacing it with a risk-calibrated permissions model that recognizes the maturity of the Indian corporate sector and the necessity of deep institutional capital for strategic mergers and acquisitions.
Structural Definitions and Legal Terminologies
Chapter I of the Directions now includes expanded definitions to ensure interpretational consistency across the banking system. Acquisition Finance is specifically defined as financial assistance provided to an eligible borrower to acquire equity shares or compulsorily convertible debentures (CCDs) in a target company or its holding company. A critical legal requirement is that the transaction must result in the borrower acquiring “control,” as understood under Section 2(27) of the Companies Act, 2013, which includes the right to appoint the majority of directors or control management policy.
Bridge Finance is identified as short-term funding for a maximum of one year, provided there is a firm plan to replace the debt with long-term resources like equity or debt issues. The amendment also clarifies the status of Capital Market Intermediaries (CMIs) as entities regulated by a financial sector regulator providing broking or clearing services, while explicitly excluding collective investment schemes like mutual funds, AIFs, REITs, and InvITs.
Furthermore, the definition of Non-debt Mutual Funds is introduced to capture schemes where the corpus is not exclusively invested in debt securities, ensuring sensitive risk weights for hybrid and equity-oriented funds.
Governance and the Expanded Role of the Board
The 2026 amendments transition toward principle-based regulation by placing the Board of Directors at the center of the risk management structure. Paragraph 6(1)(v) mandates that the Board establish a specific policy for fixing intra-day exposure limits to the capital markets within the aggregate CME prudential limits.
The Board is now responsible for overseeing underwriting benchmarks, equity contribution requirements, and leverage multiples associated with acquisition finance. By requiring board-approved policies for collateral selection and valuation rules, the regulator ensures that high-risk market exposures are integrated into the bank’s core strategy rather than managed through technical silos.
Modernized Components of Capital Market Exposure
Paragraph 95A provides a comprehensive list of components that constitute CME, including both direct and indirect fund-based and non-fund-based facilities. Investment Exposures include direct holdings in equity and preference shares, convertible bonds, and units of non-debt mutual funds, REITs, InvITs, and AIFs.
Credit Exposures cover advances to individuals for share-related investments (IPOs, FPOs, ESOPs) and any loan where shares or non-debt mutual fund units are taken as primary security. Acquisition finance, including exposures taken by overseas branches or subsidiaries, is now a formal component of CME, alongside bridge finance for meeting upfront equity contributions.
The framework also captures trade exposures where a bank acts as a clearing member in equity and commodity derivatives, ensuring that no market-linked risk remains outside the regulatory perimeter.
Prudential Ceilings and Exposure Management
The core of the risk management reform is contained in Paragraph 98A, which introduces a tiered structure of “CME ceilings” maintained on an ongoing basis. The aggregate CME of a bank is capped at 40 percent of its eligible capital base, calculated on both solo and consolidated bases. Within this aggregate limit, a sub-ceiling of 20 percent is imposed on a bank’s direct capital market investment exposures.
Furthermore, a specific 20 percent cap is established for acquisition finance, residing within the broader 40 percent aggregate ceiling. Banks must also fix separate sub-limits for intra-day exposure to single counterparties and aggregate intra-day limits to address the risk of timing mismatches in trade settlements.
Exclusions and Critical Financial Infrastructure
Paragraph 101A specifies several exclusions to protect legitimate development lending and recovery efforts. Investments in a bank’s own subsidiaries, joint ventures, and sponsored Regional Rural Banks (RRBs) are excluded unless these entities become listed. The portion of acquisition finance used for refinancing the existing debt of a target company is also excluded from CME computation, as is any exposure to institutions forming the “Critical Financial Infrastructure” of India.
Annex II lists 22 such entities, including SIDBI, NABARD, NHB, LIC, NSE, and BSE. Other exclusions include promoter shares in infrastructure SPVs where a security charge is created for project lending and underwriting commitments up to 70 percent of the credit equivalent amount if managed through a book-running process.
Valuation Methodologies and Computation
Paragraph 107A introduces technical rigor to exposure valuation, ensuring a conservative view of risk. Direct investments are valued at cost price to prevent capital inflation during market surges, while credit exposures are reckoned based on the sanctioned limit or the actual outstanding amount, whichever is higher. For Qualified Central Counterparty (QCCP) trades, intraday limits are calculated at 30 percent of the sanctioned limit, though end-of-day outstandings are fully reckoned.
Irrevocable Payment Commitments (IPCs) are included based on the settlement cycle: 30 percent for T+1 cycles and 50 percent for T+2 cycles. Paragraph 107B permits banks to offset these exposures with cash and Government securities, provided they apply the prescribed haircuts from the 2025 Capital Adequacy Directions.
Strategic Acquisition Finance: Eligibility and Safeguards
The framework for acquisition finance permits domestic banks to fund strategic mergers, provided both the acquirer and target meet strict criteria. Eligible borrowers must be Indian non-financial companies with a minimum net worth of ₹500 crore and a profit-making track record for the previous three financial years. Unlisted acquirers must also hold an investment-grade credit rating of BBB- or higher.
Bank financing is capped at 75 percent of the independently assessed acquisition value, with the remaining 25 percent funded by the acquirer’s own equity or internal accruals. Post-acquisition, the consolidated debt-to-equity ratio cannot exceed 3:1 on a continuous basis, and the loan must be primarily secured by the target’s shares along with a mandatory corporate guarantee from the acquirer or its parent.
Statutory Interplay with Banking and Insolvency Laws
Banks must continue to comply with Section 19(2) of the Banking Regulation Act, 1949, which restricts shareholdings (as owner or pledgee) to 30 percent of the target’s paid-up capital. Large acquisition deals will likely require syndication to remain within these statutory limits. Crucially, Paragraph 100 provides an exemption for shares acquired through debt-to-equity conversion during restructuring or an insolvency resolution process under the Insolvency and Bankruptcy Code (IBC), 2016. This ensures that recovery and rescue efforts are not constrained by capital market exposure ceilings while maintaining compliance with fundamental banking statutes.
Conclusion
The 2026 Amendment Directions modernize the Indian credit ecosystem by moving from a restrictive permissions model to a principle-based regulatory framework. By establishing tiered ceilings, 40% for aggregate CME and 20% each for direct investments and acquisition finance, the RBI has provided a safe boundary for institutional capital to support strategic corporate consolidations.
The technical precision of the valuation methodologies, combined with strict eligibility criteria for acquisition finance and mandatory board oversight, ensures that this expansion of credit does not undermine systemic stability. Effective April 1, 2026, these directions represent a fundamental recalibration of the relationship between commercial banking capital and the Indian capital markets.
These revised concentration risk norms must also be read with our RBI FEMA 2026 Export Import Regulations Compliance Guide, which outlines the parallel foreign exchange compliance obligations impacting commercial banks’ cross-border exposures.
