In the past, regulators in India have prohibited banks from providing acquisition financing. They have made the protection of public deposits the priority in view of the inherent risks of such transactions. In addition, regulators have viewed acquisitions as different from project or capital expenditure. This is because they involve a transfer of ownership rather than the creation of new assets or economic capacity. As a result, banks were left with little opportunity to finance management buyouts (MBO) or leveraged buyouts (LBO). These are key structures facilitating private equity and venture capital exits. Promoters and corporate entities in India have instead to negotiate funding from more expensive alternatives, such as non-banking financial companies (NBFC), private equity firms and foreign lenders.
Major stakeholders, including those in the banking industry, have consistently pressed for changes to this narrow position. On 1 October 2025, the Reserve Bank of India (RBI) abandoned its longstanding view by releasing its Statement on Development and Regulatory Policies.
This implicitly recognises the maturity of India’s capital markets and banking sector. The stated intent is to expand capital market lending and enhance credit flow in the economy. At the end of that month, the RBI followed that aim by issuing the draft Reserve Bank of India (Commercial Banks – Capital Market Exposure) Directions, 2025 (draft directions).
RBI defines limits for acquisition finance
The draft directions define acquisition finance as financing provided to an acquirer or to a special purpose vehicle (SPV) established by the acquirer for the purchase of shares or assets of a target to obtain control over the target and its operations. The draft directions restrict acquisition financing to strategic, synergy-driven acquisitions focused on long-term value creation. Banks in India may set their own evaluation parameters, provided they meet the following requirements. The RBI thus reinforces the importance of compliance and risk controls.
Banks may finance up to 70% of the acquisition value, with the remaining 30% funded by the acquirer through equity or its own funds. Acquirers and targets cannot be related parties as defined in the Companies Act, 2013. The target’s annual returns must be made available for at least the preceding three financial years. Valuation of the target must be based on two independent assessments conducted in accordance with SEBI regulations. The acquirer must be listed on a recognised Indian stock exchange and have a satisfactory net worth, with profits recorded during each of the preceding three financial years. Financial intermediaries, such as NBFCs and alternative investment funds, may not take advantage of acquisition finance.
Prudence and monitoring in acquisition finance
The framework imposes requirements of prudence and risk management. The post-acquisition debt-to-equity ratio is capped at 3:1, calculated on the combined balance sheet of the acquirer or SPV and the target. The loan must be fully secured by the target’s shares as primary security, with the acquirer’s or target’s assets able to be called on as collateral.
Finally, banks must implement robust, ongoing monitoring mechanisms for acquisition finance exposure. These include early-warning systems to detect emerging stress and periodic stress testing of acquisition finance portfolios.
RBI framework boosts domestic M&A confidence
The change is welcome and aligns with the government’s wider policy objective of fostering self-reliance while maintaining financial stability. By introducing clear eligibility criteria, exposure limits and enhanced monitoring obligations, the RBI strengthens stakeholder confidence in the safety of increased credit flows and capital market participation.
As the direction takes effect, it should lower the cost of capital for domestic M&A transactions and, significantly, expand the boundaries of MBO and LBO structuring. Necessarily, much of this will hinge on the standards mandated by banks pursuant to the draft directions. Although the revision is limited to listed entities and their subsidiaries, it signals a more supportive environment for Indian companies that opens up another source of credit. The framework removes the disadvantages banks suffer compared to other lenders, even if only for listed entities at present. However, it shows support for domestic consolidation and brings India’s regulatory system closer to global standards. It should lead to a more investor-friendly and dynamic environment for corporate growth.
