Background

For many years, financing business acquisition has been challenging due to regulatory framework that discouraged the banks from financing leveraged buyouts and control acquisitions. Consequently, the buyers have traditionally relied on a combination of internal accruals, promoter capital, offshore borrowing, private credit and other funding structures. The restrictions on banks’ ability to finance the acquisition of equity shares meant that traditional bank financing played only a limited role in acquisition transactions.

The Reserve Bank of India (RBI) has now introduced a dedicated framework for acquisition finance by banks.

The RBI (Commercial Banks – Credit Facilities) Amendment Directions, 2026, effective from 1st July 2026, addresses the growing need of acquisition financing in India by permitting the banks to finance qualifying acquisitions of control, subject to detailed conditions governing the borrower, the target, the transaction, leverage, valuation, security and the lending bank’s exposure.

The headline is significant, but that figure is a ceiling not a promise. Actual funding availability may be lower after considering the financial position of the acquirer and target, the post-acquisition debt-to-equity ratio, the borrower’s contribution, valuation requirements, the security package and the bank’s own exposure limits.

The framework, in other words, creates a meaningful new financing route — not an automatic one.

For investors, strategic buyers, private equity sponsors, Indian companies and their transaction advisers, the central question is no longer simply whether Indian bank finance may be used. It is:

Has the acquisition been structured, from the outset, in a manner that can qualify for bank finance?

Why has this framework been introduced?

India’s mergers and acquisitions (M&A) market has grown more sophisticated than the regulatory framework around it. A single transaction today may involve:

• strategic buyers;
• private equity sponsors;
• Indian and overseas acquisition vehicles;
• domestic and international lenders;
• refinancing of existing target debt; and
• complex post-closing capital structures.

Indian banks historically had far less flexibility to participate in acquisition financing than lenders in several other jurisdictions. The RBI’s earlier position was narrow by design. Banks could finance a promoter’s contribution to a new company, or equity acquisitions in overseas joint ventures and wholly owned subsidiaries as strategic investments, but little else. Anything resembling a leveraged buyout of an Indian target sat largely outside the banking system, pushed instead toward offshore debt, private credit and promoter capital.

The revised RBI framework seeks to address this gap while ensuring that acquisition lending does not expose banks to excessive leverage or capital-market risk. It creates a prudential structure within which Indian banks may evaluate and finance strategic acquisitions, with control running through nearly every stage of transaction, relating to:

• the borrower eligibility;
• target eligibility;
• acquisition of control;
• the acquirer’s own contribution;
• consolidated leverage;
• independent valuation;
• security;
• bridge financing; and
• bank-level exposure.

This combination of commercial opportunity and prudential protection is central to understanding the reform.

What exactly has changed?

Acquisition finance is now expressly recognised as financial assistance provided to an eligible borrower for acquiring control over a target company. The definition is broad enough to cover an acquisition through a merger or amalgamation. It may also include refinancing of the target company’s existing debt, where that refinancing is integral to the acquisition itself.

This is important, because it changes what “acquisition finance” actually covers in practice. The framework isn’t limited to a conventional share purchase agreement, it can apply wherever control is being acquired, whether that happens through:

• a merger or an amalgamation;
• a direct acquisition by the acquiring company;
• a qualifying subsidiary or special purpose vehicle; or
• a lending to an Indian or overseas non-financial subsidiary undertaking the acquisition.

The framework is directed towards strategic acquisitions involving control rather than passive investments or routine minority share purchases.

1. Can the proposed borrower use the framework?

The first question in any proposed transaction should be whether the acquiring entity satisfies the eligibility requirements.

Eligible acquiring company

The acquiring company must be an Indian non-financial company, listed or unlisted meeting three financial thresholds:

• net worth exceeding ₹500 crore;
• a three-year track record of profit after tax; and
• for an unlisted acquiring company, an investment-grade credit rating.

The relevant financial conditions must be assessed on both a standalone and consolidated basis. These conditions have an important commercial consequence, i.e., it is not available to every Indian company undertaking an acquisition. Smaller companies, newly established acquisition entities and companies without the prescribed financial record may not independently qualify.

Use of a Subsidiary or Special Purpose Vehicle (SPV)

The framework does not require the eligible company to be the direct borrower. Acquisition finance may also be extended to a subsidiary or special purpose vehicle established by the eligible acquiring company, including those outside India. In either case, the financing is assessed on the strength of the eligible acquiring company, and a corporate guarantee from that company is mandatory.

