RBI Acquisition Finance Framework 2026: Banks Can Now Fund LBOs and MBOs Up to 75% of Deal Value

In a landmark regulatory shift, the Reserve Bank of India on 13 February 2026 amended its capital market exposure framework to allow Indian banks to provide acquisition financing for listed mergers and acquisitions. Effective from 1 April 2026, the RBI (Commercial Banks: Credit Facilities) Amendment Directions, 2026 permit banks to finance up to 75% of the acquisition value, opening the door to leveraged buyouts (LBOs) and management buyouts (MBOs) that were previously constrained by the prohibition on bank-funded share acquisitions.

What Has Changed: From Prohibition to Regulated Access

Until these amendments, Indian banks were largely prohibited from financing the acquisition of shares or securities. This meant that leveraged buyouts, which are commonplace in the United States and Europe, were virtually impossible to structure using Indian bank debt. Acquirers had to rely entirely on equity, foreign debt, or non-banking financial channels. The 2026 amendments change this by carving out a specific exception for acquisition financing, subject to detailed conditions on eligibility, leverage, and exposure limits.

The practical impact is significant. Indian banks can now compete with foreign lenders and private credit funds in financing M&A transactions. This is expected to lower borrowing costs for acquirers, increase deal flow in the Indian market, and provide banks with a new high-yield lending segment.

Eligibility Criteria for Borrowers and Target Companies

The framework imposes strict eligibility requirements. Only listed Indian companies are eligible to borrow for acquisition financing. Both the acquirer and any special purpose vehicle (SPV) used for the transaction must not be financial intermediaries. The acquiring company must demonstrate profitability and satisfactory net worth for the preceding three financial years. The target company must similarly have at least three years of financial disclosures available. Related-party acquisitions are expressly barred, preventing the misuse of bank-funded acquisitions for promoter-group restructuring.

Financing Limits and Leverage Controls

Banks can finance up to 75% of the acquisition value, with the valuation independently determined in line with RBI-prescribed parameters. The remaining 25% must come from the acquirer's own funds through internal accruals, fresh equity, or other non-debt sources. This ensures that the acquirer has meaningful "skin in the game" and reduces the systemic risk of over-leveraged acquisitions.

The acquiring entity must maintain a maximum consolidated debt-to-equity ratio of 3:1 on an ongoing basis, ensuring total borrowings cannot exceed three times the equity. This leverage cap is designed to prevent the kind of over-leveraged deals that have historically led to corporate distress in other jurisdictions. The bank's portfolio exposure to acquisition financing is capped at 20% of its Tier 1 capital, revised upward from the draft's original 10% limit following stakeholder feedback.

Implications for India's M&A Landscape

The acquisition finance framework is expected to catalyse several changes in the Indian M&A market. Private equity firms and strategic acquirers will now have access to cheaper bank debt for acquisitions, reducing reliance on high-cost mezzanine financing or offshore borrowing. Mid-market companies that previously could not afford the all-equity cost of acquisitions may find bank-financed deals viable for the first time. Management teams of listed companies may explore MBO opportunities that were previously inaccessible due to financing constraints.

Practical Takeaways

The RBI's acquisition finance framework is a carefully calibrated opening of a previously closed door. The 75% financing limit, 3:1 leverage cap, and 20% portfolio exposure ceiling together create a controlled environment for bank-financed acquisitions. Companies planning M&A transactions should evaluate whether the bank-finance route offers cost advantages over existing funding structures. Banks should develop board-approved policies for acquisition financing and build specialised underwriting teams. Legal advisors and investment bankers will need to adapt deal structuring to accommodate the new regulatory requirements while maximising the benefits of cheaper bank debt.