When Law Limits Leverage: Can India Build a Safer LBO Model?

[Shrushti is a student at Maharashtra National Law University, Nagpur, and Tatva is a student at Maharashtra National Law University, Mumbai.]

Mergers and acquisitions (M&As) enable companies to meet various synergies. As of April 2025, India witnessed a sudden rise in M&A activity, with deal values reaching $27.2 billion in Q1 alone, driven by sectors like media, technology, and healthcare. One of the most crucial components in an event of M&A transaction is debt financing, which enables  companies to fund transactions, without immediately depleting cash reserves or diluting shareholder equity, that might otherwise be beyond their immediate financial capacity. One such debt financing strategy is leverage buyouts (LBOs). 

LBOs are acquisition structures in which a private equity sponsor acquires a target company securing substantial debt against the target’s assets and/or anticipated cash flows. Such a restructuring model not only magnifies potential returns but also incentivizes rigorous operational and financial restructuring to transform underperforming or distressed businesses. A seminal example is KKR’s £11 billion purchase of Alliance Boots in 2007, which, through disciplined cost management and strategic reinvestment, culminated in a merger with Walgreens and the creation of a global healthcare leader. Similarly, the 2005 buyout of Hertz by Carlyle Group and Clayton, Dubilier & Rice demonstrated how focused cost-reduction and international expansion can restore profitability and support a successful public relisting. In the same year, Bain Capital’s acquisition of Dunkin’ Donuts—executed with Carlyle and THL—revitalized the brand, modernized retail outlets, and drove sustained revenue growth prior to its 2011 IPO.

Given the importance of LBO models, this article focuses on the regulatory hurdles to boost LBOs in India, and draws comparison from the regulations in the US and the UK. The author then analyses the position of India and suggest recommendations, considering the differences of market and system from those in the US and the UK.  

LBOs in India

Despite many advantages of LBO model, Indian legal regime has many regulatory hurdles. 

First, the Master Circular dated 1 July 2015 of the Reserve Bank of India (RBI) (paragraph 2.3.1.9) prohibits Indian banks from lending any entity—domestic or foreign—for acquiring shares of an Indian company. It also disallows the use of the target company’s assets as collateral. Second, under Foreign Exchange Management Act 2000 and the RBI’s Master Circular on External Commercial Borrowings (ECBs) (para I(A)(vii)), Indian entities are barred from using foreign debt to invest in capital markets or acquire companies in India. Third, Section 67(2) of the Companies Act 2013 prohibits public companies and private subsidiaries of public companies from providing financial assistance to any person for purchasing their own shares.

Additionally, even if a private equity-led LBO manages to bypass these hurdles and successfully revives a distressed asset, exit remains a formidable challenge. In LBOs, the average holding period ranges from seven to ten years, and IPOs are often the preferred exit route. However, Regulation 6(1) of Securities and Exchange Board of India (SEBI) (Issue of Capital and Disclosure Requirements) Regulations 2018 mandates that companies must have net tangible assets of at least INR 3 crores over the preceding 3 years and a pre-tax operating profit of INR 15 crores in at least 3 of the last 5 years. For a company previously classified as a non-performing asset, meeting such stringent requirements are extremely onerous.

Position of the US on LBOs

LBOs in the US witnessed a sudden surge post-covid. Between 2020 and 2021, PE firms had already made $470 billion in acquisitions. One of the most peculiar reasons is cheap rates of interest of banks. Unlike RBI Master Circular (2015) that completely prohibits banks from financing acquisitions, the US government in 2013 has issued Interagency Guidance on Leveraged Lending that prohibits banks from financing LBOs, only if the company would have a debt-to-EBITDA ratio above 6x, unless there is a strong justification. Moreover, Delware Code does not have analogous restriction to Section 67 of the Companies Act 2013. Rather, the courts restricts themselves from interfering in the commercial wisdom of the corporation, and rests their judgements on ‘business judgement rules’. 

