RBI’s new acquisition finance framework: A regulatory shift towards bank-financed acquisitions in India

In a major shift poised to reshape India’s mergers and acquisitions (M&A) landscape, the Reserve Bank of India (“RBI”) has proposed a regulatory framework that, for the first time, allows commercial banks (excluding small finance banks, regional rural banks and payment banks) to directly finance corporate acquisitions.

The move announced on October 1, 2025, as part of the RBI’s Statement on Developmental and Regulatory Policies is seen as a significant liberalisation in India’s credit architecture, long regarded as conservative in acquisition funding norms. The draft guidelines, titled Reserve Bank of India (Commercial Banks – Capital Market Exposure) Directions, 2025, were released on October 24, 2025, for public consultation. Following the consultation window, which closed on November 21 last year, the framework is expected to take effect from April 01, 2026, or earlier, should individual banks adopt the rules in full.

For the first time, banks will be permitted to lend directly to acquirers or special purpose vehicles (“SPVs”) created by them for purchasing a controlling stake in domestic or overseas companies. The RBI has clarified that such acquisitions must qualify as strategic investments, driven by long-term value creation and operational synergies rather than short-term financial goals. The framework, while enabling acquisition funding by commercial banks, remains tightly controlled. Only listed Indian companies are eligible to borrow for acquisition financing. Additionally, the framework warrants that (a) both the acquirer and the SPV must not be financial intermediaries such as a non-banking finance company or an alternative investment fund; (b) the acquiring company must show profitability and satisfactory net worth for the last three years; (c) the target company must also have three years of financial disclosures; and (d) any related-party acquisitions are barred. These conditions reflect the RBI’s cautious approach to managing systemic risk, even as it relaxes the long-standing prohibition on bank-funded acquisitions.

In a nod to global leveraged-buyout norms but with more conservative guardrails, the RBI has set a maximum 70% (seventy per cent) bank financing limit for acquisitions. Acquirers must contribute the remaining 30% (thirty per cent) as equity, ensuring sufficient skin in the game. Acquisitions must be valued through two independent valuations, aligning with appraisal rules issued by the Securities and Exchange Board of India. Moreover, the RBI has capped the post-acquisition debt‑equity ratio at 3:1, applicable to the acquirer, SPV(s), or target company. Considering the international standards in parallel, where leverage often exceeds 5:1, this ratio reflects a firm prudential stance. At the bank level, exposure to acquisition finance cannot exceed 10% (ten per cent) of Tier‑1 capital, limiting concentration risk.

The framework further warrants that banks must secure acquisition loans through a pledge of the target company’s shares, forming the primary security. Additional collateral may be taken from the acquirer or the target’s assets. Share valuations must follow existing RBI norms, using the lower of the six-month average price or the previous day’s closing price at sanction. Banks are also required to establish rigorous monitoring systems, including stress testing and early-warning frameworks. Disclosure of acquisition finance exposure in annual reports will become mandatory.

Industry analysts view the RBI’s proposed framework on acquisition financing as a response to the growing complexity and scale of India’s corporate transactions. At present, large Indian companies often rely on offshore lenders or private credit funds for acquisition financing, an arrangement that can be costly and subject to external volatility. The RBI aims to strengthen India’s financial ecosystem while reducing dependence on foreign funding by allowing domestic banks to participate in such transactions. However, the central bank at the same time has ensured that prudential safeguards remain firmly in place, avoiding the high-risk leveraged buyout culture common in Western markets.

As the April 2026 implementation date approaches, stakeholders expect a recalibration of M&A strategies, with Indian corporates possibly exploring more ambitious acquisitions backed by domestic bank financing.

About the authors: Puneet Shah is a Partner and Abhishek Singh is an Associate in IC RegFin Legal.

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