Leverage, Unlocked: What RBI’s Amendment Directions enable, and what it leaves out
The Reserve Bank of India (Commercial Banks – Credit Facilities) Amendment Directions, 2026[1] (“Directions”), were initially supposed to take effect from 01 April 2026; however, were deferred to 01 July 2026 by the Reserve Bank of India (“RBI”) after banks sought clarity on operational matters.[2] The Directions permit banks to finance non-financial companies acquiring control of domestic or foreign non-financial target companies.[3] The framework governing acquisition financing sits in Chapter XI of the Directions (paragraphs 170A to 170S).
Except in limited circumstances[4], domestic bank credit for share acquisitions was unavailable for decades and so, this amendment alters the options open to strategic acquirers. Whether it does the same for financial sponsors is a different question.
The framework in outline
As per the Directions, and subject to the provisions of Foreign Exchange Management Act, 1999, a bank may finance an Indian non-financial company acquiring equity shares or compulsorily convertible securities conferring control over the target, as a strategic investment.[5] An acquirer who already holds control may seek acquisition financing to cross significant thresholds of 26%, 51%, 75% or 90% of voting rights.[6] Such finance is required to be secured by the financial instruments of the target through which control is acquired.[7] Control is required to be established within 12 months from the date of first disbursal.[8] The borrower may be the acquirer, a non-financial subsidiary or a step-down acquisition vehicle.[9] The financial eligibility criteria do most of the filtering, such as net worth of INR 500 crore, net profit in each of the three preceding financial years, an investment-grade rating of BBB- or above for unlisted acquirers,[10] and a restriction where the acquirer and target are related parties or under common control.[11]
Acquisition finance cannot exceed 75% of the independently assessed acquisition value,[12] with the remaining amount being contributed by the acquirer from its own funds.[13] Post-acquisition consolidated debt-to-equity ratio must not exceed 3:1 on a continuing basis.[14] Bridge finance is narrow: it is available only to listed acquirers, to fund their minimum own fund requirement and repayable within 12 months from an identified source (if provided by a bank, then it shall be on a secured basis) provided that it does not dilute the security provided for the acquisition finance.[15]
What requires consideration
The following features deserve more attention than they have received:
(1) Not for sponsor buyout
The 3:1 consolidated leverage test serves as a critical limitation for the Directions from facilitating sponsor buyouts. Applied on a consolidated basis, the target’s own borrowings will consume into the acquirer’s headroom. Accordingly, a leveraged / distressed target will deplete the very capacity a typical leveraged acquisition requires. As for sponsors, the eligibility criteria settle the question before the interpretive debate begins: the Directions require the bidco to be an Indian non-financial entity[16] and a freshly incorporated bidco has no net worth of INR 500 crore, no 3 year profit record and no rating. The realistic route is therefore a bolt-on by an existing Indian non-financial and profitable portfolio company, which may not be ideal in certain scenarios. What has been enabled is a profitable corporate borrowing against its own consolidated balance sheet.
(2) The financial sector carve-out is wider than it appears
It is evident that banks and non-banking financial companies cannot borrow under this framework. However, it is equally relevant to note that the framework is also unavailable where the target holds financial subsidiaries or joint ventures.[17] Accordingly, an Indian non-financial acquirer may be denied acquisition finance because the target group contains an entity engaged in captive lending or an insurance distribution business, common enough in Indian operating groups. The solution in these cases will have to be addressed through the transaction structure by surrendering the concerned license/registration early or hiving it off / ring-fencing it beforehand.
(3) Concentration limits constrain lender capacity
While the Directions permit acquisition financing, banks remain subject to concentration risk limits.[18] A bank’s aggregate acquisition finance exposure is capped at 20% of its eligible capital base, falling within the overall 40% ceiling on capital market exposures, applicable on a solo as well as consolidated basis.[19] This means that even willing lenders face a regulatory ceiling on how much acquisition financing they can collectively extend, potentially limiting the quantum of funds available for large-ticket transactions. Additionally, for overseas syndications, an individual bank’s participation is capped at 20% of the total funding under the deal, further fragmenting capacity across multiple lenders.[20] In effect, while the Directions unlock bank credit for acquisitions, the concentration framework places a structural brake on the depth of that credit pool.
Conclusion
The Directions mark a significant shift in India’s regulatory approach to acquisition financing, moving from a position of prohibition to one of conditional permissibility. By enabling commercial banks to finance specified acquisitions, the framework has the potential to improve access to domestic acquisition financing and, consequently, support greater activity in India’s M&A market. However, the concentration limits for the bank imposes supply-side constraints and limits the depth of the credit pool available for large-ticket transactions.
Moreover, the conditions prescribed under the Directions indicate that this liberalisation is deliberately calibrated towards established, profitable, un-related non-financial acquirers, with the financial sector excluded on both sides and concerns related to distressed market largely unaddressed. These safeguards reflect RBI’s cautious approach towards balancing the commercial need for acquisition financing with the credit and systemic risks associated with banks financing acquisitions.
The market will ultimately determine whether the framework materially expands the availability of acquisition financing or remains limited to a relatively narrow class of transactions. Nevertheless, the Directions represent an important regulatory milestone and a meaningful step towards reshaping India’s acquisition-financing landscape and contribute to the evolution of a more mature M&A market.
[1] RBI, Reserve Bank of India (Commercial Banks – Credit Facilities) Amendment Directions, 2026, dated 30 March 2026, available at <https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=13346>.
[2] RBI defers acquisition financing, capital market norms to July 1, Business Standard (30 March 2026), <https://www.business-standard.com/finance/news/rbi-defers-acquisition-financing-norms-july-1-capital-market-126033001367_1.html>
[3] RBI, Reserve Bank of India (Commercial Banks – Credit Facilities) Directions, 2025 (as amended), para 170A, available at <https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=13156>.
[4] Reserve Bank of India, ‘Master Circular – Loans and Advances – Statutory and Other Restrictions’ RBI/2015-16/95 (1 July 2015), paras 2.3.7.4(iv), 2.3.1.9(iii) and 2.3.18.
[5] Supra note 3, paras 170E and 170M.
[6] Supra note 3, para 170N.
[7] Supra note 3, para 170P.
[8] Supra note 3, para 170N.
[9] Supra note 3, para 170E.
[10] Supra note 3, para 170G.
[11] Supra note 3, para 170O.
[12] Supra note 3, para 170I.
[13] Supra note 3, para 170J.
[14] Supra note 3, para 170L.
[15] Supra note 3, para 170J.
[16] Supra note 3, para 170E and 170G.
[17] Supra note 3, para 170B.
[18] Reserve Bank of India (Commercial Banks – Concentration Risk Management) Directions, 2025, para 98A, as cross-referred to in para 170S of the Directions.
[19] Ibid, para 98A.
[20] Supra note 3, para 170R.