Banks have flagged off several restrictions in the Reserve Bank of India’s (RBI) acquisition financing guidelines, as they believe that these will limit their participation in the merger and acquisition (M&A) space. These include capital caps, equity restructuring as well as inability to fund smaller deals, among others.
According to banking sources, a detailed representation has already been sent to the banking regulator.
One of main feedback that bankers have given is on the majority and controlling stake acquisitions. “This rules out funding for minority acquisitions or staggered deals done in tranches as sometimes companies acquire 15%-20% initially and scale up later,” said Anu Aggarwal, president & head, corporate banking, Kotak Mahindra Bank, adding that the current framework should allow that flexibility
Other concerns
Another concern is the cap on the exposure. That is, banks are permitted to allocate only 10% of their Tier 1 capital toward acquisition financing. “This effectively turns out to be a very small number of around Rs 3 lakh crore, as the banking system’s Tier-1 capital stands at Rs 30 lakh crore ,” said bankers. Most believe that this is inadequate, especially since the M&A activity in India has already touched $50 billion in the first half of 2025.
A senior official from a private-sector bank added that the RBI should consider raising the cap to 25–40% of Tier 1 capital, allowing banks to lend up to 25% of that capital to a single corporate group.
The eligibility criteria, which restricts financing to only listed entities, is also a limiting factor. Another corporate banker from a private-sector bank pointed out that this excludes a significant portion of M&A activity, especially in the private equity space. “Many acquisitions today are driven by PE firms using unlisted vehicles. By limiting financing to listed entities, we are essentially saying this is only for the large corporates (Ambani, Adani and Tata’s),” he said, citing that even a large house owned JSW Paints’ recent $1.5 billion acquisition of Akzo Nobel’s sub in India can’t be financed under the proposed guidelines.
What did Pratish Kumar say?
Similarly, on profitability requirements, Pratish Kumar, Partner, JSA, said, “Mandating a three-year profitability track record for the target company risks undermining commercial judgment. Banks are well-equipped to assess risk and should be trusted to evaluate the strategic merit of each deal.” He added the proposed 70:30 debt-equity ratio for unlisted acquisitions is overly restrictive. “A shift to 80:20 would offer banks greater flexibility without compromising prudential norms,” he added.
The equity contribution requirement, currently pegged at 30% pure equity, is also under scrutiny. There is a demand for clarification on whether the corporate’s required equity contribution must be pure equity or if debt raised at the promoter level and then injected as equity into the acquiring company would be acceptable.
“The RBI generally prefers not to over-regulate such nuances initially, allowing market practices to evolve, said a state-run banker. Bankers believe many corporates prefer structured instruments like CCDs or preference capital, especially when partnering with PE firms. “As long as banks can ring-fence their exposure and ensure these instruments behave like equity from a senior debt perspective, they should be allowed,” said a private sector banker.
“We believe banks are better equipped than shadow lenders or mutual funds to assess credit, monitor governance, and manage risk,” concludes Aggarwal.