India’s mergers and acquisitions market has seen many large strategic transactions. Some were mergers, like the HDFC–HDFC Bank merger. Others were acquisitions, such as JSW Steel acquiring Bhushan Power. In the tech sector, Zomato acquired Blinkit, and Reliance made several acquisitions across different industries. But one major gap remained. Indian banks were not allowed to finance acquisitions. Because of this, acquirers had to use their own funds, borrow from private lenders, or raise money from abroad. That long-standing constraint limited the pool of cost-effective, transparent funding for control transactions and pushed certain bidders toward non-transparent or high-cost alternatives. In the past, when Indian banks couldn’t give loans for acquisitions, companies had to find other options to fund big deals. Many of them took funds from abroad or created special setups to complete large or complex acquisitions.
On October 24, 2025, the Reserve Bank of India released important draft frameworks. These drafts, for the first time, allow banks to finance M&A deals, including the acquisition of shares or control in another company, either directly or through a special purpose vehicle (SPV), subject to prudential caps and borrower eligibility. If approved, they could create a safe and regulated way for banks to help with acquisitions. But how much impact they have will depend on how the RBI applies the limits, filters, and checks.
Prior to the Reserve Bank of India’s October 24, 2025, draft guidelines, lending linked to share purchases and control acquisitions was generally treated by prudential regulators as capital‑market exposure and therefore subject to tight exposure limits and enhanced supervisory scrutiny; this treatment constrained commercial banks’ willingness and ability to underwrite large M&A and equity‑acquisition financings on‑balance‑sheet. As a result, many domestic acquirers routinely relied on alternatives such as private credit funds, promoter or parent‑company resources, special‑purpose vehicle and holding‑company structures, or offshore borrowings from international banks for sizable transactions. High‑value historical transactions, for example, Tata Steel’s Corus buyout and Hindalco’s Novelis acquisition, relied heavily on international bridge lenders and syndicated finance, illustrating the market preference for non‑domestic or off‑balance‑sheet solutions for large share purchases. These alternatives were often costlier, slower, and less transparent than conventional on‑balance‑sheet bank lending, and the October 2025 drafts are intended to address that constraint by creating a regulated route for banks to provide acquisition finance under specified eligibility and prudential safeguards.
RBI released a set of proposed frameworks that, if finalized, would create a regulated route permitting banks to provide acquisition finance, including for share purchases, under specified conditions. Under the proposed guidelines, only listed Indian companies and their wholly owned special‑purpose vehicles (SPVs) would be eligible to borrow for acquisitions; borrowers would be required to have a minimum track record of profitability and audited financial statements for the preceding three years. NBFCs and AIFs are not eligible borrowers under the proposed acquisition‑finance route. The drafts propose that a bank’s exposure to any single acquisition be capped at 10% of the bank’s Tier‑1 capital and that banks may finance up to 70% of the acquisition value, with the acquirer contributing at least 30% equity. The proposals treat acquisition loans as a form of capital‑market exposure, requiring them to be managed within the direct and aggregate CME ceilings in the draft package. Prior to sanction, banks would be required to obtain two independent valuations of the target, secure shareholder approval where applicable, and adopt a board‑approved acquisition finance policy; the drafts also mandate quarterly monitoring and regulatory reporting of such exposures. Short‑term bridge financing is permitted subject to a maximum tenor of six months and prompt repayment. Credit appraisal must demonstrate the borrower’s repayment capacity through assessed cash flows, and the loan should be secured primarily by the shares acquired. Post-acquisition, the borrower’s leverage is proposed to be capped at 3:1 debt-to-equity to limit financial strain. These measures are designed to reduce risk and ensure responsible lending while creating a regulated channel for banks to support eligible acquisition activity.
The RBI draft on acquisition finance aims to protect financial stability but may be overly restrictive in practice. By limiting borrower eligibility under the proposed bank acquisition‑finance route to listed companies and their wholly owned SPVs, the draft narrows the pool of acquirers and could push large transactions outside the domestic banking system. Many such deals may migrate to offshore lenders, private credit funds, which are often costlier, shorter-term, and less transparent than conventional bank debt. Market pricing differentials can be material: private credit and bridge or mezzanine finance typically carry substantially higher spreads than senior bank loans, and offshore dollar loans become more expensive in INR terms once hedging and currency premia are included. Excluding certain borrowers from the bank acquisition‑finance route, therefore, creates a domestic funding gap for unlisted or loss‑making companies with growth prospects, potentially leaving them to seek foreign lenders or private credit as practical alternative outcomes that raise costs, reduce transparency, and shift transaction control outside the domestic regulatory perimeter. The draft’s prudential safeguards of up to 70% financing with at least 30% equity, a per‑deal exposure cap of 10% of Tier‑1 capital, dual valuations, shareholder approvals, board‑level policies, quarterly monitoring, and a post‑acquisition leverage ceiling are sensible risk mitigants, but they should be calibrated so Indian buyers are not unduly disadvantaged in cross‑border competition.
A further concern is competitiveness. Global peers such as the UK, Singapore, and the US allow banks to fund acquisitions under prudential rules, for example, leverage caps, syndication requirements, and enhanced disclosure. If Indian banks are effectively barred from providing similar financing, domestic buyers are disadvantaged in cross‑border M&A because foreign rivals can access cheaper, longer‑tenor, and more flexible bank debt. Guardrails should therefore be designed not only to protect financial stability but also to ensure Indian buyers are not priced out of global competition.
The RBI’s draft is a careful first step toward letting banks help fund company takeovers. It sets some strict rules, like only allowing listed companies that show profits, requiring independent valuations, and capping each deal at 10% of the bank’s Tier-1 capital. These rules are meant to keep the financial system safe and avoid risky lending.
But the draft leaves out many real-world buyers. It doesn’t let unlisted companies, mid-sized firms, or private equity-backed SPVs borrow under this bank route even though these are often the ones driving big mergers and business growth. Because they’re excluded, many deals might end up relying on foreign lenders or private credit funds. These options usually cost more, are harder to monitor, and shift control outside India’s banking system.
Other countries have shown that banks can safely support acquisitions if the rules are clear and well-structured. India can take a similar path. Over time, the RBI can slowly widen the list of who’s allowed to borrow and raise the limits for large, important deals. That way, Indian banks can support strategic mergers, reduce the need for expensive offshore funding, and help the economy grow faster, all while keeping the system stable and transparent.
About the author: Amit Verma is a Partner Designate at Hammurabi & Solomon Partners. Kartik Godayal is an Intern at the Firm.
Disclaimer: The opinions expressed in this article are those of the author(s). The opinions presented do not necessarily reflect the views of Bar & Bench.
If you would like your Deals, Columns, Press Releases to be published on Bar & Bench, please fill in the form available here.