This may be particularly relevant where a transaction is structured through a dedicated acquisition vehicle. However, creating an SPV does not remove the underlying eligibility conditions. The strength and eligibility of the parent acquirer remain central.

2. Does the target and the proposed transaction qualify?

The target may be an Indian or overseas company, but it must be a non-financial company, this framework is a deliberate choice that gives this reform a genuine cross-border reach, rather than confining it to purely domestic deals. The framework, therefore has potential relevance to both:

• acquisitions of Indian businesses; and
• overseas acquisitions undertaken by qualifying Indian companies.

Acquisition of control

The financing must relate to a strategic investment involving control, not a passive stake. That can take several forms:

• control acquired in a single transaction;
• control built up through a series of interconnected transactions, completed within 12 months of the first disbursement of the acquisition finance;
• an increase in an existing shareholding that takes the acquirer to control; or
• where the acquirer already holds control, an additional stake that crosses one of four defined thresholds — 26%, 51%, 75%, or 90% of voting rights, each of which confers materially enhanced governance rights under applicable law.

Control is not determined only by the percentage of shares held. It may also arise through rights to appoint directors, or influence management and policy decisions under shareholding, management, voting or similar arrangements.

Related-party restrictions

For a first-time acquisition of control, the target should not be a related party of the acquiring company, as per the provisions of Section 2(76) of the Companies Act, 2013. The relevant restriction extends beyond formally documented related parties and may include entities under common control, management or promoter arrangements. The transaction structure and existing relationship between the acquirer and target should, therefore be reviewed early.

Financial entities within the target group

Acquisition finance is unavailable where the non-financial target has one or more financial entities as subsidiaries or joint ventures. This is a trap worth flagging specifically for diversified groups: a target can be a genuinely non-financial business at the holding-company level and still fall outside the framework purely because of what sits underneath it.

Where the acquisition of a target would, by extension, bring the acquirer control over other companies the target itself controls, the RBI also requires the “strategic synergy” test which ensures that commercial banks only fund corporate mergers, amalgamations, or takeover that target long-term value creation rather than short-term leverages or finances. It is necessary that this test is carried across that entire chain and not just at the immediate target level.

3. How much may a bank finance?

The framework straightforward permits banks to finance up to 75% of the acquisition value, with the acquiring company required to fund the remaining 25% from its own resources. On its face, that looks like a formula for a highly leveraged acquisition. But any deal team modelling finance ability needs to run the following:

First: 75% is a maximum ceiling, not an entitlement

The RBI has only set an outer limit; it has not guaranteed it. What a bank actually approves will still depend on its own credit assessment, the borrower’s financial strength, the target’s existing indebtedness, the post-acquisition leverage position, the independent valuation, the security actually available, and the bank’s internal risk appetite. Banks are also free to run more conservative internal ceilings than the regulatory maximum, and most will, particularly for first-time acquisition-finance borrowers.

Second: 75% applies on independently assessed value, not the negotiated price

This is where deals most often run into a gap between commercial expectation and financeable reality. The bank does not simply take 75% of whatever price the buyer and seller agreed. It must obtain its own independent valuation — for a listed target, a single independent valuer is required; for an unlisted target, the financeable value is the lower of two independent valuations, both carried out under the SEBI valuation methodology.

That distinction matters most where:

• the negotiated price embeds a meaningful control premium;
• commercial expectations of value run ahead of what an independent valuer will support; or
• the valuation shifts materially between signing and disbursement.

Buyers should therefore avoid assuming that the 75% will be calculated automatically on the headline purchase consideration.

Third: the 3:1 leverage test may have a more significant impact than the target’s own debt suggests

Post the acquisition, the consolidated debt-to-equity ratio of the acquiring company must not exceed 3:1 on a continuous basis. This is one of the framework’s most operationally significant conditions, because the test is run on the combined balance sheet of acquirer and target together. A target carrying substantial pre-existing debt can materially reduce the amount an otherwise well-capitalised acquirer is able to borrow, even where 75% of the acquisition value would, in isolation, look comfortably financeable.

4. What counts as the acquirer’s own contribution?

The 25% (or greater) portion not financed by the bank must be funded from prescribed own-fund sources. These may include:

• internal accruals;
• proceeds from the sale of assets;
• redemption of investments; or
• fresh equity.

The contribution cannot be financed through another borrowing. Instruments carrying a fixed repayment obligation or put option such as preference shares or structured instruments that behave like disguised debt, in substance if not in form, are also excluded, as is intra-group funding derived from borrowed money.

