RBI Opens the Door to Bank-funded Acquisitions: A Measured Shift, Not a Credit-Market Reset

On February 13, 2026, the Reserve Bank of India (“RBI”) released its Reserve Bank of India (Commercial Banks – Credit Facilities) Amendment Directions, 2026 (“Amendment”). For years, Indian banks were effectively out of the acquisition finance business. That changes now with these directions. For the first time, banks can lend to unlisted companies for acquisitions, provided the borrowers meet stringent financial requirements. The Amendment shows that regulators are gaining confidence in structured corporate consolidation, provided leverage remains disciplined. It also brings Indian banking regulation more in line with global acquisition finance practice. This may not necessarily be a deregulation but surely acts as controlled permission. It is still a cautious move aimed at some reforms, albeit with safety nets that ensure acquisition finance stays the exception rather than the norm.

The RBI has implemented three substantial modifications. First, it has permitted unlisted companies seeking to acquire to obtain acquisition finance only if they demonstrate strong creditworthiness. Second, it establishes financing parameters, including ceilings on the amount that can be leveraged and also the minimum equity contribution requirements. Third, it enables financing through step-down special purpose vehicles (“SPVs”), which deliver structural flexibility that did not exist before. 

To be eligible as an acquirer, a listed company must have a minimum net worth of INR 500 crores and a net profit after tax for each of the preceding three years. Unlisted acquirers must meet the same financial criteria as listed acquirers but must obtain investment-grade ratings of BBB(-) or higher from a recognised credit rating agency. The message is clear: access is earned, not assumed.

Banks can provide loans up to 75% of the acquisition cost for an acquisition, however, the acquirer must provide at least 25% of their own financial resources, which may consist of internal accruals or freshly acquired equity. The acquiring company must maintain a maximum debt-to-equity ratio of 3:1 on its balance sheet post the acquisition. Listed acquirers can use bridge finance for up to 12 months to fulfil their 25% equity obligation, provided there is a credible repayment plan.

Further, only transactions which result in the acquirer gaining complete control over the target company will qualify for financing the acquisition. In this regard, the acquirer and target cannot be related parties. Further, in instances where the acquirer already holds control, only acquisitions in which the additional stake of the acquirer company exceeds the 26%, 51%, 75%, or 90% thresholds in the target company will be eligible for such acquisition financing. Banks must implement acquisition finance policies approved by their boards of directors, including underwriting benchmarks that address structural complexities, particularly those related to cash-flow certainty, equity contribution, exposure limits, and leverage multiples.

As per the Amendment, the target company’s equity shares and its compulsorily convertible debentures must serve as security for the acquisition financing needs. Further, any additional collateral may include the promoter’s personal guarantee and/or other unencumbered assets of both the target company and the acquirer.

What this does not automatically create is a buyout market. The above considerations make it clear that banks will still be lending to balance sheets, not to targets. There is no push towards debt driving this. There is no sponsor friendly covenant flexibility, no syndicated distribution culture. This looks like acquisition finance can be offered but without financial engineering.

The Amendment strengthens the regulatory framework but, by itself, does not transform acquisition market operations. In India, acquisitions have never been routine capital allocation decisions. They have been balance-sheet events mostly because acquisitions via financing were hardly contemplated and rarely implemented given costs efficacy analysis.  Existing mechanisms for risk transfer, secondary debt markets, insurance coverage and lender distribution remaining underdeveloped in India have also contributed to the above.

Even currently, financial markets, lenders, and insurers, as risk-sharing partners, do not distribute risk among themselves. Financial investors have long seen initial public offerings (IPOs) as the only safe way out because buyers have historically been reluctant to deploy capital from balance sheets, and sellers have had to deal with immediate tax obligations without liquidity because strategic buy-outs have for long been driven by stock deals.

Now, the RBI has introduced a relatively easier process that allows companies to obtain acquisition financing before they make an offer. The proposed framework allows acquirers to rely on bank facilities for acquisitions rather than using internal funds or equity financing. Access is kept selective, however, by the Amendment’s ceilings, particularly the consolidated leverage caps and eligibility requirements linked to investment-grade ratings.

The RBI has established acquisition finance as a legitimate bank lending product, which decreases doctrinal uncertainty that previously led leveraged transactions to seek funding from alternative lenders. The Amendment indicates that institutions will accept structured acquisition financing, provided it remains within the limits of prudential requirements, including net worth, profitability, and leverage discipline, as mentioned above. Acquisition financing is no longer viewed as presumptively suspect; instead, it is now contingent on the acquirer’s consolidated post-transaction leverage discipline, continuous compliance with exposure norms, and demonstrable financial capacity. The RBI’s approach suggests that systemic risk, not deal activity, remains the primary regulatory concern.

The reform may be seen at best as a small step for bankers but a giant leap for the concept of leveraged buyouts. (paraphrasing Neil Armstrong). Traditional leverage buyout mechanisms, as seen in other developed jurisdictions, are still farther down the road. Lenders are limited in their ability to obtain effective control rights over the target, debt is prevented from being “pushed down” directly onto the target, and reliance on target cash flow is restricted. SPVs can exist as independent entities, but they must function under the control of authorised acquirers. Conditional permission, rather than market-driven credit allocation, remains the framework. Open offer obligations under the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 will still require proof of funds, which means bank commitments must be firm before public announcements.

Thus, 

Who benefits? Large, profitable strategic buyers.

Who does not? Financial sponsors and early-stage consolidators.

That could mean that private credit may still remain the preferred route for many sponsor led acquisitions, as the banking channel remains structurally cautious with focussed takers. In essence, the favourite expression of RBI: ‘regulatory sandbox’, comes to mind.

Unlisted acquirers can now obtain bank financing for acquisitions, but this option is limited to companies that meet investment-grade standards and demonstrate sufficient financial credibility. Although capped, some leverage is allowed. Sponsor-led financial transactions remain restricted, while strategic purchasers enjoy a structural advantage. 

The Amendment is a step forward. The system shifts from total prohibition to operational risk control through regulatory processes. It recognises that leverage can be systemically accommodated within reasonable bounds and that acquisition financing should not be exclusive to publicly listed companies. However, it is still unclear if and when this official approval would result in a long-lasting market for corporate control. The law can facilitate markets, but it cannot replace them. Regulation can permit leverage, it cannot manufacture liquidity. Nevertheless, the new regime is a major step in India’s vision to become a developed economy by 2047 while hoping to avoid the trauma of western ‘vulture capitalism’ as witnessed in the 1980s and 90s.