Mergers and acquisitions get a boost: RBI’s new framework should deepen India’s market for buyout finance

RBI’s new directions allow banks in India to extend ‘acquisition finance’ to non-financial corporates in the country or their subsidiary or step-down special purpose vehicles (SPVs) so that they can acquire strategic ‘control’ through equity shares or compulsorily convertible debentures in a domestic or foreign target, where the transaction is a long-term strategic investment for value creation. Incremental acquisitions that cross thresholds of 26%, 51%, 75% or 90% of voting rights are covered by this.

Acquirers will need to demonstrate a net worth of ₹500 crore and positive net profit in each of the preceding three years, and unlisted acquirers will need to additionally hold a BBB- or higher credit rating.

The quantum and equity contribution rules cap bank financing at 75% of the assessed ‘acquisition value,’ with the acquirer contributing at least 25% from its own funds. For unlisted targets, two independent valuations are required and the lower one applies. Listed acquirers may bridge this contribution for up to 12 months, subject to a clearly identified equity take-out, secured status if bridged by a bank, and no dilution of the acquisition finance security package.

Post-acquisition, the acquirer’s debt-to-equity ratio must not exceed 3:1. There is now a mandatory requirement of a corporate guarantee from the parent or holding group of the acquirer; it will be interesting to see how this works in the case of established companies under listed or large corporate houses.

The security must include a pledge over acquired shares or compulsorily convertible debentures subject to the 30% per-bank shareholding ceiling under Indian banking regulations. This explicit on-recourse requirement is a deliberate departure from the non-recourse leveraged buyout conventions common in international markets, signalling RBI’s intent to prevent fund-style leveraged structures from amplifying financial sector risk.

The acquisition directions expressly contemplate refinancing of the target’s existing debt where it is integral to the acquisition. This will be particularly relevant where legacy indebtedness is secured over shares or assets central to the deal, or where existing lenders withhold consent for change of control or security creation. Crucially, such refinancing is excluded from a bank’s capital market exposure computation.

The new concentration risk management directions cap a bank’s aggregate capital market exposure at 40% of eligible capital, with a sub-limit of 20% for acquisition finance. A separate bright-line rule applies to overseas branches of Indian banks participating in acquisition finance syndications: their aggregate participation in any deal may not exceed 20% of its total funding.

Delivering on the mandatory share pledge interacts with the Foreign Exchange Management Act’s framework for non-debt instruments in ways that matter for deal structuring.

While pledges to secure ECBs of Indian borrowers or bona fide credit facilities for Indian companies are broadly permitted, friction arises in inbound structures; where a foreign acquirer raises an offshore loan (not an ECB) and deploys its proceeds for investment in India, a pledge over Indian target shares is not within the scope of automatic pledge permissions.

This creates a level-playing field concern, as offshore branches of Indian banks will need to mandatorily cap their exposure to 20% of deal funding, given that a pledge is mandatory under the acquisition directions, while foreign investment regulations do not permit a pledge for inbound acquisition financing.

The central bank’s new ECB framework clarifies that ‘acquisition of control’ is a permitted end-use for ECB proceeds—a significant departure from the earlier restricted position. RBI has also removed the prescriptive all-in-cost ceiling and standardized minimum average maturity at three years for most ECBs. These changes open a meaningful offshore debt channel within a clear supervisory framework.

The new reforms appear to be designed for strategic corporates, not financial sponsors. Eligible borrowers must be non-financial companies and SPVs are permitted only as step-downs of qualifying acquirers.

Many private equity funds execute acquisitions through freshly-formed SPVs or foreign-owned entities lacking three years of profits or the requisite net worth. The 3:1 leverage cap and mandatory recourse further distance the framework from the thinly capitalized non-recourse models that sponsors favour. Sponsor-led transactions will likely gravitate towards private credit, ECBs or seasoned portfolio platforms that meet the acquirer-level filters.

The reforms offer a coherent if conservative path for bank-led acquisition finance in India. Strategic corporates with balance-sheet quality can now access competitive senior bank funds domestically.

Sponsors seeking non-recourse high-leverage structures must weigh the ECB route and private credit against the acquisition directions recourse and leverage constraints—and anticipate pledge-permission frictions while structuring inbound deals. Our acquisition finance market has materially deepened, but on terms that emphasize prudence.

These are the authors’ personal views.

The authors are partners with Shardul Amarachand & Mangaldas.