OVERVIEW OF CHANGES 

The RBI has, on 13 February 2026, notified amendments to the rules for financing of acquisitions of shares by banks in India (“Acquisition Financing Amendments”). Banks in India were largely restricted from lending to finance the acquisition of shares, with limited exceptions, notably in the context of acquisitions in the infrastructure sector, and overseas acquisitions. Further to draft amendments (“Draft Amendments”) published by the RBI, the Acquisition Financing Amendments were keenly anticipated by market participants. Banks are permitted to finance acquisitions across sectors, subject to the following key requirements (“Indian Bank Acquisition Finance Requirements”):

1. The acquirer (“Ultimate Acquirer”) can be a listed or unlisted company, and can either carry out the acquisition itself, through an existing subsidiary, or an SPV set up for the acquisition.
2. The Ultimate Acquirer must be a non-financial entity.
3. The Ultimate Acquirer must have a minimum net worth of INR 500 crores.
4. The Ultimate Acquirer should have reported a net profit after taxes for last 3 years.
5. Where Ultimate acquirer is unlisted, the Ultimate Acquirer must have a minimum investment grade rating (BBB- or equivalent).
6. The acquisition must result in acquisition of control (and in that context, the acquirer and the target cannot be related parties); where the acquirer already has control, any financing for acquisition of an additional stake, must result in the aggregate stake increasing to 26%, 51%, 76% or 90%.
7. Lenders must carry out independent valuation of the stake being acquired in accordance with the requirements specified in the Acquisition Financing Amendments.
8. The consolidated debt to equity ratio at the level of the Ultimate Acquirer should not exceed 3:1.
9. Acquisition must be of equity shares or CCDs. Security over the target shares or CCDs is mandatory.
10. A maximum of 75% of the acquisition consideration can be funded; the balance must come from equity.
11. Other than in the case of a listed company, the balance 25% must be equity funded. For a listed acquirer, a bridge funding for a maximum of 1 year can be raised. Where raised from a bank, such financing must be secured, and cannot detract from the security value for the acquisition financing.
12. A parent guarantee is mandatory.
13. A bank’s exposure under acquisition financing (excluding refinancing of target debt, which is permitted) will be part of capital markets exposure, which is subject to an overall cap of 40% of the eligible Tier 1 Capital of the bank. Within such overall cap, the bank’s aggregate exposure to acquisition finance shall be capped at 20% of eligible Tier 1 Capital.
14. Overseas branches of Indian banks are exempt from application of the above rules for participation in offshore syndications provided the share of a bank (aggregating participation by all overseas branches of such bank) in the financing does not exceed 20% (“Overseas Branch 20% Exemption”).

ISSUES TO CONSIDER

• Eligible borrowers have boundary conditions: The profitability, net worth and rating (for unlisted acquirers) create some boundary conditions around eligible acquirers to get bank financing

• Not all incremental stake increases can be funded: Small stake increases (for instance by promoters of listed companies) which do not meet the increase thresholds remain ineligible for bank finance. Similarly, where a promoter is looking to purchase a minority stake held by a private equity investor, such acquisition will not qualify for bank finance unless the increase results in the specified thresholds being achieved. Such financing will need to continue to be funded by existing non-bank sources.

• Skin in the game – equity requirement: Bank funding is restricted to 75% of the acquisition value. Consequentially:

• • 100% debt finance for the acquisition will not be possible from a bank finance perspective
  • Where the acquirer is unlisted, funding the 25% equity contribution from debt at a holdco level is not allowed if the 75% is being funded by banks
  • For bank funding of the equity portion of the acquisition value for a listed acquirer, this is limited to a bridge financing for a maximum of 1 year, and must be secured, which security cannot detract from the security cover for the acquisition financing. This means that the acquirer will either have to provide security over other assets or the target value should be sufficient to cover the equity financing on a subordinated basis.

