The Reserve Bank of India has issued the Amendment Directions under the Reserve Bank of India (Commercial Banks Credit Facilities) Directions, 2026 (Revised) dated 30 March 2026. The Directions will take effect on 1 July 2026. They have introduced a structured framework for commercial bank financing of corporate acquisitions, a type of commercial lending that had only been given a few carve-outs in the regulatory framework. The Directions also restated the regime relating to loans against financial assets and add a new chapter on credit to capital market intermediaries. This piece confines itself to the acquisition finance provisions in the new Chapter XI, which are the substantive innovation.
The analysis is in three steps. The first section outlines the history that the Directions are succeeding. The second part provides a walk-through of the new architecture. The third part highlights four doctrinal questions the framework poses and the rationale behind each being likely to influence the way the regime works in practice.
The Position Before March 2026
The pre-2026 regulatory posture on bank acquisition finance was one of structural caution. Section 19(2) of the Banking Regulation Act, 1949 caps a banking company's holding of shares in any company at the lower of 30 per cent of that company's paid-up capital or 30 per cent of the bank's own paid-up capital and reserves. This provision addresses share holding rather than share-backed lending, but the Reserve Bank's prudential practice extended the underlying caution to lending for the acquisition of shares. The 2015 Master Circular on Loans and Advances expressly restricted bank financing of promoter contribution and lending for the acquisition of shares in other companies. These restrictions were carried into the Reserve Bank of India (Commercial Banks Credit Facilities) Directions, 2025, which the 2026 Amendment now substantially recasts.
The practical consequence was that domestic bank financing for acquisitions was the exception rather than the rule. The dominant funding routes for Indian M&A transactions were external commercial borrowings by overseas SPVs of Indian acquirers, structured credit from Category II Alternative Investment Funds, mezzanine debt from non-banking financial companies and offshore syndicated facilities in which Indian bank participation was limited to overseas branches. Understood against this background, the 2026 Amendment is not a liberalisation of an existing permissive regime but the creation of a structured framework where none had previously existed in any developed form.
The Architecture of the New Framework
The new Chapter XI is organised around five thematic clusters. Paragraph 170A states the framework's purpose. Bank acquisition finance is permitted for an Indian non-financial company to acquire control over a non-financial target company, characterised as strategic investment driven by the objective of creating long-term value through potential synergies, rather than mere financial restructuring for short-term gains. The strategic-versus-financial framing is normative and is reflected throughout the operational provisions that follow.
Paragraphs 170B and 170C address chain-of-control acquisitions and the refinancing of existing acquisition debt respectively. Refinance is permitted only after the underlying acquisition has been concluded and resulted in establishment of control, and the refinance proceeds cannot be applied to repayment of the acquiring company's own contribution. Paragraph 170D requires banks to put in place a Board approved policy on acquisition finance covering exposure limits, equity contribution norms, leverage multiples and cash-flow certainty.
Paragraph 170E identifies four permitted structures: financing extended directly to the acquiring company, on-lent through a non-financial subsidiary, extended to an existing subsidiary as a result of the acquiring company or extended to a step-down special purpose vehicle which was created for the acquisition. The formulating of the financial criteria for the acquiring company is provided in paragraph 170G. The listed acquirers have to establish minimum net worth of Rs. 500 crore (as per section 2(57) of the Companies Act, 2013) net profit after tax of the three preceding consecutive financial years. Unlisted acquirers are required to have an investment grade rating of BBB- or higher at least prior to disbursement, and if not at the time of the sanction.
According to Paragraph 170H, financials must be prepared on a pro-forma consolidated basis (the acquirer and the target). The ceiling on financing for banks is 75 per cent in paragraph 170I – based on the acquisition value as determined independently. For listed targets, valuation is by a single independent valuer appointed by the bank; for unlisted targets, the lower of two independent valuations. In each case the valuation parameters under paragraph 8(2)(e) of the SEBI Substantial Acquisition of Shares and Takeovers Regulations, 2011 are imported by reference.
Paragraph 170J requires the acquirer to contribute the remaining 25 per cent from its own funds, and the Explanation defines that expression. Internal accruals, sale of assets, redemption of investments or issuance of fresh equity qualify. Proceeds of any borrowing, instruments carrying fixed repayment obligations, instruments carrying investor puts and intra-group funding where the source entity has itself borrowed do not. A proviso permits listed acquirers to use bridge finance to satisfy the requirement, subject to repayment from internal accruals, equity issue or asset sales within twelve months.
