Indian Corporates Can Now Use Bank Financing To Fund M&A Acquisitions Without Having the Need To Do Any Equity Dilution

The Reserve Bank of India (RBI) the apex financial sector regulatory body, on February 13, 2026, eased restrictions on domestic banks in India to provide “acquisition financing”. Historically, banks in India could not provide acquisition finance to fund acquisitions of other companies in India or abroad as the RBI believed that could potentially create a bubble market economy.

These restrictions have now been eased, and the following key changes are to be noted:

• Eligible entities: Acquisition finance can be availed by: (i) an acquiring company, being a non-financial company, directly, or (ii) an existing non-financial subsidiary of the acquiring company, or (iii) a step-down special purpose vehicle (SPV) set up by the acquiring company specifically for the purpose, subject to conditions set out in the norms relating to Core Investment Companies.
• Meaning of non-financial companies: Basically, refers to companies that do not derive their majority revenue from financial assets.
• Objective of acquisition finance: To acquire equity stakes in domestic or foreign companies as strategic investments, i.e. those investments which are driven by the core objective of creating long term value for the acquirer through potential synergies, rather than mere financial restructuring for short term gains.
• Conditions to be met while raising acquisition finance:
  1. Financial conditions: The acquiring company (or, where acquisition is through an SPV or subsidiary, the acquiring company controlling such SPV or subsidiary) shall meet the following financial criteria at the time of sanctioning the acquisition finance:
     1. If listed on a recognised stock exchange in India: (A) minimum net worth of INR 5,000 million; and (B) net profit after taxes reported in each of the previous 3 (three) consecutive financial years.
     2. If unlisted: (A) minimum net worth of INR 5,000 million; (B) net profit after taxes reported in each of the 3 (three) consecutive financial years; and (C) investment grade rating (BBB- or above) from a credit rating agency.
  2. Control acquisition requirements: The acquisition must result in the acquirer obtaining control of the target company through a single transaction, or a series of inter-connected transactions but completed within 12 months from the date of execution of the acquisition agreement. In the event that, the acquiring company already holds control over the target company prior to seeking acquisition finance, acquisition finance may be extended only for acquiring additional stake that crosses a substantial threshold of 26%, 51%, 75%, 90% of voting rights, each conferring materially enhanced governance or control rights under applicable law. Further, in cases of indirect acquisition by way of acquisition of a holding company or intermediate holding company, banks providing the acquisition finance must assess whether the ultimate acquisition of control over the target entity has been achieved in accordance with the requirements set out in the regulations.

• No related party transactions: The acquiring and the target company must not be related parties, however these restrictions would not apply for acquiring additional stakes as set out above (since at that point those entities would classify as a “related party” technically).

2025. Refinance of existing acquisition finance: Is permissible, however it is subject to prudential requirements for banks as set out in Reserve Bank of India (Commercial Banks- Resolution of Stressed Assets) Directions, 2025.

• Amount of acquisition finance that can be raised: Total bank financing must not exceed 75% of the acquisition value (though there is a provision for bridge financing as set out below), as independently assessed by the bank: (i) Listed companies: valuation must be determined by 1 (one) independent valuer (to be appointed by the bank) as per Para 8(2)(e) of SEBI SAST Regulations for valuing shares not frequently traded, (ii) Unlisted companies: Lower of the valuation determined by 2 independent valuers (both to be appointed by the banks) as per Para 8(2) (e) of the SAST Regulations for valuing shares not frequently traded.
• Other conditions relating to the acquisition finance: The acquiring company needs to contribute the remaining amount (i.e., 25% of the acquisition finance) from its own funds, such as internal accruals and fresh equity. Further, a corporate guarantee from the acquiring company, or its parent or the group holding entity, is mandatory. Post acquisition, the debt-to-equity ratio at the acquiring company’s consolidated balance sheet must not exceed 3:1 on a continuous basis.
• Bridge financing option: In the event the acquiring company is a listed company, it may utilise bridge finance to satisfy the minimum own funds requirement of 25%, which will be subject to additional conditions:
  1. There is a clearly identified repayment source (e.g. an equity or asset sale) to replace the bridge finance with equity within a specified period (maximum 12 months)
  2. If the bridge finance is provided by a bank, it shall be on a secured basis

• Bridge finance must not result in dilution of security coverage for the acquisition finance itself.

• Security creation and valuation: Acquisition finance must be secured by the acquired equity shares/ CCDs of the target company, without prejudice to Section 19(2) of the BR Act. Other unencumbered assets of the acquirer and/or the target company, and promoter’s personal guarantee may be taken as additional collateral. The equity shares/ CCDs acquired by the acquiring company must be free and clear of encumbrances.

Some additional questions remain, namely the methodology of valuation of listed target companies remain unclear since the valuation part of the listed companies talks only of companies that are infrequently traded. Further, there is no clarity with respect to acquisition of CCPS of the target entity, since the directions only speak of equity shares and CCDs.

However, all in all, this is a welcome move for M&A transactions in India as Indian corporates no longer need to rely on offshore financing option for overseas transactions (given the currency fluctuations and the de-dollarisation of the global economy). For domestic transactions, Indian corporates no longer need to rely on the internal accruals or their treasury or raising third party funds (either through a private equity transaction or even a listing) which would ultimately result in equity dilution, to fund an acquisition.