Acquisition Finance Amendments from the RBI: A Measured Shift

[Triya is a student at Maharashtra National Law University, Mumbai.]

Acquisition financing refers to debt (or structured funding) used to purchase shares or obtain control of a company. Instead of using only its own financing options, the acquirer borrows funds to complete the transaction. The loan is typically secured by shares of the target, or secured by assets of the acquirer or target, or structured with repayment tied to post-acquisition cash flows.

The Reserve Bank of India (RBI) had been deliberating on allowing Indian banks to finance acquisitions since mid-2025. After releasing a draft for public comments in October 2025, and consultations, amendments were made 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 on 13 February 2026. These amendments are slated to come into effect in July 2026.

Historically, in India, most acquisition financing came from non-bank lenders due to regulatory restrictions. These regulations existed due to the high volatility in this sector. Banks house public money, and were thus not allowed to expose it to market risks. If acquisitions are heavily leveraged, then a downturn could trigger defaults, and systemic stress may increase. RBI historically prioritised prudential conservatism over capital market expansion.

A sign of a growing market is taking prudent, steady steps to bring in more business through acquisition financing. Allowing banks to participate reduces the cost of capital, encourages expansion, and effectively increases liquidity options for businesses. The move to allow acquisition financing positions India alongside other global players like the USA and the UK. Bank participation increases access for more businesses, in a field where earlier only non-banking financial companies (NBFCs) and large corporates could interact.

The 2026 reforms reflect a calibrated shift by permitting acquisition finance under strict eligibility, exposure, and security conditions, attempting to balance financial expansion with prudential safeguards.

The Pre-2026 Position

Before the 2026 amendments, acquisition financing by banks was regulated by the Banking Regulation Act 1949 (BR Act). It does not expressly prohibit lending for acquisitions; the RBI can regulate the manner and purpose of lending under later sections. The BR Act establishes that RBI has the powers to determine policies in relation to advances given by banks. Section 21 of the BR Act also restricts a bank from holding shares in any company beyond 30% of that company’s paid-up capital or 30% of the bank’s own paid-up capital and reserves, whichever is lower. This limits how banks can enforce pledged shares, ensuring that enforcement does not convert them into impermissible equity holders. The RBI is permitted under Section 19(2) to issue directions to prevent any detrimental banking activities, which gives it the power to issue prudential restrictions and amendments, as it sees fit.

Where an Indian company sought to acquire another Indian company, financing was typically unavailable from Indian banks and instead sourced from NBFCs, AIFs, or FPIs subscribing to non-convertible debentures. Similarly, foreign-owned or controlled companies (FOCCs) incorporated in India were prohibited from utilising funds from the Indian banking system for domestic equity acquisitions, and external commercial borrowings could not be used for equity investment in India due to end-use restrictions under FEMA regulations. The earlier position reflected a longstanding regulatory philosophy that viewed acquisition finance as speculative and inconsistent with prudential banking norms.

The 2026 Amendment Directions

The amendments introduce key definitions on acquisition financing, bridge finance, eligible securities, and capital market intermediaries (CMIs), which have closed interpretation gaps. Acquisition finance is limited to equity shares or compulsory convertible debentures. The RBI places the board of directors of the bank in a crucial role, introducing the requirement to create credit policies for: loan against financial assets; acquisition finance, including for overseas branches; and credit facilities to CMIs.

The amendments introduce a stringent eligibility criterion: such financing can only be availed by (a) non-financial companies; (b) non-financial subsidiaries of the acquirer; and (c) step-down special purpose vehicles (SPV) (provided that they comply with credit information company norms). Financial criteria include only a profitability route, indicating that the RBI is not yet comfortable extending this facility to loss-making companies due to added risks. Companies (both listed and unlisted) must have a net worth of at least INR 500 crores and must have a net profit after taxes for the preceding 3 years. Additionally, for unlisted companies, the financial criteria also include the requirement of a BBB- rating at the time of sanction. Post acquisition, the entity must maintain a debt-to-equity ratio of 3:1. Such an added eligibility requirement indicates that the amendments are testing the waters by first opening it to relatively risk-averse categories of companies.

Despite the existence of such stringent eligibility criteria, banks can only finance up to 75% of the acquisition, with the rest to be funded by the entity’s own funds or using bridge financing. The requirements for bridge financing are also water-tight: there must be an identifiable source of repayment; if a bank is providing the bridge finance, the lending must be secured; and there must not be any dilution of security coverage for the acquisition finance. Following these conditions, bridge financing can be availed for a period of 12 months, after which it must be replaced by equity or assets.

The amendments introduce a stringent control acquisition requirement as a core safeguard, ensuring that bank-financed acquisitions remain aligned with strategic, long-term objectives rather than speculative or short-term financial engineering.  Acquisition finance is available only where the eligible acquirer obtains control over the target company as defined in line with Companies Act 2013, as the right to appoint a majority of directors or to control management or policy decisions, exercisable directly or indirectly through shareholding, agreements, or otherwise. This control must be achieved either through a single transaction or a series of interconnected transactions completed within 12 months from the date of execution of the acquisition agreement. In cases where the acquirer already holds prior control over the target, banks may extend finance solely for the acquisition of an additional stake that crosses a substantial threshold of 26%, 51%, 75%, or 90% of the target’s voting rights.