The logic behind the restriction is straightforward: the RBI wants the acquirer to have genuine capital at risk in the transaction, not a contribution that is itself leveraged one layer removed. It also means that transaction teams should examine the source of funds rather than merely recording that the acquirer will contribute the balance. Where funds move through several holding companies or group entities, banks are likely to require clear evidence of their ultimate source.

5. How should the acquisition structure be planned?

The financing analysis should begin before the acquisition documents are finalised.

Several aspects of the corporate and financing structure may affect bankability.

Acquisition vehicle

Where a subsidiary or SPV is proposed, the parties should consider:

• the relationship between the SPV and the eligible acquiring company, including — where the parent does not hold a majority stake or whether it holds the single largest voting block with no other shareholder able to override its control;
• the mandatory corporate guarantee from the parent, and how that guarantee sits alongside any other group-level obligations;
• the flow of funds from the bank, through the SPV, to the target;
• the acquisition vehicle’s post-closing obligations, including any restrictions on further group debt ranking ahead of the acquisition-finance lender; and
• whether the broader structure complies with the applicable company law, foreign exchange, and taxation requirements.

Target debt

The target’s existing debt should be reviewed at an early stage, not left for confirmatory diligence. It can affect:

• the consolidated leverage calculation; since the 3:1 test runs on the combined balance sheet of acquirer and target;
• lender consents required from the target’s existing creditors;
• repayment obligations;
• the use of acquisition proceeds; and
• the amount of acquisition finance ultimately available.

The framework allows refinancing of target debt where it is integral to the acquisition, but this should be built into the financing and transaction documentation from the outset.

Independent valuation

The timeline for valuation should be incorporated into the deal process. A financing condition based on independent valuation may affect:

• the purchase price;
• the size of the equity commitment;
• financing certainty; and
• the buyer’s obligations if the valuation falls below expectations.

Conditions precedent

The acquisition agreement and finance documents may need coordinated conditions, covering:

• regulatory eligibility;
• financing approval;
• completion of valuation;
• security creation;
• executions of corporate guarantees;
• repayment or refinancing of target debt;
• lender consent; and
• evidence of the acquirer’s own contribution.

Given how tightly these conditions run together, acquisition counsel and finance counsel working in isolation is the most common way a structurally sound deal turns out not to be bankable. The two teams need to be at the same table from term sheet stage, not brought together once the structure is already fixed.

6. Security may be one of the more difficult issues

The framework requires the instruments through which control is acquired to be free from encumbrance at the relevant stage and the lending bank determines the nature and extent of the security package. But, security over the acquired shares themselves cannot be considered in isolation and must be read alongside of section 19(2) of the Banking Regulation Act, 1949, which restricts the extent to which a banking company may hold shares in another company as pledgee, mortgagee or owner. The statutory ceiling is 30% of the target’s paid-up share capital, or 30% of the bank’s own paid-up capital and reserves — whichever is lower.

That ceiling creates a real structural tension for control acquisitions specifically. A buyer acquiring control will, by definition, typically be acquiring well above 30% of the target’s shares, often 51%, 75%, or more. The bank cannot simply take a pledge over the entirety of that acquired shareholding as its security; Section 19(2) of the Banking Regulation Act, 1949 caps how much of it the bank can actually hold. In other words, the very shares the loan is financing may not, on their own, be sufficient collateral for the loan.

That gap has to be filled from elsewhere. Depending on the transaction and the bank’s own policy, additional security may be required in the form of:

• security over other assets of the acquirer or target;
• corporate guarantees, including mandatory guarantee already required for SPV structures;
• security from the acquirer; or
• other credit supports the bank considers adequate.

7. What is the role of bridge finance?

The revised framework also permits bridge finance in specified circumstances. Bridge finance is interim funding for a period not exceeding one year, provided the borrower has a firm plan and the ability to repay through identified sources.

For acquisition financing, bridge finance may assist a listed acquiring company in meeting its own upfront contribution requirement, subject to the prescribed conditions that the bridge facility must:

• be secured;
• be repaid within the permitted period;
• not dilute the security coverage for the acquisition-finance facility; and
• be repaid through permitted sources, such as internal accruals, an equity issue or sale of assets.

Used well, bridge finance can be genuinely valuable where an acquirer is confident that an equity issuance, an asset sale, or internal funds will materialise within the year, but the acquisition timeline does not allow waiting for that source before closing.

