Acquisition Finance by Banks in India
RBI introduces amended directions for Indian banks to fund corporate acquisitions with enhanced financing parameters.
Acquisition Finance by Banks in India
Indian banks, with limited exceptions, were historically restricted from funding acquisition of equity in other companies. However, the Reserve Bank of India (“RBI”), perhaps recognising the strong growth potential for acquisition finance in India, on October 1, 2025, promised to provide an enabling framework to banks in India for financing acquisitions by Indian corporates. Accordingly, on October 24, 2025, the RBI introduced a draft of the Reserve Bank of India (Commercial Banks - Capital Market Exposure) Directions, 2025 for public comments (“Draft Directions”) to broaden the scope of bank finance for acquisitions in India.
The Draft Directions stipulated inter alia the following conditions:
1. banks could finance up to 70% of the acquisition value;
2. the acquirer must be a listed company with satisfactory net worth and profitability for the last three years;
3. annual returns for the previous three years of the target company were required;
4. acquiring company and the target company should not be related parties, and the acquisition finance shall be fully secured by shares of the target company as primary security, with other assets of the acquirer or the target company as collateral security;
5. private companies, NBFCs and AIFs, which constitute major players in acquisition financing, cannot avail acquisition finance; and
6. banks cannot lend towards acquisition finance more than 10% of their tier 1 capital.
Pursuant to the public consultation process initiated in October last year, on February 13, 2026, the RBI issued amendment directions to the Reserve Bank of India (Commercial Banks – Credit Facilities) Directions, 2025 and the Reserve Bank of India (Commercial Banks – Concentration Risk Management) Directions, 2025 (collectively, the “Amendment Directions”), modifying the Draft Directions. These Amendment Directions will come into force from April 1, 2026, or an earlier date, when adopted by a bank in entirety.
The key features of the Amendment Directions are as follows:
Condition | Particulars |
|---|---|
Eligible Acquirer | Both listed and unlisted non-financial companies or their existing non-financial subsidiaries or a step-down special purpose vehicle (“SPV”, and each an “Acquirer”), are now eligible to raise acquisition finance. This should take into account the norms relating to core investment companies. |
Eligibility Criteria for Acquirer | The acquiring company (or, where acquisition is through an SPV or subsidiary, the acquiring company controlling such SPV or subsidiary) must, at the time of sanction of acquisition finance, if it is a listed company, have (i) a minimum net worth of INR 500 crore; and (ii) net profit after taxes (“PAT”) reported in each of the previous three consecutive financial years. Where the Acquirer is an unlisted company, in addition to the above conditions applicable to a listed company, it should also have an investment grade rating (BBB- or above). Additionally, the Acquirer and the target should not be related parties. |
Control Requirements | The Amendment Directions now mandate that the Acquirer must obtain control of the target company through a single transaction, or a series of inter-connected transactions completed within 12 months from the date of execution of the acquisition agreement. In case the Acquirer already holds prior control over the target company, banks can finance acquisition of additional stake, as long as such additional stake crosses a substantial threshold of 26%, 51%, 75%, 90% of voting rights of the target company. |
Financing Parameters | The Amendment Directions now allow financing up to 75% of the acquisition value, with the balance amount being funded by the Acquirer. Also, if the Acquirer is a listed company, it can avail secured bridge finance for financing the remainder 25% of the acquisition value, subject to having a clear identified repayment source for the replacement of bridge finance within 12 months. Importantly, the security for the bridge finance must not dilute the security coverage for the acquisition finance. |
Valuation | The credit assessment should be on a consolidated basis for both the Acquirer and the target company. In case of listed companies, valuation is to be determined by one independent valuer in accordance with the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, and for unlisted company, the valuation should be lower of the valuation determined by two independent valuers. |
Security | The acquisition finance must be secured by the acquired equity shares/CCDs of the target company (which should mandatorily be unencumbered), subject to the requirements of Section 19(2) of the Banking Regulation Act, 1949. Additionally, banks must mandatorily obtain a corporate guarantee from the acquiring entity, its parent company, or the group holding entity. Security on other assets of the Acquirer/target or the promoter’s personal guarantee can also be taken. |
Limits on exposure | The aggregate capital market exposure of banks including investment exposures and credit exposures, on both solo and consolidated basis, shall not exceed 40% of its eligible capital base. Within this overall cap, a bank’s aggregate exposure to acquisition finance is now permitted up to 20% of its eligible capital base. Acquisition financing provided by overseas branches of Indian banks in offshore syndications is exempt from these directions, subject to their contribution not exceeding 20% of such financing. |
The Amendment Directions have improved and clarified the position under the Draft Directions. By expanding eligibility to unlisted companies, increasing the financing threshold to 75%, and providing clarity on security and valuation requirements, the RBI has acknowledged the evolving needs of the market. However, certain aspects may need further consideration from stakeholders, including the following:
1. Eligibility criteria: the eligibility criteria for potential acquirers, particularly in relation to PAT and credit ratings, may reduce the accessibility of such funding.
2. Financing to InvITs: while the Amendment Directions provide that InvITs are covered under such directions, the conditions on related parties and Acquirers being ‘companies’ might be difficult to comply with.
3. Parent guarantee: given that there are limitations on Acquirers for availing only up to 75% of the acquisition value from banks, and in case of listed entities availing bridge financing, it would only be for one year, secured without any impact on the security cover of the acquisition financing (which includes the equity shares or CCDs being acquired), there is sufficient skin in the game of the Acquirer. Hence the requirement of parent guarantee seems onerous and will limit off balance sheet structures.
4. Position of foreign owned and controlled company (“FOCC”): under the current FDI regime, FOCCs cannot utilise funds from the Indian banking system for acquisitions. This continues to remain and therefore is an untapped pool of borrowers for banks.
5. Funding from offshore branches: while the directions are clear that they do not apply to syndications of offshore acquisitions when the contribution of offshore branches of Indian banks do not exceed 20% of the financing of such transaction, there is no clarity on the applicability of these Directions: (i) in case their contribution exceeds 20%; and (ii) in case of the acquirer being an offshore entity which is acquiring an Indian entity.
The Amendment Directions represent a welcome development from the RBI, opening new avenues for banks to participate in and effectively channel mainstream institutional capital back into the M&A ecosystem. For Indian corporates and strategic acquirers, this means access to deeper pools of capital, more competitive pricing, and a broader set of structuring options. It is also an opportunity for banks to enter a sophisticated, high-value lending segment with a greater risk appetite than was previously permissible. Importantly, effective guardrails are in place to ensure prudent lending. That said, given that this is a new step for the Indian banking sector, this remains an evolving arena, and further refinements to the regulatory framework may be anticipated as market practices develop.