Banks, especially large public sector lenders such as State Bank of India and Bank of India, have begun seeking legal advice on reviving acquisition financing in the domestic market, following the Reserve Bank of India’s (RBI) release of its final prudential guidelines on acquisition financing.
“Large PSU banks have shown a lot of interest… they have a large appetite. The interest is already visible,” said a senior partner at a law firm, stating that lenders have started internal evaluations on how to operationalise the new framework. Banks are now preparing board-approved policies, subject to risk department vetting and upgrades in staffing and capabilities.
Why Lenders are Racing to Comply
A senior private sector banker said the initial draft guidelines were “widely dismissed as toothless,” offering little flexibility and failing to address long-standing industry concerns. “But the RBI’s revised guidelines have dramatically altered that perception. Banks are eager to enter this business. The final guidelines are far more favourable and provide ample operational headroom,” added a senior official at a state-run bank.
Anu Aggarwal, President & Head – Corporate & Transaction Banking, Kotak Mahindra Bank, said, “It’s a huge positive for the industry.” For the first time, she said, Indian banks can meaningfully participate in financing Indian assets. “The opportunity is not just in new deals—it’s in the refinancing pipeline, which is going to be very large.”
Aggarwal stated that allowing refinancing of existing acquisition debt is the most consequential shift. “This single change opens the door to a massive secondary market opportunity. The refinancing pool alone could be far larger than the pipeline of new acquisitions.”
Another major relief is the treatment of refinancing when retiring the target company’s existing debt. “This refinancing… will not be included in the capital market exposure… they have excluded this portion,” said Pratish Kumar, Partner, JSA Advocates & Solicitors. This is significant in leveraged buyouts, where refinancing existing debt is standard.
Aggarwal added that banks can now finance not only control deals but also substantial creeping acquisitions at thresholds such as 26%, 51% and 76%, reflecting India Inc’s nuanced ownership structures.
Expanding the Net
The new framework is considerably more robust, expanding who can borrow, what can be financed, and how capital can be structured. Unlisted companies—previously excluded—are now eligible if they have a net worth of Rs 500 crore and a three-year track record of profitability. Financing is no longer restricted to initial control acquisitions; banks can now fund creeping acquisitions, stake hikes, and joint venture partner buyouts.
The mandatory equity contribution has been eased from 30% to 25%, and crucially, this equity no longer needs to be fresh capital—internal accruals are acceptable. “In the case of listed companies… you can give 100% also… but 25% will be bridge finance provided it is repaid within one year,” Kumar said. For unlisted companies, however, promoters must bring in 25% of the equity from non-bank sources, such as NBFCs, NCD issuances, or internal accruals.
The guidelines are expected to catalyse domestic consolidation, particularly in manufacturing, infrastructure, healthcare, and consumer sectors. “This will be one of the ways to expand your capex… I see there will be a lot of activity,” Kumar added.
Sanjay Agarwal, Senior Partner, CareEdge Ratings, said the final regulations have been “thoughtfully relaxed,” enabling banks to participate more aggressively in domestic M&A financing. The lowering of equity requirements and the increase in the acquisition limit from 10% to 20% of Tier 1 capital reflect confidence in banks’ stronger balance sheets. “While the industry had sought a higher threshold, this step is still a significant boost, and we are already seeing large PSU banks showing keen interest,” he said.
According to Capitaline, 32 public and private sector banks have a combined net worth of nearly Rs 28 lakh crore, making close to Rs 5.6 lakh crore available for acquisition financing. Agarwal added that the regulator’s swift move to allow banks to commence acquisition financing from April 1 underscores RBI’s pro-growth stance. “At a time when credit demand is picking up, opening the acquisition financing window not only facilitates M&A activity but also gives a strong push to capex, accelerating economic momentum.”
Another significant change is the introduction of a mandatory corporate guarantee from the promoter—a requirement absent in the draft. “They (RBI) want the corporate guarantee to be mandatory,” Kumar said, reflecting the regulator’s intent to ensure stronger promoter commitment. The debt–equity structure has also been refined.
Meanwhile, a major clarification—one that resolves a key industry concern—is that the new prudential norms do not apply to offshore branches of Indian banks. “These prudential loans… do not apply to offshore branches of Indian banks,” Kumar said. “They will have to just follow the ECB norms… which is relaxed.” It means entities like SBI Singapore can continue offering acquisition financing under the External Commercial Borrowing framework without being constrained by the new domestic limits, ensuring cross-border M&A financing remains flexible and competitive.
Inputs from Christina Titus