However, if used carelessly, it may become a liability to the acquirer. A bridge facility is not optional financing, it is rather, a firm repayment obligation with a hard one-year deadline, and the permitted repayment sources are narrow by design.

Buyers should treat bridge finance as something to be used only where the exit is genuinely reliable, not as a way to paper over uncertainty about a capital raise that hasn’t yet been committed. An anticipated fundraise that later slips, falls short, or falls through does not extend the one-year clock.

8. The bank’s own exposure limits also matter

Even where the borrower and transaction qualify, the proposed lender must have sufficient regulatory and internal capacity.

Acquisition-finance exposure is subject to a ceiling of 20% of the bank’s eligible capital base, within an overall capital-market exposure ceiling of 40%, assessed on both an individual and consolidated basis. A bank may prescribe a lower limit based on its risk profile and business strategy.

This means a legally eligible transaction may still face practical constraints if:

• the proposed bank has limited remaining exposure capacity;
• the transaction is large relative to the bank;
• the bank’s internal policy is more conservative; or
• the bank wishes to avoid concentration in a particular borrower, sector or transaction.

Lending capacity should therefore be discussed early or alongside but not after the borrower and target eligibility analysis. Large acquisitions may also require a consortium or syndicated structure rather than reliance on a single bank to carry the full facility.

9. What should buyers consider before signing the acquisition agreement?

Before entering into binding acquisition documents, buyers and advisers should consider the following questions, ideally as a structured checklist, not a retrospective diligence exercise.

10. Five practical takeaways

How may the framework influence cross-border M&A?

The reforms have potential significance for both inbound and outbound acquisitions, but in each direction, the framework extends a genuine opportunity while quietly preserving a hard boundary that foreign parties in particular should not overlook.

Inbound investment into India

Foreign sponsors and strategic investors may be able to incorporate Indian bank debt into qualifying acquisition structures involving an eligible Indian acquirer or acquisition vehicle.

However, the foreign sponsor itself does not become an eligible borrower merely because it is investing in India.

The availability of domestic bank finance will depend on:

• the identity of the Indian acquiring entity;
• the financial strength of the eligible acquirer;
• the target and group structure; and
• compliance with the RBI framework’s full set of conditions — borrower, target, leverage, valuation, security, and exposure alike.

Foreign investors should therefore avoid assuming that Indian bank debt can simply be added to an otherwise offshore transaction structure as an additional financing layer. It has to be designed in as part of an Indian-anchored structure from the outset, or it won’t be available at all.

Outbound acquisitions

Because the target may be overseas, qualifying Indian companies may also consider Indian bank finance when pursuing foreign acquisitions. Such transactions will additionally require consideration of:

• overseas investment rules;
• foreign-exchange regulations;
• local law in the target jurisdiction;
• security enforceability; and
• cross-border movement of funds.

Private equity transactions

The framework may expand financing options for private equity-sponsored acquisitions, but it does not create unrestricted Indian bank lending to foreign funds. The acquisition structure must involve an eligible Indian borrower or qualifying acquisition vehicle and it’s financial strength and ongoing obligations.

Domestic and offshore financing combinations

Some acquisitions may use a combination of Indian bank debt; off-shore acquisition finance; sponsor equity; and other permitted capital structure. Such structures will need careful coordination across all financial layers to avoid:

• impermissible double leverage;
• inconsistent or competing security packages;
• competing or unclear lender rights and priority; and
• breach of Indian foreign-exchange and banking regulations at any point structure.

Acquisition finance at a glance

Conclusion

The RBI has not merely increased the amount that banks may lend. It has created a regulated domestic acquisition-finance framework that is likely to influence how qualifying acquisitions are planned, negotiated and funded.

The framework may give eligible buyers access to a financing route that was previously far more restricted and allows Indian banks to participate more meaningfully in strategic domestic and cross-border acquisitions. However, the opportunity comes with important conditions nearly at every step. Borrower eligibility, target structure, leverage, valuation, security, sources of equity contribution and lender exposure must all be considered together.

Businesses that address these issues at the beginning of the transaction will be better placed to determine:

• whether bank finance is realistically available;
• how much may be actually borrowed;
• how the acquisition vehicle should be structured; and
• what protections should be included in the acquisition and financing documents.

The central commercial lesson, then, isn’t simply that bank-financed acquisitions are now permitted. It’s that permission and bankability are not the same thing — and only one of them is available automatically.

Bankability must be designed into the transaction from the outset.