What changed
RBI issued a clarification extending the existing ban on bank loans for promoters' equity contributions to also cover ancillary costs like non-compete fees. The restriction now explicitly applies to overseas branches and subsidiaries of Indian banks as well.
What it means for you
Indian banks must ensure no loan products, including those for acquisition-related expenses, are used to fund promoters' equity contributions. This tightens compliance requirements, especially for cross-border transactions, and reinforces the principle that promoters bear equity risk with their own capital.
What you must do
- Review all loan proposals to ensure no financing is provided for promoters' equity contributions or related costs like non-compete fees.
- Update internal credit policies to explicitly prohibit such financing, including for overseas branches and subsidiaries.
- Train credit and relationship teams on this clarification to avoid inadvertent violations.
- Audit existing exposures to identify and rectify any non-compliant loans.
Who it affects
All commercial banks (excluding RRBs), Overseas branches and subsidiaries of Indian banks, Corporate borrowers seeking promoter funding
Does this circular ban all bank loans related to equity acquisitions?
No, it only bans loans for promoters' equity contributions and related costs like non-compete fees. Exceptions exist for overseas joint ventures, PSU disinvestment, etc., as per the 1998 master circular.
Are overseas branches of Indian banks exempt from this restriction?
No, the circular explicitly states that the restriction applies to overseas branches and subsidiaries of Indian banks.