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On April 1, 2026, something significant will change in India’s financial system. For the first time in a formal way, Indian banks will be allowed to finance corporate acquisitions under a dedicated regulatory framework. T
The Reserve Bank of India has issued final guidelines that open the door to what is known as acquisition financing, but with carefully built guardrails. This marks a shift in how Indian companies can fund takeovers and how banks can participate in one of the most lucrative corners of corporate finance.
To see why this shift is significant, you have to go back to why banks were effectively kept away from this business for years. Indian banks have long faced tight restrictions on lending against shares.
RBI’s broader philosophy was simple: deposit-taking banks should not fund speculative equity purchases.
India has seen credit cycles where easy lending later became a pile of bad loans. So regulators were careful. They did not want promoters using bank loans to tighten their grip on companies.
Older regulatory circulars made it clear that promoters’ equity should come from their own resources, not bank loans. Loans against shares were tightly monitored. Banks were warned not to enable borrowers to acquire or retain controlling interest in other companies through leverage. The message was blunt. Banks are not meant to behave like private equity funds.
There were a few limited carve-outs. Banks could help fund overseas acquisitions if their boards approved it. They could also participate in certain government disinvestment deals. In some situations, promoters were allowed to borrow toward their contribution. But these were exceptions, not the norm. There was no clear, structured framework that let banks regularly finance domestic takeovers.
As India’s M&A market grew bigger, this gap became more visible. Deal activity increased, but banks were not the main lenders behind those transactions. Instead, private credit funds, NBFCs, bond markets and foreign banks stepped in. Indian banks, despite having large deposit bases and deep corporate relationships, mostly stayed on the sidelines when it came to takeover financing.
Now the RBI has changed the stance, but very carefully. The new framework comes with clear conditions. Acquisition financing is allowed only for Indian non-financial companies. That means financial institutions cannot use this route for balance sheet games or layered transactions.
The regulator has made its intent explicit. Funding must be for strategic investments aimed at long-term value creation and synergy. In other words, the regulator wants this money to fund genuine business expansion and consolidation, not short-term speculative bets or financial engineering.
Eligibility filters are strict. The acquiring company must have a minimum net worth of ₹500 crore. It must have reported profits in each of the last three financial years. If the acquirer is unlisted, it must carry an investment-grade credit rating of at least BBB minus or equivalent. This effectively restricts access to financially stable and established firms. Startups with thin balance sheets or heavily leveraged entities will not qualify.
The structure of the loan also has boundaries. Banks can finance up to 75% of the acquisition value. The acquirer must bring at least 25% from its own resources, either through internal accruals or fresh equity. This is critical. It ensures that the company has meaningful skin in the game. RBI has also allowed listed companies to temporarily borrow the 25% they are required to bring in. But this is only a short-term arrangement. The borrowed amount must be replaced with actual equity within 12 months. It cannot remain as debt beyond that period.
There is also a strict limit on how much debt the combined company can carry after the deal. Its total debt cannot be more than three times its equity. This 3:1 cap must be maintained at all times. If it crosses this limit, it breaks the rule. This single clause alone curbs the possibility of highly leveraged buyouts that are common in some global markets.
Control is a key requirement. The deal must lead to the buyer gaining control of the target company within 12 months. If the buyer already has control, banks can fund further stake purchases only when ownership crosses major levels like 26%, 51%, 75% or 90%.
These percentages are important under Indian company and takeover rules. They trigger things like voting power changes, open offers or special resolutions. So RBI is making sure that bank loans are tied to real shifts in ownership and governance, not small, gradual stake increases.
The rules also make sure the deal value is fair. If the company being bought is listed, its price must be based on an independent valuation that follows market regulations. If it is unlisted, the price must be the lower of two separate independent valuations. This prevents companies from inflating the deal value just to borrow more money.
Banks also get strong protection. The shares being bought must be pledged to the bank as security. The acquiring company or its parent must give a corporate guarantee. The shares must not already be pledged or tied up elsewhere. This way, the bank is not left exposed if something goes wrong.
Even participation in overseas syndicated acquisition financing is capped. If a bank’s overseas branches participate in a global deal, the aggregate exposure across branches cannot exceed 20% of the total funding for that acquisition.
All of this might sound cautious, and that is exactly the point. RBI is not opening the floodgates. It is allowing banks to step in slowly, with layered safeguards that protect depositors and financial stability. The framework becomes effective on April 1, 2026, giving banks time to adjust policies, build underwriting teams and refine risk management processes.
So what changes now?
For banks, this creates a new revenue opportunity. Mergers and acquisitions have grown steadily in India over the past decade. Large conglomerates have been consolidating sectors such as telecom, cement, renewable energy, logistics, pharmaceuticals and consumer goods.
Previously, funding structures often involved NBFCs or offshore lenders. With this framework, banks can capture a share of this business. Some market estimates suggest that acquisition financing could represent a multi-billion dollar opportunity annually as deal activity expands.
While exact numbers fluctuate with market cycles, India’s M&A volumes in recent years have regularly crossed tens of billions of dollars in aggregate value. Even a modest share of that financed by domestic banks represents significant lending exposure.
For corporates, especially large profitable companies, this provides an additional funding channel. Instead of relying entirely on bond markets or structured private credit at higher costs, they can approach banks with whom they already have relationships. It may reduce overall cost of capital for strategic acquisitions, provided the company meets eligibility criteria.
For the broader economy, this could encourage orderly consolidation in fragmented industries. When stable companies acquire competitors or integrate supply chains, efficiency can improve. However, the risk remains that if underwriting standards slip, banks could accumulate concentrated exposures to cyclical sectors. That is why RBI has nested acquisition financing within the broader capital market exposure framework. It is not a standalone relaxation but part of a recalibrated approach to how banks take equity-related risk.
There are also clear risks. Integration failures are common in acquisitions. Two profitable companies do not automatically become more profitable together. Cultural clashes, operational inefficiencies and overestimated synergies can weaken cash flows. Since the acquired shares are pledged, a sharp fall in share prices could erode collateral value. A 3:1 leverage cap helps, but if earnings decline sharply, debt servicing can still become strained. History across global markets shows that acquisition-led expansion cycles sometimes precede credit stress.
That is precisely why the RBI has drawn hard lines. Each layer addresses a specific historical vulnerability.
In essence, this is RBI acknowledging that India’s corporate ecosystem has matured enough to warrant a structured entry of banks into acquisition finance, but not trusting the system enough to allow free rein. Over the next five to ten years, if the system behaves responsibly, acquisition financing could become a normal part of corporate lending in India.
For now, the story is one of calibrated liberalisation. RBI has opened the door, but it is standing at the threshold. The opportunity is real, the safeguards are clear, and the responsibility now shifts to banks and corporates to prove that acquisition financing in India can grow without repeating the credit excesses of the past.
