Update: RBI (Commercial Banks – Credit Facilities) Amendment Directions, 2026

Background and Regulatory Shift

Historically, the RBI restricted banks from financing acquisitions of companies, driven by concerns around speculative leverage, equity market exposure and protection of depositor funds. Only narrow carveouts were permitted, including financing promoter contribution to new companies and acquisition of equity in overseas joint ventures/ wholly owned subsidiaries or other overseas companies as strategic investments. This cautious policy framework was carried over into the Master Directions.

As a result, Indian corporates seeking to undertake domestic or cross border acquisitions were largely dependent on high cost non-bank funding.

The Amendment Directions reflect a deliberate and thoughtful policy evolution. Acknowledging the increased maturity of Indian corporates and the growing ability of domestic banks to underwrite complex transactions, the RBI has now adopted a calibrated approach that permits acquisition finance subject to strict prudential guardrails. The framework is explicitly designed to support strategic long term investments rather than financial engineering or short term restructuring.

Applicability and Transition

The Amendment Directions becomes effective from April 1, 2026 (“Effective Date”). Banks are, however permitted to adopt the amendments earlier, provided they do so in “entirety”. Given that the Amendment Directions modify multiple chapters of the Master Directions, this requirement effectively prevents selective adoption and ensures holistic compliance.

All loans or guarantees outstanding up to the date the amendments come into force (Effective Date, or earlier adoption by a bank), may continue until their original maturity. Any new acquisition finance or renewal of existing facilities from the Effective Date, or earlier adoption by a bank, must comply with the amended framework.

Permitted Structures and Eligible Borrowers

Acquisition finance may be extended solely to Indian non-financial companies. Such funding can be extended to:

1. the acquiring company, directly;

2. a step-down special purpose vehicle (“SPV”) set up specifically for the acquisition, without prejudice to extant norms on core investment companies;¹ or

3. an existing non-financial subsidiary of the acquiring company.

The RBI has imposed stringent financial eligibility thresholds. An acquiring company or, where the acquisition is routed through a subsidiary/ SPV, the controlling acquiring company, must meet the following financial criteria at the time of sanction:

Acquisition Finance and Control

Acquisition finance is narrowly defined as funding for the acquisition of equity shares or compulsorily convertible debentures (“CCDs”) that results in the acquirer obtaining control over the target company, through a single transaction or a series of interconnected transactions completed within 12 (twelve) months of the acquisition agreement. Refinancing of existing target debt is permitted where it is integral to the acquisition.

The definition of ‘control’ is aligned with Section 2(27) of the Companies Act, 2013. Where the acquirer already exercises control, bank financing is permitted only for incremental stake acquisitions that cross clearly defined thresholds of 26% (twenty six percent), 51% (fifty one percent), 75% (seventy five percent), or 90% (ninety percent) of voting rights, each of which corresponds to a material enhancement of governance or control rights.

Where acquisitions are structured through holding or intermediate entities, the RBI requires banks to assess ultimate control at the level of the target company, reinforcing the substance-over-form approach of the framework.

Related Party Prohibition

Acquisition finance is prohibited where the acquirer and the target are related parties, except where financing is for additional stake acquisition as discussed above. ‘Related parties’ include entities having relationships as mentioned under Section 2(76) of the Companies Act, 2013 as well as entities under common control, management or promoter group. This effectively prevents intra?group round?tripping arrangements, while allowing limited flexibility for incremental stake acquisitions that satisfy the prescribed control thresholds.

Financial Criteria and Prudential Safeguards

Financing Limits and “Skin-in-game” requirements

Bank funding for financing of acquisitions is capped at 75% (seventy five percent) of the independently assessed acquisition value, requiring the acquirer to contribute at least 25% (twenty five percent) from its own funds, such as internal accruals or fresh equity.

However, the RBI has carved out a specific exception for listed acquirers, which may utilise bridge finance to satisfy the 25% (twenty five percent) own funds requirement, subject to the following conditions:

1. availability of a clearly identified repayment source to replace the bridge financing with equity within a maximum period of 12 (twelve) months;

2. if the bridge finance is being availed from a bank, then the same shall be done on a secured basis; and

3. bridge finance must not result in dilution of the security coverage for the acquisition finance, as stipulated in the Amendment Directions.

Guidelines on Valuation

Valuation must be undertaken in accordance with the valuation parameters for shares not frequently traded, prescribed under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. Listed targets require valuation by a single independent valuer, while unlisted targets are subject to the lower of two independent valuations. Credit assessment must be undertaken on a pro-forma consolidated basis, combining the financials of the acquirer and the target, reflecting the RBI’s emphasis on group-wide risk assessment.

Mandatory Security

Acquisition finance must be secured by a mandatory corporate guarantee from the acquiring company, or its parent or group holding entity, as applicable, and by a pledge over the acquired equity shares or CCDs. The pledge remains subject to the limitations under Section 19(2) of the Banking Regulation Act, 1949. The equity shares or CCDs acquired by the acquirer must be free from encumbrance. At their discretion, banks may also seek additional collateral over other unencumbered assets of the acquirer and/ or the target company as well as promoter guarantees, in line with their internal credit policies.

Consolidated Leverage Cap

Another key prudential safeguard is that, following the acquisition, the acquiring company’s consolidated debt-to-equity ratio cannot exceed 3:1 on a continuous basis. This ensures that bank funds are not used for acquisitions that result in riskier, heavily leveraged entities or distressed company acquisitions.

Overseas Consortium Lending

Acquisition finance extended by overseas branches of Indian banks as part of syndication arrangements is exempt from the detailed domestic prudential conditions outlined above, provided that the bank’s aggregate funding contribution across all its overseas branches in any particular deal does not exceed 20% (twenty percent) of the total deal funding.

Conclusion

The Amendment Directions represent a meaningful recalibration of India’s acquisition finance regime. They formally permit bank?led acquisition finance to eligible Indian non?financial acquirers for transactions resulting in ‘control’, while embedding strict prudential guardrails around eligibility, related?party dealings, equity contribution, valuation, security package and ongoing consolidated leverage. For Indian banks, the framework creates an opportunity to participate in strategic M&A transactions within a clear regulatory perimeter. For acquirers, it offers an additional onshore financing avenue, one firmly anchored in prudential discipline and long term value creation. Further, given the requirement that the acquiring company’s consolidated debt-to-equity ratio must not exceed 3:1 on a continuous basis, acquisitions of highly leveraged targets may be difficult to finance through bank-led acquisition financing, unless supported by substantial equity infusion by the acquirer.

Please find attached a copy of the Amendment Directions, here.

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.