India Opens the Vault: RBI’s Acquisition Finance Framework and the Road Ahead

[Vinayak Srivastava is a third year student at National Law University and Judicial Academy, Assam]

The Reserve Bank of India’s (“RBI”) amendment to the Commercial Banks – Capital Market Exposure Directions, issued on 13 February 2026, is not merely a regulatory update. It is, in a meaningful sense, the end of a long era of institutional caution. For decades, Indian commercial banks were largely kept out of acquisition financing, a market that thrived, in their absence, on foreign lenders, alternative investment funds, private credit players, and offshore structures. That gap has now been formally acknowledged and, at least partly, closed.

The question worth asking, however, is not simply what changed, but how much it actually changes the landscape, and where the unfinished business lies.

What Changed, and Why It Matters

Before February 2026, an Indian company seeking bank funding for a corporate takeover was navigating a regulatory desert. Regulatory restrictions had historically been designed to limit speculative lending and protect depositor funds from high-risk leveraged transactions. The practical consequence was that acquiring companies were forced to approach foreign lenders at higher interest rates, tighter covenants, and with the additional burden of routing money abroad, thereby increasing transaction costs while leaving domestic banks as passive bystanders to India's M&A growth story.

The Amendment Directions change this. Indian commercial banks may now extend acquisition finance, defined as financial assistance to eligible borrowers for acquiring equity shares or compulsorily convertible debentures ("CCDs") in a target company (or its holding company) with the objective of gaining control over it.

That word, control, is doing significant work in this framework. Banks cannot fund minority acquisitions. The acquirer must either gain fresh control through a single transaction or a series of connected transactions completed within 12 months, or, where the acquirer already holds control, must be crossing a substantial threshold: 26%, 51%, 75%, or 90% of voting rights. Each of these thresholds confers materially enhanced governance or control rights under applicable law, and the RBI has treated them as distinct, independently financeable milestones. This is a thoughtful design choice: it supports both first-time takeovers and creeping acquisitions by existing controlling shareholders, without opening the door to speculative minority stake purchases.

Who Can Borrow, and What They Must Bring to the Table

The eligibility framework is deliberately conservative, and that conservatism reflects the RBI's stated intent: this is a framework for strategic investments, not a lever for amplifying financial sector speculation.

Eligible borrowers are non-financial entities only: the acquiring company itself, an existing non-financial subsidiary, or a step-down SPV set up specifically for the acquisition. Financial entities such as NBFCs and AIFs are excluded as acquiring companies, though Infrastructure Investment Trusts ("InvITs") have been permitted to avail acquisition finance subject to applicable conditions.

The financial thresholds for the acquiring company are meaningful. Both listed and unlisted companies (a significant expansion from the earlier draft, which restricted access to listed entities only) must demonstrate a minimum net worth of ₹500 crore and three consecutive years of post-tax profitability. Unlisted companies carry an additional requirement: an investment-grade credit rating of BBB- or above, obtained prior to disbursement. The RBI's decision to allow unlisted companies, albeit with an extra safeguard, is one of the more market-responsive changes from the draft directions, and substantially broadens the potential borrower pool.

The Numbers: Exposure Limits and Financing Parameters

The framework's quantitative architecture has been calibrated carefully. Banks may finance up to 75% of the independently assessed acquisition value, up from the 70% originally proposed in the draft directions, a concession that reflects RBI's confidence in banks' credit judgment. The remaining 25% must come from the acquirer's own funds: internal accruals, fresh equity issuances, or, for listed acquirers only, secured bridge finance with a clearly identified repayment source (equity issuance or asset sale) within 12 months.

On the exposure side, a bank's aggregate capital market exposure is capped at 40% of its eligible capital base. Within that ceiling, acquisition finance specifically is capped at a further 20% of eligible capital base, a significant increase from the draft's proposal of 10% of Tier 1 capital. This headroom matters: it signals that the RBI expects banks to meaningfully participate in this market, not merely dip a cautious toe.

The post-acquisition consolidated debt-to-equity ratio at the acquiring company level must not exceed 3:1 on a continuous basis. This ongoing leverage covenant, paired with the mandatory corporate guarantee from the acquiring company (or its parent/group holding entity), ensures that the framework does not enable purely off-balance-sheet or recourse-free structures. This isn't flexible private credit. Banks will remain structured and conventional lenders: monthly interest servicing, full security packages, mandatory guarantees.

The Security Package: Pledges, Guarantees, and Collateral

Primary security under the framework is the acquired equity shares or CCDs, pledged in favour of the lending bank, subject to Section 19(2) of the Banking Regulation Act. Acquired shares not used as primary security must remain unencumbered. Beyond this, banks may obtain additional collateral, including unencumbered assets of the acquirer or target, or promoter personal guarantees, as per their internal policies.

The mandatory corporate guarantee requirement has attracted some criticism. S&R Associates' analysis points out that given the genuine equity skin-in-the-game (at least 25% of acquisition value), the requirement of a parent guarantee may appear onerous and could constrain off-balance-sheet structures. This is a fair observation, particularly in deal structures where SPVs are involved and the acquiring parent is seeking some structural separation. How banks and their credit committees navigate this in practice will be an early test of the framework's flexibility.

