The Reserve Bank of India (RBI) is ushering in a new era for corporate mergers and acquisitions (M&As) financing in India. With a booming M&A market often funded by private credit, the central bank has released draft guidelines designed to bring bank participation under stricter prudential norms. This move aims to balance growth in buyout financing with systemic stability, ensuring banks maintain adequate capital buffers while lending for large corporate buyouts. These proposed rules, open for stakeholder feedback until November 30th, are set to reshape how Indian banks engage with the dynamic M&A landscape, potentially impacting everything from deal structures to market dynamics from April 1st, 2026.
Under the new draft norms, the RBI proposes several key guardrails. Banks' overall capital market exposure, including acquisition financing, will be capped at 20% of their Tier 1 capital. Significantly, only listed companies will be eligible for such funding from banks, and the acquiring entity's debt-to-equity ratio must not exceed 3:1. Furthermore, banks can only finance up to 70% of the acquisition cost, with the remaining 30% to be funded by the acquirer's own resources. These measures aim to introduce greater discipline and reduce excessive leverage in corporate takeovers. Banks will also need to assess the earnings capacity and debt serviceability of both the acquiring and acquired companies, moving beyond just balance sheet metrics.
This regulatory clarity could significantly impact India's fast-growing private credit market, which has largely dominated M&A financing until now. Banks, with their lower cost of funds, may gain a competitive edge, potentially leading to lower yields and different terms for deal financing. The RBI's core rationale for these guidelines is to curb concentration risks. Loans for M&A are often secured by the shares of the acquired company, which can be volatile. By introducing these prudential norms, the RBI seeks to prevent a scenario where aggressive financing of high-profile takeovers could lead to stress within the banking system, thereby safeguarding overall financial stability. While market experts generally welcome the intent, some have raised concerns about the rigidity of certain thresholds, such as the 3:1 leverage cap and 70% funding limit, which they believe might not be universally suitable across all sectors or deal types.
