Source: Mint
Context:
Recent reforms by the Reserve Bank of India (RBI) have significantly reshaped India’s acquisition finance landscape, allowing banks to play a larger role in funding corporate acquisitions while maintaining strong prudential safeguards.
These changes come through:
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- Amendments to the Credit Facilities Directions (February 2026)
- A revised framework for External Commercial Borrowings (ECBs)
Together, they open new channels for bank-funded acquisitions and offshore borrowing.
1. Banks Can Now Provide Acquisition Finance
RBI now allows Indian banks to provide acquisition finance to:
- Indian non-financial corporates
- Their subsidiaries
- Step-down Special Purpose Vehicles (SPVs)
The funds can be used to acquire strategic control in domestic or foreign companies.
Thresholds covered
Acquisitions that cross key voting thresholds are eligible:
- 26%
- 51%
- 75%
- 90%
Control can be acquired through:
- Equity shares
- Compulsorily Convertible Debentures (CCDs)
2. Eligibility Conditions for Borrowers
To prevent excessive risk, RBI has set strict financial eligibility criteria.
Minimum financial strength
Acquirers must have:
- Net worth: at least ₹500 crore
- Positive net profit: in each of the last 3 years
For unlisted companies:
- Credit rating must be BBB- or higher.
3. Financing Limits and Equity Contribution
RBI has imposed conservative leverage rules.
| Rule | Requirement |
|---|---|
| Maximum bank financing | 75% of acquisition value |
| Minimum equity contribution | 25% from acquirer |
| Post-acquisition debt-equity ratio | Max 3:1 |
For unlisted targets:
- Two independent valuations are required.
- Lower valuation is used.
Listed acquirers can temporarily bridge equity contribution for up to 12 months, provided an equity take-out is planned.
4. Mandatory Recourse and Security
Unlike leveraged buyouts in global markets, RBI requires recourse to the parent company.
Key safeguards include:
- Corporate guarantee from the parent group
- Share pledge over acquired shares/CCDs
- Compliance with 30% per-bank shareholding limit
This marks a clear departure from non-recourse leveraged buyout structures commonly used internationally.
The goal is to prevent highly leveraged acquisition structures from threatening financial stability.
5. Refinancing of Target Company Debt Allowed
Banks can now refinance existing debt of the target company if it is integral to the acquisition.
This helps when:
- Existing lenders block change-of-control clauses
- Debt is secured on core assets of the target
Importantly:
- Such refinancing does not count toward banks’ capital market exposure limits.
6. Exposure Limits for Banks
The new framework also regulates banks’ risk exposure.
| Exposure Limit | Cap |
|---|---|
| Total capital market exposure | 40% of eligible capital |
| Acquisition finance sub-limit | 20% |
| Overseas branch participation in a deal | Max 20% of funding |
These limits help prevent concentration risk in acquisition lending.
7. Changes to External Commercial Borrowings (ECBs)
The RBI also liberalized the ECB framework.
Major changes include:
- Acquisition of control now allowed as an ECB end-use
- Removal of all-in-cost ceiling
- Minimum maturity standardized at 3 years
This opens an offshore borrowing channel for acquisition finance.
