Why RBI's Acquisition Financing Reform Marks A Structural Shift In Indian Banking

The Reserve Bank of India’s statement on Developmental and Regulatory Policies dated October 1, 2025, represents a significant regulatory development with far-reaching legal and commercial implications. By allowing banks to finance corporate acquisitions, subject to prudential norms, the RBI has addressed a long-standing gap in India’s credit ecosystem.

Previously, banks were largely prohibited from providing loans for equity acquisitions or leveraged buyouts. Such restrictions, grounded in concerns over asset-liability mismatches, concentration risk, and speculative use of deposit-based funds, meant that acquisition financing was primarily undertaken via offshore borrowing, capital markets, or non-bank financial institutions, with Indian banks playing only a limited role. The October 2025 announcement constitutes a deliberate and calibrated liberalisation, with operational contours to be defined in forthcoming prudential guidelines.

The earlier stance reflected the RBI’s prudential approach under the Banking Regulation Act, 1949, and the Master Circulars on Loans and Advances, which regarded acquisition finance as potentially speculative, particularly where loan proceeds were used to acquire controlling stakes rather than productive assets.

Over the past decade, however, the legal and regulatory environment has evolved. The Insolvency and Bankruptcy Code, 2016, strengthened the resolution framework, while banks have improved capitalisation and risk management under Basel III norms. The corporate M&A landscape has expanded, with increasingly complex transactions requiring structured financing solutions, both domestic and cross-border. The RBI’s decision reflects regulatory recognition of market maturity and aligns domestic banking practice more closely with global norms, while retaining appropriate safeguards.

Permitting banks to extend acquisition finance is expected to transform transaction structuring. Sectors such as power, infrastructure, telecom, manufacturing, and financial services, often characterised by fragmentation and scale inefficiencies, may witness accelerated consolidation.

For Indian corporates, access to bank-led acquisition finance can broaden the spectrum of available funding, particularly for mid-sized companies previously reliant on offshore lenders or non-bank channels. For banks, this opens a significant line of business, positioning them as strategic financiers of corporate consolidation rather than merely providers of conventional credit facilities.

The entry of banks into acquisition financing will likely reconfigure competitive dynamics for private credit players and NBFCs. Historically, these entities filled the vacuum left by banks, offering acquisition loans at higher yields and with fewer regulatory constraints. With banks now permitted to participate, large structured transactions may migrate towards regulated banking channels, potentially compressing margins for private lenders while elevating governance and transparency standards in acquisition finance.

Globally, bank-led acquisition finance is an established and legally recognised practice:

• In the United States, commercial and investment banks routinely underwrite leveraged loans and syndicate them in accordance with guidance from the Federal Reserve and the Office of the Comptroller of the Currency.

• In Europe and the UK, banks commonly provide bridge loans refinanced through capital market instruments, operating under Basel capital rules and national banking regulations.

• Financial centres such as Singapore and Hong Kong have developed structured regulatory frameworks that permit acquisition finance subject to robust risk management.

India’s previous stance, effectively prohibiting such lending, was an outlier. The October 2025 framework closes this gap, signalling regulatory convergence with mature jurisdictions, while allowing for prudential safeguards tailored to the domestic context.

The extension of acquisition financing powers necessitates robust legal, regulatory, and credit risk frameworks. Acquisition financing typically involves:

• Event-linked exposure, with repayment contingent on successful acquisition completion and integration.

• Complex security structures, including share pledges, negative covenants, and conditions precedent tied to regulatory approvals.

• Regulatory interfaces, covering compliance with the Companies Act, 2013; the SEBI Takeover Code; foreign investment norms; and, where relevant, antitrust and sectoral approvals.

The RBI’s forthcoming prudential framework is expected to specify capital treatment, provisioning requirements, exposure limits, and risk weights. Banks must also observe statutory restrictions, including Section 20 of the Banking Regulation Act, to manage connected lending and protect depositor interests.

The RBI’s policy to permit acquisition financing represents a measured liberalisation with systemic significance. It expands the scope of permissible banking activity in a manner that is legally coherent, economically strategic, and regulatorily cautious.

If implemented prudently, the reform can:

• Deepen the domestic credit market by introducing a new class of structured lending;

• Facilitate corporate consolidation and strategic expansion, enabling Indian corporates to access domestic bank finance;

• Reduce reliance on offshore capital, strengthening financial system resilience; and

• Align India’s regulatory framework with global standards, reinforcing the legal and institutional foundations of the banking sector.

The effectiveness of this initiative will depend on the design of prudential norms, banks’ risk management capabilities, and disciplined utilisation by corporates. Importantly, this measure also raises the competitive and governance standards for private credit players, ensuring that the expansion of acquisition finance occurs in a transparent, legally compliant, and risk-aware environment.

The October 2025 framework is not merely a regulatory adjustment but a structural shift, repositioning Indian banks as central facilitators of corporate growth through M&A, while providing a carefully calibrated mechanism to manage associated legal and credit risks. It heralds the emergence of a mature, domestically anchored acquisition finance market, with implications for corporate strategy, banking operations, and the broader credit ecosystem.

Debashree Dutta is a partner at Vritti Law Partners, specialising in banking, corporate and infrastructure finance, and regulatory advisory.

Disclaimer: The above sponsored content is non-editorial and has been sourced from a third party. NDTV does not guarantee, vouch for or necessarily endorse any of the above content, nor is responsible for it in any manner whatsoever.