Introduction
Recently, the Reserve Bank of India (“RBI“) Governor, Mr. Sanjay Malhotra underscored the importance of enabling Indian banks to finance acquisitions by domestic corporates, with the objective of broadening the scope of capital market lending and enhancing the credit flow within the Indian economy[1]. Reflecting this policy vision, the RBI, through its ‘Statement on Developmental and Regulatory Policies’ dated October 1, 2025, proposed several key measures, including the establishment of an enabling framework to facilitate bank financing of corporate acquisitions by Indian corporates. Pursuant to this announcement, the RBI has issued the draft RBI (Capital Market Exposure) Directions, 2025 (“Draft Directions“). This Article will examine the potential implication of these Draft Directions on India’s merger and acquisition (“M&A“) landscape, and how they may reshape the contours of acquisition financing in the domestic market.
Regulatory Stance
The M&A activity in India has remained strong, with a total deal value of USD 50 billion in the first half of 2025, driven by sectors such as renewable energy, consumer products and retail[2]. A crucial element in M&A transaction is debt financing, which enables companies to fund transaction without immediately depleting cash reserves. One such strategy is leveraged buyouts (“LBO“).
An LBO is a financial strategy where an investor acquires a company primarily using borrowed funds, with the target company’s assets or cash flows used as collateral to secure or repay debt.
Historically, the RBI has maintained a conservative stand on allowing bank’s exposure to the capital markets. The RBI master circular titled ‘Loans and Advances – Statutory and Other Restrictions’ dated July 1, 2015 (“Master Circular“) restricts banks from granting advances against the primary security of shares and debentures, effectively blocking the mechanism whereby acquisition debt is secured against target company assets[3]. Although, the Master Circular allows banks to extend loans to Indian corporates for the acquisition of equity in overseas joint ventures / wholly owned subsidiaries as strategic investments, in terms of a board-approved policy[4], however, such acquisition should be in conformity with the statutory requirement outlined under Section 19 (2) of the Banking Regulation Act, 1949.
The RBI master direction titled ‘External Commercial Borrowings, Trade Credits and Structured Obligations’ dated March 26, 2019 (“Master Directions“) provides the framework for commercial loans raised by eligible resident entities from recognized non-resident lenders.
Under these Master Directions, the list of non-permissible end uses of external commercial borrowing includes investment in the capital market and equity investment[5]. This effectively bars the use of foreign banks or financial institutions to finance the acquisition of an Indian company via an LBO.
Considering the growing value of M&A transactions and recognising the maturity of India’s banking system, the RBI has sought to recalibrate its position. This policy rethink culminated in the Draft Directions.
RBI (Capital Market Exposure) Directions, 2025
The introduction of Draft Directions represents a calibrated move towards permitted bank-financed corporate acquisitions within a controlled and prudentially monitored framework.
The capital market exposure including both direct exposures i.e. investment in securities and indirect exposures i.e. lending against securities, financing to capital market intermediaries like stockbrokers and custodians will be subject to prescribed ceilings under the Draft Directions. The direct exposure limit is capped at 20% (twenty percent) of tier-1 capital as on March 31 of the previous year, while the overall capital market exposure, including indirect channels, is capped at 40% (forty percent) of tier-1 capital[6]. The Draft Directions also prescribe certain exceptions to these ceiling limits, for instance investment by banks in their own subsidiaries, joint ventures and sponsored regional rural banks, and in preference shares without voting rights etc [7].
The Draft Directions define the term ‘acquisition finance’ as finance extended specifically to gain control over a target company and its operations by purchasing all or a controlling portion of target company’s shares or assets, thereby leaving no room for minority acquisition[8].
With respect to borrowers, the Draft Directions, require that the borrowing entity be a listed entity with a satisfactory net worth and a profit-making track record for the past last 3 (three) years. The borrower may be either the acquiring company itself, or a special purpose vehicle (“SPV“) formed by the borrower, thereby providing flexibility to structure acquisitions through SPV’s[9]. The Draft Directions specify that post-acquisition debt to equity ratio of the borrowing entity or the SPV shall be subject to a maximum of 3:1 ratio[10].
Additionally, the Draft Directions outline that banks may finance up to 70% (seventy percent) of the acquisition value, with at least 30% (thirty percent) of the acquisition value to be funded by the acquiring company in the form of equity using its own funds[11]. The Draft Directions emphasise the need for banks to implement a board approved policy on acquisition finance, security, risk management and monitoring norms etc.
Impact on the M&A landscape
With a new wave of corporate consolidation underway, the RBI’s intent appears clear to give domestic banks a prominent seat at the M&A funding table. This policy shift could mark a turning point in how large corporate transactions are financed in India.
Additionally, by proposing to withdraw the guidelines issued on August 25, 2016 titled ‘Enhancing Credit Supply for Large Borrowers through Market Mechanism’ that discouraged the bank from lending to the large corporates, the RBI is signalling a significant change in approach[12]. The move aims to allow banks to play a more active role in financing mergers and acquisitions, thereby expanding the domestic funding pool. This shift will enable the medium to large companies to access structured credit for expansions and acquisitions activities, rather than relying solely on offshore lenders or private equity sources.
These Draft Directions are open for public comments until November 21, 2025, following which stakeholders await their final implementation. In longer term, this policy shift, as and when implemented, could help the Indian corporates to emerge as strong players at the global stage. By fostering a more vibrant and a domestically supported M&A ecosystem, the RBI is laying the groundwork for a dynamic phase of corporate growth in India.
[1] RBI Governor Statement dated October 1, 2025, https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=61333.
[2] Navigating the M&A landscape of India: Insights of H1 2025, EY India (August 13, 2025), https://www.ey.com/en_in/insights/mergers-acquisitions/navigating-the-m-a-landscape-of-india-insights-of-h1-2025.
[3] Paragraph 2.3.1.8 of the Master Circular.
[4] Paragraph 2.3.1.9 (iii) of the Master Circular.
[5] Part 1 – External Commercial Borrowing Framework, (2.1) (viii) (b) & (c) of the Master Directions.
[6] Paragraph 11 of the Draft Directions.
[7] Paragraph 12 of the Draft Directions.
[8] Paragraph 8 (i) of the Draft Directions.
[9] Paragraph 41 of the Draft Directions.
[10] Paragraph 42 (vii) of the Draft Directions.
[11] Paragraph 42 (vi) of the Draft Directions.
[12] Guidelines on Enhancing Credit Supply for Large Borrowers through Market Mechanism – Repeal Circular – Draft for Comments, 1 October 2025.
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