Position of the UK on LBOs

In contrast to India’s heavily restrictive regime, the UK provides a comparatively facilitative legal and regulatory environment for LBOs, especially when it comes to private companies. The UK does not impose a blanket prohibition on funding LBOs through debt, whether domestic or foreign. While Sections 678–683 of the Companies Act 2006 prohibit public companies from giving financial assistance whose “principal purpose” is for the acquisition of their own shares, the it does not extend this prohibition to private companies. In Brady v. Brady ([1989] AC 755), House of Lords interpreted “principal purpose” under the Companies Act 1985. The court held that the “principal purpose” of the assistance must not be to reduce or discharge any liability incurred for the purpose of acquiring shares. 

Moreover, the UK permits the use of ECB and foreign capital for acquisitions, except under Section 3 of National Security and Investment Act 2021. More importantly, there is no restriction on the private company to use the assets of the target company as collateral in the buyouts, subject to corporate authorization and creditors’ rights. 

Recommendations for India 

The Indian legal regime is currently cautious to classic LBO structures, considering past crises, such as the IL&FS collapse (2018), which left scars on India’s banking policy. UK and US has a matured market, where the market has the tolerance to the post-LBOs risk effect. Hence, India cannot blindly adapt regulatory system from UK and US, but contextual and phased adoption is the need of an hour to boost Indian LBOs. Here are some of the recommendations that Indian legal regime can adopt:

Introducing prudential “leveraged lending” guidance

India should consider lifting the blanket ban imposed by the RBI (2015 circular) in controlled cases, such as IBC-approved distressed assets, priority sectors (manufacturing, healthcare), or company with minimum promoter equity or a proven turnaround plan more than a fixed threshold. Rather than a blanket ban on bank support for acquisitions, the RBI may issue prudential norms. This means that instead of completely prohibiting banks to finance debt financing, limit the exposure of the banks to cases where debt/EBITDA exceeds some threshold, unless justified by strong cash-flow projections. 

Furthermore, SEBI should consider creating a special IPO window for companies revived through LBOs or under IBC.

Diversifying India’s corporate debt markets

India’s bond markets must offer a full spectrum of instruments—from high-yield bonds to structured debt—to give LBO sponsors different financing options, and not just remain limited to bank credit. A recent Economic Times analysis highlights growing appetite for BBB– to AA– rated bonds, which yield more than government securities and carry manageable credit risk. Such high-yield issuances (e.g., by relaxing minimum issue sizes and credit enhancement norms) would mirror U.S. junk-bond markets that fueled historic LBOs like RJR Nabisco.

Asset reconstruction companies (ARCs) as “turnaround agents”

Under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002, ARCs currently focus on net performing asset recovery, but they could be repositioned as operators that restructure and rehabilitate distressed firms—much like the specialized UK “turnaround” funds. Experts argue ARCs should move from passive recovery to proactive business revival. They should deploy their capital and management expertise to restore value. 

Extending pre-packaged insolvency to larger firms

India’s PPIRP for MSMEs has had limited uptake. Experts suggest for extending pre-pack schemes to mid- and large-cap companies. This would offer the resolution speed, certainty and yet preserve the value of the company. Adapting the well-developed pre-pack regime to the big companies —and pairing it with strict creditor approval thresholds—would give LBO sponsors a fast-track path to acquire and revive assets under court-supervised but also creditor-driven plans.

Conclusion

 

LBOs are no longer niche financial instruments confined to Western boardrooms—they are, in global markets, a proven mechanism for restructuring underperforming companies. Yet in India, this potential remains largely unfetched. The current regulatory framework is rooted in caution. It effectively, at times, blocks best business judgements and the core features of LBOs: bank-financed share acquisitions, asset-backed collateral, and flexible exit strategies.

However, as India moves towards a more mature and resilient financial system, it becomes increasingly essential to question whether these blanket prohibitions are still proportionate or productive. The experience of the United States and the United Kingdom—both of which allow LBOs within structured safeguards—demonstrates that regulation need not be a barrier to innovation. Through prudential norms, both jurisdictions have managed to support leveraged acquisitions while keeping systemic risks in check.

India does not need to replicate foreign models completely, but it can certainly learn from their logics and approaches. It is a need of an hour for India to tailor certain reforms, like easing lending restrictions for IBC-approved assets, permitting controlled use of target collateral, creating special IPO windows, and expanding high-yield debt options, would allow the Indian market to benefit from LBOs, alongside also being cautious.