RBI Reshapes M&A: Banks Can Now Fund 75% of Acquisitions

A New Era for Indian Corporate Finance

The Reserve Bank of India (RBI) has initiated a structural overhaul of the nation's corporate financing landscape with its 'Commercial Banks – Credit Facilities Amendment Directions, 2026'. Effective from April 1, 2026, these landmark regulations permit commercial banks to finance mergers and acquisitions (M&A), reversing a policy that has been in place for decades. This move is poised to unlock significant domestic capital, intensify competition among lenders, and fuel a new wave of corporate consolidation and strategic investments across India.

The Previous Financing Landscape

For over seventy years, Indian banks were prohibited from directly financing the acquisition of equity stakes in companies. This restriction was rooted in prudential concerns to protect public deposits from what was perceived as speculative corporate activity. Consequently, the acquisition finance market was dominated by Non-Banking Financial Companies (NBFCs), Alternative Investment Funds (AIFs), private credit funds, and large foreign lenders. Indian corporations seeking to fund acquisitions often had to rely on these alternative sources or complex offshore structures, which frequently came with higher financing costs and less flexible terms. This regulatory environment effectively sidelined domestic banks from a crucial segment of corporate deal-making, limiting the pool of available capital for large-scale transactions.

Key Provisions of the New Framework

The RBI's new guidelines provide a clear and comprehensive framework for banks to participate in M&A financing. The regulations are designed to facilitate strategic investments while incorporating strong prudential safeguards. A central feature is that banks can now finance up to 75% of an acquisition's value. This is balanced by a crucial requirement for the acquiring company to contribute a minimum of 25% of the deal value from its own funds, such as internal accruals or fresh equity. This 'skin in the game' clause ensures that promoters have a significant stake in the success of the acquisition.

Eligibility and Transaction Criteria

To ensure that financing is directed towards financially sound and strategic transactions, the RBI has established strict eligibility criteria. Only non-financial companies with a minimum net worth of ₹500 crore and a consistent profit track record for the last three consecutive financial years are eligible. For unlisted companies, an additional requirement of a minimum domestic credit rating of BBB– has been mandated. The framework is designed for transactions that result in a genuine change of control. It also applies when an existing controlling shareholder acquires an additional stake that crosses key voting right thresholds of 26%, 51%, 75%, or 90%, signifying a substantial increase in governance rights.

A Summary of the New Acquisition Finance Rules

To provide clarity, the core components of the new framework are summarized below:

Broader Reforms and Market Alignment

Complementing these domestic reforms, the RBI has also revamped the External Commercial Borrowing (ECB) framework through the 'Foreign Exchange Management (Borrowing and Lending) (First Amendment) Regulations, 2026'. This parallel reform moves away from fixed all-in-cost ceilings to a market-linked pricing regime, allowing well-rated Indian companies to access offshore capital at more competitive rates. By widening the pool of eligible lenders and borrowers, including Limited Liability Partnerships (LLPs), the RBI is creating a more flexible and globally integrated capital access environment for Indian businesses.

Expected Impact on the M&A Ecosystem

The entry of commercial banks into acquisition financing is expected to have a profound impact on the market. Analysts predict a 10% to 15% increase in M&A volumes in 2026, building on the US$113 billion recorded in 2025. This could create an additional financing opportunity of $10-15 billion annually for the banking sector. The increased competition from banks is likely to put downward pressure on borrowing costs and may lead to more favorable terms for acquiring companies. Sectors such as technology, financial services, automotive, manufacturing, and infrastructure are expected to see a significant uptick in deal activity.

Balancing Opportunity with Prudent Risk Management

While the new framework opens up significant opportunities, the RBI has embedded strong guardrails to manage systemic risk. The overall capital market exposure for banks is capped, and the specific sub-limit for M&A financing ensures that no single institution becomes over-leveraged. The stringent eligibility criteria for borrowers are designed to filter out high-risk proposals, directing capital towards stable and strategically sound companies. This calibrated approach signals the RBI's confidence in the maturity of the Indian banking system while maintaining its focus on financial stability.

A Structural Shift for Corporate India

The RBI's decision marks a historic inflection point. It brings India's financing regulations closer to international norms and empowers domestic banks to compete on a level playing field with foreign and alternative lenders. For Indian corporates, this means deeper liquidity pools, greater financing optionality, and the ability to structure large-scale transactions domestically. This structural reform is not merely an incremental change but a foundational shift designed to strengthen India's capital markets, enhance the competitiveness of its banking sector, and support the next phase of the country's corporate growth and consolidation.