• Mandatory security over target shares or CCDs and parent guarantee: The acquisition funding must be secured by target shares or CCDs and have the benefit of a parent guarantee. The intent of the regulator in prescribing a mandatory parent guarantee appears to be to prohibit non-recourse financing, and ensure that credit risk is against the acquirer. However, where the acquirer chooses to directly acquire the shares itself rather than through an SPV, it is unclear why a parent guarantee would need to be obtained.

• CME: The Draft Amendments treated acquisition financing exposure as capital markets exposure and capped aggregate exposure to acquisition finance at 10% of eligible Tier 1 Capital. The final rules continue with the CME treatment but have increased the 10% cap to 20%.

• Overseas Branches 20% Exemption: The intent of disapplying the rules to overseas branches is a response to comments on the Draft Amendments seeking exemption of financing of overseas acquisitions as a whole, since those were permitted to be financed by banks even earlier. The RBI has responded by stating that the new rules are intended to be a comprehensive framework for financing of acquisitions by banks; however, limited participation in the context of overseas syndications is exempted. While the impact of this in relation to acquisition of an offshore target by an Indian acquirer is clear, a question arises as to whether this exemption will also apply in relation to financing of onshore acquisitions using ECBs once the revised ECB guidelines are notified. Another question is where an offshore acquirer of an Indian target raises financing at an offshore SPV, can an Indian bank participate in such financing to the extent of 20% without complying the new rules. Application of the 20% exemption rule for financing acquisition of Indian targets would appear to be inconsistent with the intent of the Acquisition Financing Amendments.

IMPACT ON ONSHORE ACQUISITIONS

• Indian acquirers: The key impact on onshore acquisitions if that for acquirers with the required net worth and profitability, a significant new source of acquisition finance now becomes available.

• FOCC: A foreign owned/controlled entity is not permitted under the foreign direct investment rules to leverage the Indian market for downstream acquisitions. This will continue to be relevant and bank finance from banks in India will not be available to FOCCs for this type of acquisition.

• Offshore acquirer: Where an offshore financial sponsor or offshore strategic buyer is looking to raise financing in an offshore SPV to acquire an Indian target, the question is around participation of offshore branches of Indian banks in such financings. One point to note here is that creation of security over target shares is mandatory under the Indian Bank Acquisition Finance Requirements. However under the foreign investment regulations, where the end use of funds is for investment in India, creation of security over the Indian target shares is not permitted. Therefore unless Indian banks are able to lend under the Overseas Branch 20% Exemption (which would seem inconsistent with the intent of the Acquisition Financing Amendments), participation by overseas branches of Indian banks will not be possible.

IMPACT ON OFFSHORE ACQUISITIONS

• Increased restrictions: Banks in India were permitted to finance offshore acquisitions by Indian entities on the basis of their board approved policies. Under the new rules, except to the extent of 20% or less of a financing, banks must comply with all the requirements of the rules even for offshore acquisitions.

WHAT NEXT? 

• Revised ECB guidelines awaited: The draft rules around liberalization of acquisition financing by banks in India and the ECB guidelines were published by RBI around the same time, and both have been eagerly anticipated by market participants, since together they have a significant impact on the sources and application of Indian financing, particularly in the context of acquisitions. It remains to be seen as to whether the scope of acquisition financing under the ECB guidelines will be similar to that permitted in the Acquisition Finance Amendments. Some of the requirements which go towards credit risk management for banks may not be applicable in the context of ECBs, since the lenders (other than overseas branches of Indian banks) are not regulated by RBI.

• Clarifications on Acquisition Financing Amendments: Market participants may seek some clarifications on specific points within the new rules, notably on parent guarantees and the 20% exemption for overseas branches of Indian banks.

Author: Sonali Mahapatra – Partner

Disclaimer: This alert only highlights key issues and is not intended to be comprehensive. The contents of this alert do not constitute any opinion or determination on, or certification in respect of, the application of Indian law by Talwar Thakore & Associates (“TT&A”). No part of this alert should be considered an advertisement or solicitation of TT&A’s professional services.