Introduction: A Landmark Shift in India’s Acquisition Financing Landscape
India’s M&A market has evolved rapidly over the last decade. In specific, the Indian conglomerates have expanded across sectors, mid-sized companies have pursued strategic scale, and private equity investors have become a core of country’s growth story. Despite this momentum, one structural limitation has been a part for deal-making in India
which is the limited role of domestic banks in financing acquisitions.The RBI has introduced a
new framework permitting banks to extend financing for acquisitions under a clearly defined regulatory structure. In simple words it means the Indian banks can now fund the purchase of shares in a company subject to specific safeguards and conditions.
At its core, this reform acknowledges that mergers and acquisitions are no longer occasional events in India’s economy. They are increasingly important to how companies expand, consolidate market share, and build scale. By allowing banks to participate in this process within a structured regulatory environment, the RBI has signalled its intent to modernize India’s credit architecture in line with evolving business realities.
What the New RBI Framework Allows
The RBI’s framework does not straight away present a relaxation of lending norms. Instead, it introduces a structured regulatory pathway that permits banks to finance acquisitions while ensuring certain important safeguards. The design follows a balanced approach helping corporate growth through acquisitions while preventing excessive leverage within the banking system.
A. Eligibility: Only Strong Borrowers Qualify
The frameworks has been designed is such a way that acquisition financing is restricted only to financially sound Indian corporates to ensure that leverage is used responsibly.
Banks may extend such financing to:
- An Indian non-financial company being the acquirer
- A subsidiary of the acquiring company
- A special purpose vehicle (SPV) established by the acquirer for the transaction
| Parameter |
Requirement |
| Minimum Net Worth |
INR 500 crore |
| Listed Entities |
Profit track record (typically last 3 years) |
| Unlisted Entities |
Investment-grade credit rating (BBB– or higher) |
B. Capital Structure: Controlled Leverage
The framework imposes clear limits on leverage within acquisition transactions.
| Capital Discipline Element |
Regulatory Position |
| Maximum bank funding |
75% of acquisition value |
| Minimum borrower contribution |
25% |
| Post-deal leverage cap |
3:1 Debt-Equity |
This structure ensures that promoters adds in and retain meaningful economic exposure and highly leveraged buyouts are structurally limited.
C. Nature of Transactions
Financing is permitted only for transactions that will result in a real transfer of ownership or control.
Few of the key conditions include:
- Loans must be used for the acquisition of shares or compulsorily convertible instruments.
- Related-party or circular intra-group transactions are restricted.
- Independent valuation of the target company is a must for calculating loan size.
D. System Level Safeguards
To manage systemic risk, the RBI has also imposed exposure limits on banks providing acquisition finance.
| Exposure Type |
Ceiling |
| Acquisition Finance |
20% of eligible capital |
| Overall capital market exposure |
40% of eligible capital |
E. Bridge Finance for the 25% Equity Contribution
Listed borrowers may use
bridge finance to meet the minimum 25% owned funds requirement, subject to certain conditions:
- A clearly identified repayment source must exist.
- The bridge loan must be replaced within 12 months.
- Borrowers must demonstrate a credible plan to raise funds through:
- Equity issuance
- Debt or hybrid instruments
- Asset divestitures or business hive-offs
F. Mandatory Collateral and Guarantees
Acquisition loans must be backed by appropriate security structures. The primary collateral typically consists of a
pledge over the shares or instruments being acquired.
Depending on the transaction’s risk profile, banks may also further require:
- Corporate guarantees from the acquiring entity
- Promoter or parent guarantees
- Additional collateral or asset security
How This Will Change Deal Structuring in India
Beyond the regulatory change, the real impact of the framework will be majorly behavioural. It will change how acquisitions are negotiated, financed, and executed in India.
A. Leverage Will Become a Negotiation Tool
Until now, acquisition negotiations in India were heavily equity driven as buyers had to commit large upfront capital because domestic leverage options were limited.
With bank funding available up to 75%, bidders now have an alternate option to finance the transaction which will eventually:
- Improve return on equity (ROE)
- Increase bidding capacity for strong balance sheet players
- Potentially push valuation benchmarks higher in competitive auctions
B. Private Equity Deal Structures May Evolve
While the framework has not been specifically designed for classic leveraged buyouts, but it does indirectly affect private equity. PE-backed companies that meet eligibility norms can now access structured bank leverage for acquisitions. Eventually, this would:
- Improve IRR profiles
- Encourage platform consolidation strategies
- Increase secondary buyout activity
C. Promoter-Level Structuring Will Become Cleaner
Earlier, acquisition funding sometimes required layered holding companies or offshore SPVs to optimize capital structure. With an introduction of regulated onshore pathway, structuring can become simpler and more transparent. This reduces legal complexity, regulatory arbitrage, and cross-border funding risk.
D. Banks Will Develop Sectoral Expertise in M&A Lending
Acquisition finance is fundamentally different from working capital or project finance. It requires:
- Cash flow-based underwriting
- Integration risk assessment
- Synergy evaluation
- Covenant engineering
As banks build internal expertise in this space, we may see the emergence of specialized acquisition finance desks within large banks.
Impact on Indian Businesses: Opportunities and Strategic Shifts
The introduction of an acquisition finance framework by RBI will eventually change how Indian businesses approach growth opportunities. While the regulation primarily targets banks, its implications will be felt indirectly across corporate strategy, deal-making behaviour, and competitive positioning.
A. Faster Access to Growth Through Acquisitions
Until now, acquisitions in India were often limited by the availability of internal capital and therefore, companies had to rely heavily on equity or retained earnings to fund deals, which ultimately lead to limited growth.
But with banks now able to fund up to
75% of the acquisition value, companies can pursue strategic opportunities without putting forward large amounts of capital and accelerate their growth opportunities.
B. Greater Momentum in Industry Consolidation
Several sectors in India remain fragmented such as manufacturing, healthcare services, logistics, and technology services. Access to acquisition financing can accelerate consolidation as stronger companies may acquire smaller competitors and eventually lead to:
- Larger, more competitive corporate groups
- Greater operational efficiencies being achieved in groups
- Stronger balance sheets within industry leaders
C. Improved Competitive Positioning for Large Corporates
The eligibility criteria mentioned in the framework are for companies with strong balance sheets and credible financial histories. Which mean it will help well-capitalised corporates gain greater strategic flexibility when pursuing acquisitions.
Also, now in bidding situations, the ability to secure bank-backed acquisition funding may provide a decisive advantage to companies with stronger financial profiles.
D. Reduced Dependence on Offshore and Alternative Financing
Earlier, acquisition transactions relied on offshore borrowing, private credit funds, and non-bank lenders due to the absence of a clear domestic financing framework.
With banks now permitted to participate directly, businesses gain access to a more transparent and potentially more cost-efficient source of funding.
The Road Ahead: A Measured Opening for India’s M&A Ecosystem
The step taken by RBI marks an evolution in India’s corporate financing landscape. By allowing banks to participate in acquisition funding, the regulator has created a structured pathway for domestic capital to support strategic M&A activity.
The immediate impact may be gradual but as banks develop internal capabilities and companies adapt to the framework’s eligibility and leverage conditions, this reform will change the dynamics of India’s financial system and deepen India’s deal market, improve funding efficiency, and accelerate industry consolidation.
If implemented with proper structure by both lenders and borrowers, this framework has the potential to strengthen India’s M&A ecosystem, enabling companies to scale while maintaining stability within the financial system.
