Bank Capital Steps into India’s M&A engine as RBI allows Acquisition Lending
The Reserve Bank of India introduced a formal framework allowing banks to finance mergers and acquisitions, ending nearly two decades of restrictive practice. The policy reflects growing confidence in corporate balance sheets, financial-sector resilience, and the economy’s shift toward scale-driven growth.
The timing aligns with a period of consolidation across sectors, rising succession-driven transactions, and a policy focus on building globally competitive Indian enterprises. A domestic M&A lending channel strengthens capital self-reliance and supports the evolution of India’s credit markets toward internationally comparable standards.
Key Regulatory Parameters
The RBI has introduced strict eligibility and risk-control conditions to ensure prudent leverage and disciplined deployment of capital:
- Bank financing permitted up to 70% of transaction value
- Maximum 3:1 debt-to-equity ratio at the borrower level
- Exposure limited to 10% of a bank’s Tier-1 capital per group
- Eligibility confined to profitable listed acquirers
- Independent credit evaluation and post-transaction monitoring mandated
These safeguards aim to support strategic transactions while preventing speculative or highly leveraged structures.
Positive Implications for corporates:
Until now, Indian corporates largely depended on offshore lenders, private credit funds, or equity dilution for acquisition financing. Now Indian corporates will have easy access to find funds to acquire companies that are available at attractive valuations. Also, the cash flows of acquired target companies can support the debt service obligations of acquirers. Overall Indian corporates will be in better position to scale and consolidate their positions, surely benefitting the overall economy.
Positive Implications for Banks:
The new regime positions domestic banks as central participants in strategic transactions. This is very positive for Indian Banks as the moves comes at the time when the corporate credit growth has slowed significantly as increasingly corporates have turned to equity capital markets and debt capital markets for their financing needs. Banks can also deepen strategic engagement with high-quality corporate clients in their most important transactions. Banks will also improve their profitability as acquisition financing is generally at a premium in interest rates as M&As are considered riskier. Earlier banks had made representation to RBI to allow M&A funding to Indian corporates starting with listed companies where the acquisitions are more transparent and approved by shareholders.
Concerns:
RBI restricted acquisition finance till date due to concerns due to over leverage, uncertainty of creation of new assets or growth and inherent risks associated with any M&A transaction as M&A can fail easily with reasons ranging from cultural mismatches to failed synergies. M&A transactions require special skill sets and proper due diligence to succeed and banks should fund only deserving acquirers. It is critical that banks as lenders create dedicated teams, with special skill sets, that can evaluate M&A funding deals within well-defined safe guards.
A Calibrated Step toward Scale and Self-Reliance
India’s growth narrative shifts from capacity addition to structural consolidation and efficiency improvement. The new lending window strengthens the ability of Indian enterprises to absorb assets, compete globally, and pursue expansion without excessive foreign borrowing or ownership dilution.
Acknowledgements:
RBI Bulletin (www.bulletin.rbi.org.in), SEBI (www.sebi.gov.in), NSE (www.nseindia.com), BSE (www.bseindia.com)
Disclaimer:
This material has been prepared by the personnel in Vora Corporate Finance which is Investment Banking arm of Vora Management Consultancy Private Limited and looks after Mergers & Acquisitions (M&A), Private Equity (PE), Fund Raising, Debt syndication and Valuations and is based out of Ahmedabad, Gujarat, India. Any views or opinions expressed herein are solely that of individual authors and may differ from view of Vora Management Consultancy Private Limited. This material is proprietary to Vora Management Consultancy Private Limited and is for your personal use only. Any distribution, copy, reprints or forward to others is strictly prohibited.
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