The Reserve Bank of India has introduced new rules allowing Indian lenders to finance acquisitions up to 20% of their eligible capital base. According to reports from Business Standard, the central bank issued amended directions on capital market exposure and acquisition financing following a comprehensive review of bank exposure to capital markets. The new framework introduces tighter eligibility norms, lending caps, and borrower requirements to regulate acquisition financing activities.
As reported by Business Standard, banks are permitted to extend acquisition finance for strategic stake purchases under the new framework. However, the central bank has implemented strict conditions requiring total bank funding to be capped at 75% of the deal value. This ensures that acquiring entities retain meaningful skin in the game and maintain substantial equity contribution in their acquisition activities.
According to the RBI's new directions, acquiring companies must contribute at least 25% equity from their own funds to access acquisition finance. As reported by Business Standard, listed acquirers must demonstrate profitability by reporting profits in the last three consecutive years. For unlisted acquirers, a minimum net worth of ₹500 crore is mandatory to access acquisition finance, while unlisted companies must hold a BBB- or higher credit rating. The final guidelines announced by RBI extend eligibility to unlisted companies and permit funding for substantial creeping acquisitions, making the framework more liberal than earlier versions.
Industry estimates indicate that nearly 35% to 40% of India's M&A value is bankable under conventional credit criteria, unlocking a potential $10-15 billion annual opportunity for Indian banks. According to The Economic Times, over the past three years, annual deal values in India have averaged close to $50 billion, but domestic banks could not participate in acquisition funding, leaving the opportunity largely to offshore lenders, private credit funds and internal corporate reserves. Banks with strong investment-banking capabilities such as Kotak Mahindra Bank, State Bank of India, ICICI Bank and Axis Bank are best positioned to benefit from these liberalized rules, as established competences and strong balance sheets will give them early visibility into upcoming opportunities.
Beyond traditional lending, banks will benefit from advisory mandates, underwriting roles, syndication fees, escrow services and treasury products, making acquisition financing a strategic franchise enhancer. As Pratik Shah, partner and national leader of financial services at EY India, noted, acquisition financing could emerge as an attractive, high-value asset class offering superior spreads, structuring fees, and multi-dimensional revenue opportunities. The new rules will bring more players into the market and increase competition, though foreign banks will still be at play because local lenders will not be able to fund transactions with more than three times leverage. Kotak Mahindra Bank is already preparing for this opportunity, with Anu Aggarwal, head of corporate & transaction banking, stating that the rules align well with their strong investment banking franchise and create compelling opportunities to deepen corporate relationships.