Leveraged Buyouts In India: Navigating Financial Strategies Amid Regulatory Challenges

Given the conservative nature of the Indian Banking Sector, Indian banks have been and still are prohibited from directly financing mergers and acquisitions ("M&As"), with the regulatory framework only allowing for banks to provide indirect financing, via project financing or working capital loans. This compels Indian acquirers to rely on private credit, non-banking financial institutions ("NBFCs"), offshore financing or tap into the bond market to fund their acquisitions, which typically comes at a higher cost. Indian banks, unlike their global counterparts, are missing out on opportunities of acquisition financing and leveraged buyouts, areas that form a valuable segment of international banking.

At the FIBAC Conference in August 2025, the State Bank of India ("SBI") reportedly submitted a formal request to the Reserve Bank of India ("RBI") seeking regulatory clearance for Indian banks to participate in financing corporate acquisitions¹. This move, if cleared, could streamline M&A transactions in India, especially for large, listed companies. Backed by the Indian Banks' Association, SBI's request marks a noteworthy development in the evolution of Leveraged Buyouts ("LBOs") regulations in India.

SBI's proposal adopts a measured approach: it advocates phased relaxation, beginning with listed companies where shareholder approval and disclosures reduce the risks of misuse and hostile takeovers. Approval of this reform would finally give Indian corporates access to mainstream bank debt for LBOs, unlocking domestic capital, enabling larger transactions, and aligning India with global acquisition-finance standards.

In addition, SBI has suggested that opening bank lending to listed-company buyouts, could strengthen transparency and governance, as such companies already follow robust disclosure norms that help lenders better assess credit risk. Over time, bank involvement may encourage standardization of deal structures and greater formalization of the LBO market. The overall impact, however, will depend on the prudential safeguards RBI adopts to monitor systemic risk and credit exposure. If implemented well, the reform could make acquisition finance more robust, efficient, and accessible, boosting Indian leveraged buyouts.

Against this backdrop, this Article, broadly, seeks to provide a comprehensive overview of LBOs, examining their conceptual framework, the current landscape in India and the regulatory stance adopted by Indian authorities.

Introduction to LBOs

India's M&A landscape is on an upward trajectory, with total M&A deal values reaching USD 29.8 billion in Q1 CY 2025², particularly in the energy, financial services, and digital sectors. LBOs have become an increasingly important financing structure in both in domestic and global M&As, allowing potential acquirers to purchase companies with minimal equity contribution by using substantial debt financing secured against the target company's assets or cash flows. However, in India, the regulatory landscape presents unique challenges for structuring such LBO transactions.

An LBO is a structure by which a target company is acquired primarily through debt secured against the assets of the target company, used as collateral to repay the debt. The borrowed funds are repaid using the cash flow generated by the target company³. This method of acquisition is commonly employed by private equity ("PE") firms and is typically funded by 60-90% of debt⁴, allowing them to make large acquisitions without having to commit to the heavy capital costs. They generate a profit by paying down the debt of the borrowed money, and increasing its equity held in the target company. Investors also take steps to increase the profit margins of the target company by reducing unnecessary expenditures. The company may also be sold at the end of the investment period at a higher price than the investment company paid, a process called margin expansion.

Financial Viability of Leveraged Buyouts

To understand the financial viability of LBOs, we shall utilise an illustrative example, assuming acquisition of a Target Company, XYZ Ltd. by a PE Firm. Let us assume that Company XYZ reports an annual pre-tax revenue of ₹15 crore. Applying a simplified corporate tax rate of 33.33% (i.e., one-third of taxable income), the tax outflow amounts to ₹5 crore, resulting in a post-tax net profit of ₹10 crore.

To better understand the financial implications of different acquisition strategies, the following table sets out a comparison of two scenarios: one where the PE firm employs an "all-cash acquisition" and a one where the acquisition is financed via debt i.e., An LBO structure.