Paragraph 170L imposes a post-acquisition leverage covenant: the consolidated debt-to-equity ratio of the acquirer must not exceed 3:1 on a continuous basis. Paragraph 170M lists the permitted instruments for acquiring control (equity shares, compulsorily convertible preference shares and compulsorily convertible debentures) and requires that all debt claims of the acquirer or its group on the target rank subordinate to the bank's claims for the full tenor of the facility. Paragraph 170N requires control to be established within twelve months of first disbursal and contains a separate proviso for incremental stake acquisitions where control already exists. Paragraph 170O prohibits acquisition finance where the acquirer and target are related parties under section 2(76) of the Companies Act, 2013 or under common control, management or promoter group.
Paragraphs 170P and 170Q address security. The acquisition finance must be secured by the very instruments through which control is acquired, those instruments must be unencumbered, and additional collateral including unencumbered assets of the acquirer or target and promoter guarantees may be taken at the bank's discretion. Paragraphs 170R and 170S address overseas branch syndication participation (capped at 20 per cent of any deal across all overseas branches of a bank) and aggregate exposure limits under the concentration risk framework.
Four Doctrinal Questions
The framework is substantial size and on its face comprehensive in nature. After careful reading, four questions come to mind that could be important in how it is used in practice.
The first is about the scope of 170J. The Exclusionary limbs in Explanation (ii) are more general than the strategic-financial approach as set out in paragraph 170A. The third limb (instruments with investor puts) does not only apply to preferred equity structures of private equity sponsors, but also to any financial investor of any type, such as sovereign wealth funds and strategic minority co-investors. The fourth limb (intra-group funding, where the source has borrowed) includes any type of holdco-down financing, including whether the source borrowing was raised for the purposes of the acquisition, or for general corporate use. The provision over-includes as it catches those acquirers where the financing of the acquisition coincides with the prohibited features, even if the strategic rationale behind the acquisition is not called into question. The different ways in which the text is read will be the measure of the effectiveness of supervisory practice over the next year and whether the strict text reading is maintained or a substance-over-form approach evolves.
The second concerns paragraph 170L's continuous covenant. The consolidated debt to equity ratio is maintained at 3:1 on a continuous basis without giving any indication of what will happen if the ratio is breached, whether a cure period will be provided and what will happen if there is a breach after a non-credit event (foreign exchange movement on offshore debt, mark-to-market adjustment to consolidated equity, one time impairments) or what will happen if the breach occurs due to the interaction with the Reserve Bank of India (Commercial Banks Resolution of Stressed Assets) Directions, 2025. A covenant that has no definite conditions, or stipulations, is an incomplete covenant. The gap will be filled by documents kept in the facilities, but a uniformity across the banking system will be difficult to achieve before the Reserve Bank provide clarificatory guidance.
The third concern relates to the "related party" prohibition in paragraph 170O. The provision, read with section 2(76) of the Companies Act and the added gloss on the concept of common control, management and promoters group, negates Banking financed consolidation in Indian corporate groups. The exception in the proviso is available on a limited basis that is only if the acquirer already controls the target and is adding to its control. Where cousin entities or companies in a promoter group are consolidated in accordance with the arm's length principle, they will not be regarded as consolidations at arm's length, even if authorised by the independent directors and the price is fair value. It is unclear whether this is properly balanced with prudential concerns that are the basis of it.
The fourth concern has to do with paragraph 170P and section 19(2) of the Banking Regulation Act. Paragraph 170P stipulates that the acquisition finance must be obtained by the instruments by which control is to be acquired (which expressly does not affect the requirement in section 19(2)). The bank's security interest would be a potential violation of the section 19(2) cap in cases of a controlling acquisition, where the definition of “control” includes a significant stake in the target. The Directions do not provide any guidance on what is to be done if the bank's rights of realisation conflict with the statutory shareholding cap where the bank is in distress. This will probably not be tested until the first material default, but it's something to be aware of.
The 2026 Amendment is the most substantial reworking of Indian acquisition finance regulation in the modern period. Its provisions are tightly drawn and read together create a regime that is, on most dimensions, more prudentially rigorous than the popular framing has acknowledged. None of the four doctrinal questions mentioned above are faults in the system. They are places of interpretive choice that will be overcome through the practice of supervision, documentation of the facilities and, eventually, judicial scrutiny. The framework's success will be measured less by deal volume in its first twelve months than by whether those interpretive choices are made in a manner that preserves both the policy ambition of the Directions and the operational coherence that any acquisition finance market requires.
Authors are Law students of Gujarat National Law University, Gandhinagar. Views are personal.