Time right for banks to star in the M&A story as RBI opens doors

Draft guidelines enable banks to fund acquisitions, deepening corporate relationships and reducing reliance on offshore credit

The Reserve Bank of India’s (RBI’s) draft guidelines on financing mergers and acquisitions (M&As) signal that these are no more episodic but have become a strategic lever for growth, enabling companies to acquire technology, enter new markets and strengthen themselves against competition.

Traditionally, acquisition financing has relied on offshore borrowing, private credit funds or internal corporate reserves. While this allowed firms to pursue deals, it also meant domestic banks remained passive observers. The historical reason for barring banks from this business was that deposit-taking institutions should not bear equity-linked risks. This stance sought to prevent excessive leverage and preserve systemic stability.

As a result, capital needs were primarily met by alternative investors: Private equity (PE), alternate investment funds or structured credit players. Such prudence was justified in an era when governance and disclosure standards were evolving. However, with stronger balance sheets, more-disciplined leverage and enhanced risk-assessment frameworks, the time is opportune for banks to participate — selectively and prudently — in the M&A story. 

M&A transactions (excluding PEs) worth about $24 billion were announced in the first half of 2025, with full-year activity likely to cross $50 billion. Over the past three years, annual deal values have averaged $48-50 billion. By enabling participation in well-structured, risk-mitigated transactions, the draft guidelines could open a new market for banks worth an estimated $10-15 billion annually. Around 35-40 per cent of M&As are bankable under conventional credit criteria. For banks, the reform expands their product suite and deepens client relationships beyond working capital. For companies, it could enhance transaction certainty and reduce dependence on costlier, offshore, or unregulated funding sources. 

The guidelines allow banks to finance up to 70 per cent of the target value, requiring a minimum 30 per cent equity contribution from the acquirer and a post-deal leverage ceiling of 3:1. Credit is to be secured, primarily through pledged shares of the target entity, supplemented by additional collateral, if needed. Further, aggregate bank exposure to acquisition finance cannot exceed 10 per cent of Tier-I capital and must also fit within the broader 20 per cent direct and 40 per cent overall capital market exposure ceilings. Collectively, these provisions reflect an attempt to balance market development with credit discipline. 

While this is progressive and comprehensive, certain aspects require calibration. The scope limitation to listed entities, for instance, could exclude a large cohort of profitable, well-governed unlisted firms, particularly in the mid-market and family-run business segments. Allowing participation for unlisted companies via special purpose vehicles could broaden the framework’s reach. 

A tiered approach could help. Banks in the United Kingdom can extend leveraged acquisition finance to both listed and private companies, provided enhanced due diligence, cash-flow assessment, and covenant monitoring are in place. US and European banks routinely provide leveraged loans under supervisory frameworks that balance credit opportunity with systemic oversight.

Similarly, the 3:1 leverage cap, while sensible in most scenarios, may warrant contextual flexibility — particularly for high-cashflow or distressed asset transactions, where leverage sustainability can be objectively assessed. Global precedent again supports this: Many regulators adopt differentiated thresholds based on sectoral risk or deal structure, rather than a single static ratio. 

On collateral, an over-reliance on pledged target shares may not always offer adequate coverage. Including acquirer assets, corporate guarantees, or tangible security could strengthen recovery prospects. The European Union’s leveraged lending guidelines promote a diversified collateral base to mitigate volatility in equity valuations. The RBI may also, over time, consider adjusting the Tier-I exposure ceiling for banks with stronger governance. Clarifying the definition of “own funds”, especially regarding promoter resources or hybrid instruments — could further improve consistency across institutions.

The writer is partner, Investment Banking Advisory, EY India