RBI’s Game-Changer: How the Draft Framework for Acquisition Financing Is Set to Reshape India’s M&A Landscape.
RBI’s Draft Framework Reshapes M&A Financing: What It Means for India Inc.
The RBI’s draft framework for acquisition financing is set to reshape India’s M&A landscape by allowing banks to provide debt financing for strategic corporate acquisitions within strict prudential limits. This change is expected to boost the M&A market by lowering the cost of capital and increasing the speed of transactions for eligible Indian companies, while also balancing growth opportunities with financial stability through safeguards like caps, eligibility criteria, and risk management policies.
The Reserve Bank of India (RBI) has proposed a landmark shift in the way mergers and acquisitions (M&A) deals are financed in India. For the first time, commercial banks are being formally allowed to provide acquisition finance , a space that has, until now, been dominated by private credit funds and other non-bank entities.
This draft framework, titled “Reserve Bank of India (Commercial Banks – Capital Market Exposure) Directions, 2025,” represents a strategic intervention to formalize and regulate what has long been a loosely defined segment, while opening doors for banks to deploy their balance sheet strength in acquisition-led corporate deals.
Key Features of the Draft Framework:
Here’s a detailed breakdown of the most important elements of the draft norms, along with their potential implications.
1. Eligibility & Borrower Criteria:
Only listed companies (or their step-down SPVs) will be eligible for acquisition financing.
The acquiring company (or SPV) must have “adequate net worth” and a profitability track record over the last three years.
The target company must also present at least three years of audited financials.
Importantly, related-party acquirers are excluded: acquirer and target must not have familial or certain corporate ties as per the Companies Act.
2. Loan Structure & Risk Discipline:
Banks can finance up to 70% of the acquisition value, while acquirers must bring at least 30% in equity from their own funds.
The post-acquisition debt-to-equity ratio (at the acquiring entity or SPV level) must not exceed 3:1, ensuring leverage stays within acceptable bounds.
Credit assessment must be based on the combined balance sheet of the acquirer and target not just the acquirer alone.
Primary security: The loan must be fully secured by the shares of the target company. Additional collateral (from acquirer or target) is allowed as per bank’s internal policy.
3. Prudential Limits & Risk Controls:
Aggregate acquisition finance exposure for any bank is capped at 10% of the bank’s Tier-1 capital.
More broadly, a bank’s direct capital market exposure (CME) which includes both investment exposures and acquisition finance should not exceed 20% of Tier-1 capital.
On a consolidated basis, all CME (direct + indirect) must remain under 40% of Tier-1 capital.
Strict monitoring is required: banks must adopt early warning systems, conduct stress testing, and maintain continuous surveillance of acquisition finance exposures.
4. Valuation & Transparency:
The valuation of the target company must be done via two independent valuations, in line with SEBI norms preventing over-optimistic or manipulated deal pricing.
Banks must publish aggregate acquisition financing exposure in their annual reports (in their “Notes to Accounts”), enhancing transparency.
5. Other Lending Permissions:
Banks can also lend to individuals subscribing to IPO, FPO, or ESOP, up to ₹25 lakh per person, under certain conditions.
For such retail-capital-market loans, banks require a minimum 25% cash margin (i.e., LTV capped at ~75%) for subscription financing.
Strategic Implications & Impact:
For Banks
This is a structural shift: Indian banks, long sidelined from the acquisition finance market, now have a regulated pathway to fund buyouts and takeovers.
Their lower cost of capital compared to private credit funds could mean more competitive deal financing.
However, the exposure limits and risk guardrails (like the 10% cap on Tier-1 capital) signal RBI’s caution — it wants growth, but not at the expense of systemic risk.
For Acquirers / Corporates:
Listed acquirers now get access to cheaper and more formal debt for M&A, enabling larger-scale strategic acquisitions.
The requirement of 30% equity ensures promoters or acquirers remain materially invested, fostering long-term commitment rather than speculative takeovers.
However, not all acquirers will qualify: private companies, financially weak firms, or new/unprofitable listed firms may be excluded.
For Private Credit / Alternative Lenders:
Domestic banks entering this space means heightened competition for private credit funds, which have historically dominated leveraged buyouts and acquisition lending.
Private lenders may need to revisit their risk-return models, offering more flexible terms or specialized structures to retain their edge.
But private credit isn’t going anywhere: its flexibility, speed, and willingness to take on higher risk will remain appealing especially for non-standard or complex deals.
For the Broader Economy:
More bank-led M&A financing could boost deal activity, especially in sectors where strategic consolidation is desirable.
It can deepen India’s corporate credit market, making acquisition-led growth more accessible.
Over time, this could support value creation, enterprise scale-up, and more efficient corporate structures — as banks become an active partner in growth, not just in capex or working capital lending.
Risks & Challenges:
While the framework has promise, there are clear risks and challenges that stakeholders must watch closely:
1. Credit Risk: Acquisition finance is inherently risky. If acquisitions don’t generate expected synergies, banks could face defaults, especially if valuations are aggressive.
2. Collateral Concentration: Loans are secured by target’s shares. If a target’s share price collapses post-acquisition, banks might face heavy losses.
3. Governance Risk: Ensuring rigorous due diligence, independent valuation, and fair governance is critical. The requirement for double valuation is a positive, but execution matters.
4. Leverage Risk: A 3:1 debt-to-equity cap helps, but overleverage remains a possibility in aggressive deals.
5. Regulatory Arbitrage: If not carefully monitored, ill-governed acquisition finance could become a source of systemic risk.
6. Implementation Risk: Banks need to build expertise in acquisition financing: underwriting, monitoring, stress-testing, and recovery — a non-trivial capability.
Way Forward: What to Expect Next:
Public Comments: RBI has opened the draft for stakeholder feedback.
Final Circular: Based on responses, RBI will likely revise some norms before issuing a final circular.
Implementation Date: The draft indicates the new framework could come into effect from April 1, 2026.
Bank Policies: Banks will need to put in place dedicated internal acquisition finance policies, covering risk parameters, eligibility, monitoring, and reporting.
Market Evolution: As banks begin participating, deal structures may evolve. We could see more SPV-driven acquisitions, strengthened governance, and improved transparency in M&A financing.
Bottom Line:
RBI’s proposed acquisition finance framework is a game-changer. It opens a new frontier for banks in India’s M&A landscape, promising cost-effective, regulated funding for buyouts and takeovers. By bringing in formal guardrails caps on exposure, risk weight norms, valuation discipline, and borrower eligibility , the central bank is trying to balance growth ambition with financial stability.
If implemented well, this move could democratize access to acquisition capital, reduce dependence on opaque private credit, and make the M&A market more vibrant and resilient. Still, execution risk is real, and both banks and corporates will need to tread carefully.
Team: Credit Money Finance