What the Framework Does Not Address: Four Structural Frictions

The CME Amendment Directions establish a coherent foundation. But they operate within a broader legal ecosystem that was not designed with acquisition finance in mind, and several structural frictions remain unresolved.

First, IBC avoidance risk. Sections 43 to 51 of the Insolvency and Bankruptcy Code empower resolution professionals and liquidators to unwind transactions made prior to insolvency, including transactions that involve underpricing, fraud, or preferential treatment. Acquisition debt, by its nature, fits within the profile of transactions that could attract scrutiny. Unlike the EU's restructuring framework under Directive 2019/1023, which protects new financing reasonably necessary to implement a restructuring plan from subsequent avoidance actions, the IBC provides no analogous safe harbour for value-enhancing acquisition lending. Until this gap is addressed, sophisticated lenders will price this risk into their covenants, potentially blunting the framework's competitive appeal.

Second, the Section 79 and 72A asymmetry in tax law. Tax losses matter enormously in leveraged buyout models, directly affecting post-acquisition cash flows and debt serviceability. Section 79 of the Income Tax Act restricts loss carry-forwards for closely held companies where beneficial ownership has changed by more than 49%. A bank-funded acquisition that results in a change of control could trigger this restriction, eliminating planned tax efficiencies and altering lender projections. By contrast, Section 72A permits loss carry-forwards in amalgamations and demergers, giving merger-based deal structures a meaningful tax advantage over outright share purchases. The result is that identical business transactions may yield entirely different tax outcomes depending solely on the structuring choice, which is a source of significant uncertainty for lenders building financial models.

Third, the mezzanine gap. Effective acquisition finance requires a full capital stack, with senior secured bank debt sitting above subordinated mezzanine capital that absorbs first losses. The RBI's framework manages the senior layer well; it does not address the junior layer at all. India's existing AIF and FPI regulatory architecture, with its concentration limits, leverage restrictions, and equity caps, makes it difficult for subordinated capital to be raised onshore. The consequence is predictable: deal-specific subordinated debt continues to flow through offshore private credit funds or opaque cross-border structures, outside the reach of Indian regulatory oversight. Creating a dedicated acquisition-finance AIF category under SEBI, with calibrated diversification requirements and disclosure norms, would bring this capital onshore and reduce banks' dependence on less transparent offshore counterparts.

Fourth, connected-borrower concentration risk. Indian business structures are often promoter-centric, with inter-company loans, cross-guarantees, and economic interdependencies spreading across group entities. The CME Directions address concentration risk through capital-linked caps, but do not adopt a connected-client approach that would aggregate exposure across economically linked entities, which is the methodology that the EU's Capital Requirements Regulation and the European Banking Authority's guidelines (EBA-GL-2017-15) apply. Without this, a bank's true exposure to a particular business group could be significantly understated. Integrating a connected-borrower lens into large exposure monitoring would more accurately reflect real-world risk patterns.

What This Means for the Market

For Indian corporates and strategic acquirers, the direction of change is unambiguously positive. A domestic bank-funded acquisition will typically price more competitively than offshore alternatives, carry fewer restrictive covenants, and avoid the currency and timing complexities of cross-border financing. For mid-sized companies that previously had no access to this market, the inclusion of unlisted entities as eligible borrowers is particularly significant.

For banks, this is an opportunity to re-enter a high-value segment of corporate lending that has been inaccessible for years. The exposure limits, eligibility thresholds, and mandatory guarantees collectively function as guardrails that should prevent the kind of reckless lending that historically plagued India's corporate credit markets. How aggressively banks step through the door, and how consistently their credit committees interpret the framework's more ambiguous provisions, will determine whether this becomes a steady stream of bank-led M&A activity or a cautiously navigated side market.

For financial sponsors and private credit funds, the picture is more nuanced. The framework explicitly excludes NBFCs and AIFs as acquiring entities. It also preserves the competitive edge of private credit in deal structures that require flexibility, off-balance-sheet mechanics, or financial entity acquirers. The bank-led channel and the private credit channel will likely coexist, serving different segments of the market.

Conclusion: A Necessary First Step, Not a Complete Solution

The RBI’s CME Amendment Directions represent a genuine structural shift in India's acquisition financing landscape. They are also, by the regulator's own acknowledgment in the framework's design, a conservative first step tightly constructed, with guardrails in place to ensure prudent lending.

The framework will function as intended only if the broader legal ecosystem catches up. Safe-harbour protections for value-enhancing acquisition lending under the IBC, clarity on loss utilisation under Sections 79 and 72A, a regulated onshore mezzanine layer under SEBI, and a connected-client approach to concentration risk under the RBI's large exposure framework these are the four reforms that would transform the CME Directions from a promising regulatory opening into a durable and efficient domestic M&A financing market.

The door has opened. How wide it swings will depend on what happens next both in banks' credit committees and in Parliament.