Scenario 2 demonstrates the financial leverage advantage of an LBO structure. By deploying only ₹10 crore of its own capital, the PE firm achieves a 40% annual return on their investment which is four times higher than the 10% return in the all-cash scenario. This illustrates how strategic use of debt can significantly enhance equity returns.

Therefore, an LBO not only offers potentially higher return to investors, but is also favoured for its tax advantages, as interest payments on the loan are tax-deducible and reduce taxable income.

Regulatory Hurdles in India

In India, LBOs are largely restricted due to provisions under the Companies Act, 2013 as well as regulatory norms laid out by the RBI. These constraints have significantly limited the scope for similar financial breakthroughs within the Indian economy.

1. RBI Master Circular- Loans and Advances – Statutory and Other Restrictions dated 1 July 2015 ("Master Circular")

The RBI's Master Circular creates structural barriers that prevent traditional leveraged buyout models in India. Paragraph 2.3.1.8 of the Master Circular restricts banks from granting advances against primary security⁵ of shares and debentures, effectively blocking the mechanism whereby acquisition debt is secured against target company assets. While the primary security can be accepted as "collateral for secured loans granted as working capital or for other productive purposes," this exception does not extend to acquisition financing.

Paragraph 2.3.1.9 further restricts banks from funding promoters' equity contributions, requiring that such capital shall "come from their own resources" and should not ordinarily extend loans to companies for the purpose of acquiring shares of other companies. However, an exception at paragraph 2.3.1.9 (iii) creates a significant carve-out that permits Indian banks to finance overseas acquisitions, effectively allowing outbound LBOs while maintaining the prohibition on domestic acquisition financing.

These restrictions consequently prevent private equity funds from utilizing assets of a target company as security for purchasing the target company's shares.

2. RBI Master Direction – External Commercial Borrowings, Trade Credits and Structured Obligations dated 26 March 2019 ("Master Directions")

The Master Directions provide for the framework of permissible external commercial borrowings ("ECB") i.e., commercial loans raised by eligible resident entities from recognised non-resident entities. Under Part I (2.1) (viii)(b) and (c), the non-permissible end uses of ECBs include investments in the capital market and equity investments, thereby disallowing a loan from a foreign bank/ financial institute to finance an acquisition of an Indian company via a leveraged buyout.

3. The Companies Act, 2013

Section 67(2) of the Companies Act, 2013 precludes LBOs for public companies by prohibiting public companies or private companies that are subsidiaries of public companies from offering financial assistance to any other corporation for the purpose of buying or subscribing to that target company's shares. Similar to the Master Circular, it considers utilising the shares of the target company as collateral to be a form of "financial assistance." This prohibition on financial aid does not permit the investor to leverage the assets of Indian target companies for availing loans for the buyout.

The Supreme Court of India in Ramesh B. Desai and Ors. Vs. Bipin Vadilal Mehta and Ors⁶, while analyzing "financial assistance" under the erstwhile Section 77 of the Companies Act, 1956 (which deals with restrictions on purchase by company, or loans by company for purchase, of its own or its holding company's shares and corresponds to Section 67 in the Companies Act, 2013), ruled that if financial assistance was extended for subscription of shares, it would essentially amount to the company purchasing its own shares, thereby rendering the allotment invalid. It enforces the statutory prohibition that the company must not assist in acquiring its own shares, either directly or indirectly.

This Section (i.e., Section 77 of the Companies Act, 1956), deriving origin from the 1887 House of Lords decision of Trevor v. Whitworth⁷, held that financing a purchase of its own shares was understood as a company diminishing its assets. This rule of law was implemented with the intention of protecting the interests of creditors and minority shareholders.

In line with this long-standing policy, the Standing Committee on Finance, in its 57^th Report on the Companies Bill, 2011, considered public suggestions (to Clause 67, which was ultimately adopted as Section 67, in the Companies Act, 2013) on excluding LBOs from the scope of Section 67. The Committee concluded that "Leveraged buyouts take place either contractually or through court-approved schemes of compromise or arrangement (or through the Tribunal under the new Bill) and therefore do not require specific mention in the statute." Accordingly, the Companies Act, 2013, retained the prohibition with no specific exemption for LBOs.

