In this Leading Questions piece, Abhimeet Sinha discusses the RBI’s 2026 framework that conditionally allows bank-led acquisition finance in India — setting narrow definitions, strict borrower/ security/valuation and concentration limits, excluding related parties and certain intermediaries, and flags significant implementation ambiguities.

Question: India’s banking regulatory framework has historically restricted banks from lending against shares. What was the rationale behind that prohibition, and what prompted the RBI to reconsider it in 2026?

Answer: India’s historic prohibition on bank lending against shares was primarily due to concerns surrounding stock-market volatility. Associated concerns include “overheating of the market, over-exposure to certain stocks and overleveraging of borrowers”. RBI has explicitly noted, in a 2014 notification, that irrespective of the manner and purpose for which money is lent against shares, default by borrowers results in offloading of shares in the market, thereby creating avoidable volatility. RBI had, therefore, long feared that allowing banks to fund equity acquisitions would expose the financial system to stock-market volatility.

A confluence of factors prompted RBI to reconsider this prohibition. Indian corporates had no access to domestic bank capital for strategic acquisitions and so turned to foreign lenders or offshore, private financing structures that were more expensive and exposed to external volatility. Further there was sustained industry lobbying, in 2025, in favour of allowing banks to finance acquisitions, which also contributed to RBI reconsider the prohibition.

Question: How does RBI’s 2026 framework define “acquisition finance”?

Answer: The definition of ‘acquisition finance’ was narrowly tied to the acquisition of equity shares or compulsorily convertible debentures (CCDs) as per the original notification issued on February 13, 2026. However, this definition has been broadened in the revised notification issued by the RBI on March 30, 2026. According to the revised notification, “acquisition finance” means a financial facility or assistance provided to an eligible borrower entity for the purpose of acquiring control in a target company, including through a scheme of amalgamation or merger.

Further, it also permits refinancing of existing debt of the target company where that refinancing is integral to the acquisition finance. Crucially the exclusion with respect to minority stake acquisitions, the bar on financial intermediaries (non-banking finance company or an alternative investment fund) and the top-up financing thresholds at 26%, 51%, 75%, and 90% of voting rights remain structurally intact under the revised framework.

Question: What are the key eligibility conditions that a borrower must satisfy before a bank can extend acquisition finance?

The eligibility criteria operates at different levels. Firstly, the framework is expressly limited to Indian non-financial companies. As per the revised directions, a “non-financial company” is defined as an entity not primarily engaged in undertaking financial activities and in the domestic context, refers to a non-banking institution that is a company but not included in the definition of a ‘financial institution’ or a ‘non-banking financial company under the RBI Act, 1934. Secondly, three financial conditions must be satisfied at the time of sanction: (a) minimum net worth net worth of ₹500 Crore; (b) acquiring company must have recorded net profit after tax for each of the three preceding consecutive financial years; (c) Investment-grade credit rating should be BBB- or above. The last condition applies mandatorily to unlisted acquiring companies only.

Further, acquisition finance is prohibited where the acquirer and the target are related parties as defined under Section 2(76) of the Companies Act, 2013, as well as entities under common control. Although, this prohibition is subject to narrow exception for top-up financing where the acquirer already holds control and is crossing a materially significant threshold (26%, 51%, 75%, or 90% of voting rights).

Question: The new framework imposes specific conditions on security, valuation and concentration risk. How do these requirements operate in practice?

Answer: Acquisition finance must be secured by a mandatory corporate guarantee from the acquiring company in situations where acquisition finance is extended to a subsidiary or an SPV of the acquiring company. This is also coupled with a pledge over the acquired equity shares or CCDs. In practice, this means that two concurrent security interests must be created simultaneously before any finance can be extended. The corporate guarantee requirement ensures that the bank has recourse beyond the pledged securities. Sometimes acquirers set up a shell company (SPV) to actually make the purchase so as to escape liability. The revised framework closes that loophole. Now, even if the acquisition is routed through an SPV, the real company behind it or the controlling acquirer must still give the corporate guarantee.

Total bank financing shall not exceed 75% of the acquisition value, as independently assessed by the bank. For a listed company, valuation is determined by one independent valuer appointed by the bank, using the methodology prescribed under paragraph 8(2)(e) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (SEBI SAST Regulations). Several practical consequences follow. First, the bank and not the acquirer, appoints the valuers thereby eliminating any conflict of interest that might arise when the party seeking finance controls the valuation process. Second, the SEBI SAST Regulations will serve as objective, judicially tested framework that will reduce any inter-bank inconsistency in the valuation approach.

Question: What are the major implementation challenges and grey areas that lenders and borrowers are likely to encounter in the early months of the framework?

Answer: The framework is mired with indeterminacies and ambiguities that generate genuine implementation challenges. Firstly, the framework permits acquisition finance only where the transaction qualifies as a strategic investment driven by long-term value creation rather than mere financial restructuring for short term gains. Crucially, directions do not define what constitutes a "strategic investment" or when refinancing is "integral" to an acquisition. This means that banks will develop divergent internal interpretations, potentially leading to inter-bank inconsistencies with respect to application of the same threshold. Secondly, where the target entity is a holding company, banks will need to ensure that the requirement of potential synergy is met across all subsidiaries and not just at the parent level. This due diligence burden will be difficult to discharge in complex conglomerate acquisitions where a holding company has dozens of subsidiaries. Importantly, RBI’s decision to defer implementation from April 1 to July 1, 2026, is itself an evidence of how significant these implementation challenges are.

Abhimeet Sinha is a Partner at Singhania and Partners.

Aditya Kumar Yadav, Intern, provided research assistance.