Gist – The Reserve Bank Of India (RBI) has proposed a new, unified framework—the Capital Market Exposure Directions, 2025—to consolidate over 50 circulars. It sets a 40% of Tier 1 capital ceiling for total exposure and a 20% sub-limit for direct investments. Strict LTV ratios are mandated for loans against shares (60%) and equity funds (75%). The draft introduces clear rules for individuals, intermediaries, and corporates, aiming to balance market growth with financial stability, effective April 2026.
The Reserve Bank of India (RBI) in a significant move to modernize and consolidate the regulatory landscape, has released a draft circular, the “Capital Market Exposure (CME) Directions, 2025.” This comprehensive framework seeks to replace a sprawling web of over 50 existing circulars with a single, unified set of rules governing how commercial banks can invest in and lend against capital market securities.
The draft directions, open for public comment, aim to strike a balance between enabling structured bank financing for the capital markets and implementing robust risk controls to safeguard the financial system. If finalized, the new regime will come into effect on April 1, 2026.
Key Pillars of the New Framework
The proposed framework is built on four core pillars: clear exposure ceilings, rationalized definitions, strict loan-to-value (LTV) ratios, and segmented rules for different borrower categories.
1. Prudential Ceilings: Capping the Risk
The RBI has introduced clear, hard limits on banks’ capital market activities:
- Overall CME Limit: A bank’s total capital market exposure cannot exceed 40% of its Tier 1 Capital.
- Direct Exposure Limit: Within the overall limit, direct investments in shares and acquisition finance are capped at 20% of Tier 1 Capital.
- Acquisition Finance Sub-Limit: A further sub-limit for acquisition finance is set at 10% of Tier 1 Capital.
Notably, exposures to critical financial infrastructure (like NSE, CCIL, NPCI), debt instruments, and debt mutual funds are excluded from these ceilings, encouraging banks to support core market infrastructure and safer debt instruments.
2. Clearer Definitions: What Counts as CME?
The draft provides much-needed clarity by explicitly defining CME to include:
- Direct Exposure: Investments in equities, convertible bonds, and units of equity-oriented mutual funds and Alternative Investment Funds (AIFs).
- Indirect Exposure: Loans against securities, financing for stockbrokers and custodians, acquisition finance, and bridge loans.
3. Stricter Loan-to-Value (LTV) Norms
To mitigate the risk of market volatility, the RBI has prescribed conservative LTV ratios for loans against securities:
- Listed Shares: Maximum 60% LTV
- Equity Mutual Funds, ETFs, REITs/InvITs: Maximum 75% LTV
- Debt Mutual Funds & High-Rated Corporate Debt: Between 75% and 85% LTV
Banks will be required to monitor LTV on an ongoing basis and rectify any breaches within seven working days.
4. Segmented and Targeted Lending Rules
The draft recognizes that a one-size-fits-all approach does not work and lays down specific rules for different borrower types:
- For Individuals: Loans against shares and equity funds are capped at ₹1 crore per person, with a lower limit of ₹25 lakh for secondary market purchases. IPO financing is permitted up to ₹25 lakh with a mandatory 25% minimum margin.
- For Capital Market Intermediaries (CMIs): Banks can provide secured funding to stockbrokers for activities like margin trading, subject to stringent haircuts on collateral (e.g., a 40% haircut on equity shares).
- For Corporates (Acquisition Finance): The rules for funding corporate acquisitions have been tightened. The acquiring company must be a listed, profitable entity, and banks can finance only up to 70% of the acquisition value, with a minimum 30% promoter contribution. The post-acquisition debt-to-equity ratio must not exceed 3:1.
A Shift Towards Consolidated Regulation and Enhanced Risk Management
The overarching theme of the draft is consolidation and enhanced risk management. By repealing 50 outdated circulars, the RBI aims to eliminate regulatory ambiguity and create a single source of truth for banks. Furthermore, the draft repeatedly emphasizes the need for banks to have robust internal policies for risk monitoring, stress testing, and ensuring the end-use of funds is not for speculation.
Implications for the Market
The proposed directions are expected to bring greater discipline and transparency to bank financing of capital markets. While the caps and LTVs may tighten lending in some high-risk segments, the clarity and structure provided by a unified framework could ultimately foster a more stable and enabling environment for legitimate capital market activities.
The RBI has invited feedback from stakeholders, marking a crucial step in refining these rules before their implementation in 2026. This draft represents the most significant overhaul of capital market exposure norms in decades, signaling the central bank’s commitment to a modern, risk-aware financial system.
Read RBI’s Draft Circular here
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