New Delhi, March 13 -- The Reserve Bank of India (RBI) has taken a significant step towards liberalising the acquisition financing landscape in India. Through a series of recent regulatory changes, the RBI has opened broader, yet carefully guarded, financing options for Indian companies pursuing acquisitions.
Two key regulatory developments underpin this shift. Firstly, the RBI (Commercial Banks - Credit Facilities) Amendment Directions, 2026 (Credit Facilities Amendment Directions) establish a framework that allows domestic banks to provide acquisition financing. Secondly, the FEMA (Borrowing and Lending) (First Amendment) Regulations, 2026 (ECB Amendment Directions) ease access to offshore debt under the External Commercial Borrowing (ECB) framework. Together, these measures expand funding avenues for strategic acquisitions by Indian companies.
A new framework for domestic acquisition financing
Under the Credit Facilities Amendment Directions, 'acquisition finance' is defined as financial assistance used to acquire equity shares or compulsorily convertible debentures in a target company (or its holding company) where the transaction results in the borrower gaining control (which should be acquired within 12 months from acquisition agreement). Importantly, this definition excludes financing for slump sales (effectively to continue keeping it out of rigours of the new financing framework for banks).
The regulations also introduce safeguards around related-party transactions. Banks are generally prohibited from financing acquisitions where the acquirer and the target are related parties (including where they are under common control, common management, or common promoter group, directly or indirectly). An exception applies where the acquirer already controls the target and the proposed acquisition results in the acquirer crossing certain control thresholds, i.e. 26%, 51%, 75%, or 90% voting rights, each treated as conferring materially enhanced governance or control right.
Domestic bank financing may be extended to an Indian non-financial company acting as the acquiring entity, its existing non-financial subsidiary or a step-down special purpose vehicle (SPV) created for the acquisition.
Borrowers must meet certain eligibility conditions. The acquiring entity must have a minimum net worth of INR 500 crore, must have reported profit after tax in each of the previous three financial years, and must hold an investment-grade rating if it is unlisted. Banks may finance up to 75% of the acquisition value and the balance 25% must be funded by the acquirer from its own sources, including internal accruals or equity contributions. In the case of listed acquirers, bridge finance may also be used for this purpose, so long as there is a clearly identified repayment source to replace the bridge finance with equity within 12 months.
Security over the acquired shares or CCDs is mandatory, along with a corporate guarantee from the acquirer, its parent, or another group entity.
Expanding access to offshore debt
The ECB Amendment Directions broaden the pool of eligible borrowers. Any person resident in India incorporated under a Central or State Act (other than individuals) may now access ECB, including entities undergoing restructuring or corporate insolvency resolution where the approved plan permits borrowing.
On the lender side, the list of recognised lenders has been expanded significantly. It now includes all persons resident outside India, including individuals and non-resident Indians, along with overseas branches or subsidiaries of RBI regulated entities, and financial institutions or their branches operating from an International Financial Services Centre. The framework also simplifies average maturity requirements. A uniform minimum average maturity period (MAMP) of three years now applies across borrowers and end uses. A shorter window of one to three years is available for manufacturing sector borrowers whose outstanding ECB does not exceed $150 million.
A key change is that ECB can now be used for acquisitions where control of a listed or unlisted company is obtained. Distressed acquisitions under the Insolvency and Bankruptcy Code, 2016 and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 are also permitted. This marks a clear shift from the earlier regime, where acquisition-related uses of ECB were largely restricted.
The amendments also remove earlier limitations on borrowing costs. The previous all-in-cost ceiling and prepayment restrictions have been eliminated, allowing borrowing costs to align with prevailing market conditions for medium- and long-term debt.
What this means for M&A landscape
These changes could significantly reshape India's M&A landscape by expanding the available sources of acquisition funding. Going forward, acquisition financing may come from four key channels: domestic bank lending, offshore borrowing through ECB, foreign portfolio investors (through listed non-convertible debentures), and domestic alternative investment funds (AIFs).
For acquisitions involving control, domestic bank financing and ECB are likely to emerge as the most cost-efficient options, subject to eligibility requirements. For acquisitions that do not involve control, AIFs and foreign portfolio investors may continue to be important funding sources.
While the RBI has opened the door to bank-led acquisition financing, banks are likely to proceed cautiously. Borrowers should expect careful monitoring of end-use, leverage levels, own-fund contributions, and restrictions around related-party transactions. At the same time, ECB financing could become an attractive route for foreign-owned or controlled companies, cross-border acquisition structures, and related-party transactions. In certain cases, it may compete directly with financing from foreign portfolio investors or alternative investment funds.
Ultimately, the choice between bank financing, ECB, AIF capital, or FPI investment will depend on factors such as whether the acquisition involves control, the preferred tenor of financing, the ownership structure of the acquirer, and whether the acquiring entity is listed.
A broader, more competitive financing ecosystem
Taken together, these regulatory changes expand the acquisition financing resources available to Indian companies. By enabling domestic banks to participate directly in acquisition financing and by opening the ECB route for strategic acquisitions, the RBI has created a more competitive and flexible credit environment. Borrowers now have greater structuring flexibility and access to a wider pool of capital, while lenders and arrangers gain new opportunities to participate in India's evolving M&A market.
(Rajeev Vidhani and Sameer Sah are Partners and Manas Pandey is Principal Associate at Khaitan & Co. The views expressed are personal.)
Published by HT Digital Content Services with permission from VC Circle.