Permissibility under Indian Regulations

Despite regulatory restrictions that generally prohibit LBOs in India, particularly the use of borrowed funds for acquiring domestic companies, there are three notable and legally permissible exceptions through which LBO transactions could still take place:

1. Outbound LBOs

Clauses 2.3.1.9(iii) of the Master Circular allows banks to extend loans to Indian companies for acquiring equity stakes in overseas joint ventures, wholly owned subsidiaries, or even unrelated foreign entities, as long as these acquisitions are considered strategic in nature. Such lending should follow a board-approved policy outlining specific limits and eligibility norms. The acquisition(s) is required to be beneficial to the company and the country and would be subject to compliance with the statutory requirements under Section 19(2) of the Banking Regulation Act, 1949. This framework effectively enables Indian companies to pursue outbound acquisitions through bank-financed routes.

2. Specialized turnaround entities

The inclusion of LBOs for stressed companies has also been suggested by RBI in its 2013 Discussion Paper, which has been implemented under the Master Circular-Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances dated 1 April 2025 ("Master Circular on Prudential Norms"). Paragraph 30.2 of the Master Circular on Prudential Norms provides for an exception, allowing banks to provide financing to specialized 'turnaround' entities, which are body corporates set up solely for acquiring stressed/ troubled companies and turning them around. Further, as per the Master Circular on Prudential Norms, the debt-to-equity ratio of these 'troubled' entities must not exceed 3:1.

3. Financing provided by NBFCs

The Master Directions define the end uses that are not permitted and specifically disallows Indian companies from borrowing from overseas lenders if the 'end use' is "investment in capital market" or is "equity investment." However, it does not disallow such lending activities to be carried out by NBFCs. NBFCs face fewer restrictions than banks in financing share acquisitions or changes in corporate control, making them more flexible partners for structuring LBOs. However, the natural problem faced by developing countries like India is that the NBFCs are not developed enough to take on such high-risk investments and finance an LBO.

Structuring an LBO deal in India

Given India's regulatory landscape, traditional leveraged buyouts have not been commonly employed for the acquisition of Indian target companies. Instead, LBOs that have predominantly executed so far involve outbound acquisitions wherein Indian companies acquire foreign entities using funds borrowed from overseas lenders. This approach has been consistently followed since the landmark Tata Tea–Tetley transaction in 2000. Nonetheless, within the Indian regulatory framework, the following alternate structures have emerged to facilitate similar outcomes while remaining compliant with domestic laws:

1. Foreign holding company structure

In this form of structure, an investor establishes a foreign holding company, herein referred to as "Acquisition Co." and infuses it with equity capital. Consequently, the Acquisition Co. raises additional debt from foreign lenders, such as international banks or financial institutions. The aggregate proceeds from debt and equity are then deployed to acquire shares or securities of the Indian target company. Following the acquisition, the cash flows generated by the Indian target are up streamed to the Acquisition Co., typically in the form of dividends, interest payments, royalties, or management fees, to service the foreign debt.

In such a structure, the choice of jurisdiction, tax liability, and facilitation of exit through the foreign listing are all pertinent factors, which would have to be considered by the investor. It is noteworthy that this structure was utilised in the landmark cross border acquisition of Tetley by Tata Tea, with 70% of the deal financed through debt raised from international banks to a U.K based special purpose vehicle, secured against Tetley's future cash flows. The balance of the funding was sourced from Tata Tea's internal resources, and Tetley has since continued operating as a wholly owned subsidiary.