Refinancing of acquisition lending is expressly allowed in line with the master directions on resolution of stressed assets. Such refinancing is treated as “restructuring” where the borrower is in financial difficulty, meaning acquisition finance transactions remain subject to downgrades, monitoring, and prudential discipline, thereby preventing misuse through evergreening.

Structural Limits of the Amendment

While the 2026 framework liberalises bank participation in acquisition finance, five unresolved grey areas narrow its practical reach: the restriction of eligibility to profitable companies; the continued exclusion of FOCCs; the mandatory parent guarantee that undermines SPV structuring; the control-linked thresholds that exclude minority and incremental acquisitions; and the unclear treatment of offshore branch exposure in syndicated deals.

Eligibility isolates strategic acquisitions

The eligibility criteria under the amendments significantly narrow the scope for distressed M&A by effectively limiting bank funding to financially sound and profitable target companies. Not all unprofitable firms are fundamentally weak; some are high-growth, reinvestment-heavy, or cyclical businesses. By equating lack of profit with unacceptable credit risk, the framework substitutes a bright-line accounting test for a nuanced credit assessment. Acquisition finance can facilitate the resolution of financial issues outside insolvency. Restricting funding to profitable targets may push distressed firms toward insolvency proceedings instead of enabling earlier, market-driven restructuring. This is especially restrictive because there are proper frameworks for banks to only take calibrated risks.

In fact, as per the SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018, it is clear that even retail investors are exposed to risks in an initial public offer (IPO), via the non-profitability route available to companies to proceed with an IPO. Banks can certainly absorb more risks than a smaller investor: they operate under capital adequacy norms (Basel framework) and hold diversified loan books across sectors and geographies, spreading risk across large portfolios, unlike retail IPO investors who often hold concentrated positions.

Further, the framework’s reference to “long-term strategic investment” lacks clarity, both in terms of time period and indicators of strategy or synergy. The absence of objective criteria creates interpretive discretion, allowing notions of “synergy” or strategic alignment to function as filters that may defer or deny financing, thereby undermining predictability in the regime that the RBI seeks to create.

The FOCC exclusion: Liberalisation with a blind spot

Under India’s FDI framework, FOCCs remain barred from using funds sourced from the Indian banking system for acquisition transactions, and the recent amendments leave this position as is. The result is an asymmetry within the liberalisation objective: on one hand, while domestic acquirers may now access bank financing for acquisitions, similarly situated FOCCs must rely on offshore funding or internal accruals, even when the acquisition target and economic activity are entirely domestic. This cannot be termed as a ‘risk-based’ initiative. The prohibition does not turn on leverage, exposure, or prudential safeguards rather on ownership character alone. Thus, a significant borrower segment remains excluded.

The mandatory parent guarantee: Prudence or overreach?

Typically, acquirers leverage step-down SPVs or non-financial subsidiaries to ring-fence acquisition debt, isolating liabilities from the parent’s consolidated balance sheet to maintain cleaner financial ratios, preserve borrowing capacity, and avoid triggering covenants in existing facilities. However, the parent guarantee imposes a contingent liability that must be recognised or disclosed on the parent’s books, effectively consolidating the exposure and negating the off-balance-sheet purpose. This increases group-wide leverage, breaching internal risk thresholds and/or external rating criteria, and constrains entities. Given the acquirer’s inherent exposure through the 25% self-funded portion and bridge finance safeguards, this guarantee appears overly prescriptive, indicating the RBI’s conservative posture in this regime that may deter sophisticated, structuring options in mature M&A markets.

Control thresholds and minority acquisitions

The mandatory control-acquisition requirement confines bank financing to transactions involving a decisive shift in ownership, excluding minority strategic investments, incremental stake increases, and consortium-based acquisitions that may still create economic value. Control is a legal threshold, and does not necessarily correlate with the creditworthiness or viability of the target.

The structural design of InvITs creates an issue for obtaining financing. By nature, an InvIT typically operates through a sponsor, trustee, investment manager, and underlying project SPVs that often share common control, management, or promoter alignment. This integrated structure may inadvertently trigger related-party or “company” eligibility conditions under the acquisition finance chapter, yet no specific carve-out or clarification has been provided for InvIT structures. Given that InvIT acquisitions frequently involve incremental stake consolidation or intra-group transfers within a managed structure, the applicability of these control criteria remains uncertain, leaving their access to acquisition financing unclear.

Exposure caps: Treatment of offshore branches

The aggregate exposure cap, of which only 20% may be deployed for acquisition financing, creates complexity where offshore branches participate in syndicated structures. If overseas syndication arrangements expand exposure beyond the intended threshold, there is no clarity on what steps would need to be taken. The interaction between exposure norms and offshore participation, therefore, introduces monitoring and compliance uncertainty.

Conclusion

The continued exclusion of FOCCs, the rigid profitability and control thresholds, the ambiguity around “long-term strategic investment,” and the uncertainty surrounding InvIT structures and offshore exposure caps together narrow the practical scope of the reform. As a result, although the framework signals liberalisation, its operational boundaries still leave significant segments of the market outside meaningful access to bank-led acquisition finance. While the amendments open the door for acquisitions to be financed, without addressing these concerns, in the interest of prudence and risk management, they isolate innovative transaction structuring and nascent companies’ restructuring.