A structural reset in Indian M&A financing: RBI reforms reshape market

Amended framework empowers domestic banks, boosts flexibility in deal-making and introduces stringent credit safeguards

India’s mergers and acquisitions (M&As) and corporate financing landscape is entering a more dynamic phase. The Reserve Bank of India’s (RBI’s) amendments to the October 2025 acquisition finance guidelines expand flexibility, strengthen safeguards and align regulatory intent with market evolution. By enabling banks to participate more meaningfully in strategic value creation while preserving discipline, the framework lays the foundation for a more mature, resilient and domestically anchored acquisition financing ecosystem.

 

Over the past three years, annual deal values have averaged $48-50 billion. It is an expansion, but domestic banks have historically been constrained participants in acquisition funding, leaving the opportunity largely to offshore lenders, private credit funds and internal corporate reserves. The amended framework reshapes the landscape. Industry estimates show that 35–40 per cent of the M&A value is bankable. Even by conservative assumptions, it unlocks a potential $10–15 billion annual opportunity.

 

The increase in the permissible bank funding cap to 75 per cent (from 70 per cent) under the framework’s draft guidelines improves transaction feasibility (implicitly lowering the minimum acquirer equity contribution to 25 per cent) while preserving promoter “skin in the game.” This adjustment recognises the capital intensity of contemporary M&A transactions.

 

While the RBI has retained the 3:1 post-deal debt-equity ceiling, this may warrant flexibility in select cases. High-cash-flow businesses or distressed asset transactions, where leverage sustainability can be objectively assessed, could benefit from calibrated differentiation. Global precedent supports such nuance.

 

Structural clarity has been strengthened through explicit recognition of Indian non-financial companies, including subsidiaries and special purpose vehicles (SPVs), as eligible borrowers. As acquisition transactions are often done through SPV-led structures to ring-fence liabilities and align financing with deal architecture, this clarification removes a key operational constraint and brings the framework closer to global financing norms.

 

Borrowers must now demonstrate a minimum net worth of ₹500 crore and a record of net profit over the preceding three years. This raises the entry threshold, restricting participation by smaller or financially weaker acquirers while improving systemic credit quality and underwriting resilience.

 

The framework also incorporates an additional safeguard for unlisted borrowers. While the SPV or subsidiary route indirectly broadens access for transactions involving unlisted entities, such borrowers must additionally possess an investment-grade credit rating (BBB- or higher). This condition addresses opacity, disclosure and governance risks associated with unlisted companies, ensuring that expanded participation does not compromise prudential discipline.

 

Although full liberalisation for unlisted firms remains measured, the combination of SPV structural enablement, enhanced borrower eligibility filters and rating-based safeguards introduces pragmatic inclusivity. This is particularly relevant for mid-market and family-owned enterprises —segments that continue to drive industrial expansion — while preserving regulatory prudence and credit safeguards.

 

From a risk-management standpoint, the amendments reinforce lender safeguards. The collateral framework now recognises a broader pool of securities — listed equities, debt instruments, mutual fund units and other approved financial securities — subject to regulatory haircuts and risk controls. A diversified collateral base enhances recovery prospects, mitigates valuation sensitivity and improves underwriting confidence.

 

Notably, acquisition finance exposures — which were earlier proposed to be subject to a separate cap of 10 per cent of a bank’s Tier-I capital under the draft guidelines — are now integrated within the broader Capital Market Exposure framework, aligned to the 20 per cent and 40 per cent ceiling for direct and aggregate exposures, respectively. This shift simplifies regulatory architecture while preserving concentration risk discipline and ensuring acquisition lending remains anchored within overall capital market risk limits.

 

For India Inc., the amendments expand credible domestic funding avenues for strategic acquisitions at a time when global credit markets are volatile and offshore funding costs subject to currency and rate uncertainties. Beyond lending income, banks stand to benefit from advisory mandates, underwriting roles, syndication fees, escrow services, and treasury products.

 

Acquisition finance, therefore, becomes not merely a credit deployment avenue but a strategic franchise enhancer. The opportunity is particularly pronounced for large banks with strong capital adequacy, sectoral expertise and sophisticated captive investment banking divisions.

 

The writer is National Financial Services Leader, EY India