2. Indian holding company structure

In an LBO, structured through a domestic holding company, the investor establishes an Indian holding entity which acts as the acquisition vehicle. This holding company raises funds, often sourced through foreign debt or equity and channels them to its Indian operating subsidiary by subscribing to non-convertible debentures ("NCDs") issued by the subsidiary. The subsidiary, in turn, uses the proceeds to acquire the Indian target company. After the acquisition, the target's cash flows are gradually up streamed to the subsidiary, which then services the NCD obligations to the holding company. The holding company ultimately uses these funds to repay its external borrowings. While this structure operates within India's regulatory boundaries, it requires careful compliance with Foreign Exchange Management Act, 1999 ("FEMA"), RBI and Securities Exchange Board of India norms and is commonly used in situations where direct acquisition funding is otherwise restricted.

3. Asset Buyout Structure

Under an asset buyout, the financial investor incorporates a domestic holding company and finances it using debt and equity. The debt is raised to buy operating assets of the target company and is secured by those assets, since asset-backed, project loans and secured working capital loans are permissible for domestic banks in India. Foreign investors may invest in the equity of the domestic holding company through the foreign direct investment route. One of the key drawbacks of this structure is that the substantial stamp duty liability on operating assets typically ranging from 5-10% of the entire transaction value falls onto the domestic holding company and there is a high execution risk with such a structure, given its complexity and regulatory sensitivities.

Conclusion: Prospects for LBOs in India

It is significant to note that a study conducted by Dr. Suman Patra⁸ provides empirical evidence that LBOs contribute to a significant increase in Shareholder Value Added post-transaction. By comparing financial performance indicators such as earning per share, return on equity, and return on investment before and after the LBO, the study finds enhanced profitability and greater consistency in earnings among LBO firms versus control companies. The statistically significant improvements observed suggest that LBOs effectively create shareholder value by improving operational efficiency and financial returns in the post-buyout period.

It is also noteworthy that the LBO structure has been popular in the American economy due to the deep and liquid capital market and a large private equity ecosystem that supports high levels of debt financing. In contrast, the Indian market, having underdeveloped bond markets, regulatory constraints and a relatively cautious banking sector which is unable to realise and implement the LBO model. Additionally, India's promoter-driven corporate governance tends to make owners and managers synonymous to one another, making it tougher for private equity firms to execute control transactions for a larger stake in the company. Despite these challenges, the allowance of leveraged buyouts in the context of stressed asset acquisitions reflects a gradual evolution in Indian legislation.

For the facilitation of leveraged buyouts as a legally recognised acquisition model, certain regulatory provisions that currently act as absolute barriers and implement blanket provisions need to be re-evaluated and reformed. Instead of outright prohibitions, the introduction of a more nuanced approach involving conditional approvals and oversight mechanisms can ensure prudent use of leverage. This would allow market participants to explore the potential of LBOs without undermining financial stability.

Ultimately, if India aims to cultivate a mature private equity landscape and encourage growth through sophisticated financing models like LBOs, which support asset backed collateral and flexible exit strategies, a gradual, well-regulated shift is essential. This involves balancing investor flexibility with creditor protection, ensuring transparency in governance, and strengthening institutional frameworks around enforcement.

Footnotes

1. https://www.reuters.com/sustainability/boards-policy-regulation/indias-top-lender-sbi-asks-regulator-allow-banks-fund-acquisitions-2025-08-25/

2. PwC India, Deals at a glance: Q1 CY25, (2025).

3. Will Kenton, Understanding Leveraged Buyouts (LBOs): Fundamentals and Examples, (2025).

4. Steven N. Kaplan & Per Stromberg, Leveraged Buyouts and Private Equity, 23 JOURNAL OF ECEONOMIC PERSPECTIVES, 2009, at 124.

5. Primary security means the asset created out of the credit facility extended to the borrower.

6. Ramesh B. Desai and Ors. Vs. Bipin Vadilal Mehta and Ors, AIR 2006 SC 3672.

7. Trevor v Whitworth, 12 App Cas 409 (1887).

8. Dr. Suman Patra, Financial Performance of LBO: An Empirical Study, International Journal of Research in Finance and Management, Comprehensive Publications.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.