Partner: Joseph Jimmy, Counsel: Tania Chourasia
The Reserve Bank of India (RBI) had issued draft directions in October 2025 titled the Reserve Bank of India (Commercial Banks – Capital Market Exposure) Directions, 2025 (Draft Directions), which proposed a framework for banks to fund acquisitions. The Draft Directions were open for stakeholder feedback, and the RBI has now introduced a framework pursuant to the Reserve Bank of India (Commercial Banks – Credit Facilities) Amendment Directions, 2026 (New Framework) permitting acquisition finance, subject to certain conditions. The implications for sponsors, strategic acquirers and the competitive dynamics of the lending market are likely to be meaningful.
The New Framework takes effect from 1 April 2026, with early adoption by banks being permitted subject to board-approved policies. We have set out below some broad contours.
1.Permitting acquisition finance: Scope and significance
Banks are permitted to finance an acquirer to purchase equity shares or compulsorily convertible debentures (CCD) of a target company or its holding company. The New Framework allows:
- acquirers to raise finance from banks in order to acquire equity shares or CCDs in both listed and unlisted companies;
- refinancing of existing acquisition finance; and
- refinancing of the target’s existing debt where such refinancing is “integral” to the acquisition finance.
2.Eligibility criteria: Acquirer and target
The New Framework introduces the following threshold conditions for both acquirer and target:
- The acquirer must satisfy a minimum net worth requirement of ₹500 crore and net profit after taxes for the preceding three financial years. In addition, unlisted acquirers must obtain an investment-grade rating (BBB- or above) prior to disbursement.
- The New Framework clarifies that acquisition finance may be availed by: (i) the acquirer itself, if it is a non-financial company; (ii) an existing non-financial subsidiary of the acquirer; or (iii) a step-down special purpose vehicle (SPV) set up specifically for the acquisition.
- The acquisition must result in “control” as understood under the Companies Act. Banks are required to independently assess whether, post-acquisition, the borrower has the ability to exercise control over management or policy decisions of the target.
3.Financial parameters
The RBI has embedded quantitative discipline through the following leverage and valuation caps:
- The aggregate exposure of the bank towards the acquisition finance transaction must not exceed 75% of the transaction value. This effectively mandates a minimum 25% acquirer contribution, ensuring sponsor skin-in-the-game. Listed acquirers may avail bridge finance to meet the mandatory 25% acquirer’s contribution, subject to certain conditions.
- Post-acquisition, the consolidated debt-to-equity ratio of the acquirer cannot exceed 3:1 on a continuous basis.
4.Security and guarantee
- Under the New Framework, acquisition finance facilities must be secured with the primary security comprising the equity shares or CCDs of the target company acquired through the transaction.
- A corporate guarantee from the acquirer, or its parent, or group holding entity has been made mandatory, reinforcing recourse beyond target pledged shares.
- Additional security over other unencumbered assets of the acquirer and personal guarantees are also permitted.
5.Timeline and other conditions for acquisition
- The acquisition must result in the acquirer obtaining control of the target either through a single transaction or a series of transactions within 12 months from the execution of the acquisition agreement.
- If the acquirer already holds a controlling interest, acquisition finance may be extended only for acquiring an additional stake that crosses the thresholds of 26%, 51%, 75% or 90% of voting rights.
- If control is acquired indirectly by the acquirer, acquisition finance must be assessed based on the ultimate acquisition of control over the target company.
6.Key takeaways
- Early adoption: Banks are permitted to implement the New Framework prior to the effective date of 1 April 2026, subject to putting in place a board-approved policy. As a result, implementation timelines may vary across banks, with some banks operationalising the New Framework earlier than others.
- Refinancing impact on AIFs and NBFCs: Given that banks are now permitted to refinance existing acquisition finance, there may be some impact on Alternative Investment Funds (AIF) and Non-Banking Financial Companies (NBFC) that have historically provided such financing, potentially compressing yields and altering competitive positioning in the acquisition finance market.
- Strategic investor structures: Private equity funds and financial sponsors will need to consider whether their investment strategy would meet the requirement of acquisition resulting in “control”. Questions may arise as to what constitutes a “strategic” acquisition creating “long-term value”, and such structures will need to be carefully assessed.
- Triggering of open offer: Since acquisitions under the New Framework must result in control, any acquisition of listed company shares will likely trigger an open offer and the requirements under the SEBI Takeover Regulations would apply.
- FOCC restriction: The ability of a foreign owned and controlled company (FOCC) to avail acquisition finance will continue to be restricted, given the existing restrictions on leveraging domestic funds under the foreign direct investment regime.
- Pledge creation and enforcement: Under the New Framework, banks are required to take pledge over the target’s shares. However, the 30% ceiling under the Banking Regulation Act may limit the percentage of shares that can be pledged.
- Permitted instruments for acquisition: The New Framework expressly refers to equity shares and CCDs. However, there appears to be an absence of an explicit reference to compulsorily convertible preference shares. This absence may require careful consideration when structuring control transactions using alternative convertible instruments.
- Leverage constraints: The 3:1 debt-to-equity cap may constrain structuring flexibility in large-scale or capital-intensive transactions (such as infrastructure), particularly where targets carry significant existing leverage. As a result, the framework may not be equally workable across all sectors or transaction sizes and could operate as a constraint for certain acquirers.
- Corporate guarantee requirement: The requirement of a mandatory corporate guarantee from the acquirer, its parent or its group holding entity leaves scope for negotiation between borrowers and banks on credit support from creditworthy entities.
For decades, Indian banks have not been permitted to finance acquisitions. The New Framework aligns Indian banking regulations more closely with international leveraged finance markets while preserving systemic and prudential safeguards. Given the magnitude of changes, clarificatory FAQs or supervisory guidance from the RBI may be expected as the market begins to transact under the new regime.
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