RBI permits Leveraged Buy-Outs through Bank Finance

– Conditions for acquisition finance, prudential limits and new LTV requirements for various capital market exposures

– Payal Agarwal, Partner | payal@vinodkothari.com 

– Updated on March 31, 2026

Capital markets are subject to higher fluctuations and volatility, and hence, Capital Market Exposures (CME) carry a higher risk, naturally requiring higher level of control and prudential norms by the regulator. In a move to permit Leveraged Buy-Outs (LBOs), RBI issued Amendment Directions on Capital Market Exposures on 13th February, 2026, bringing amendments in various applicable Directions, covering, inter alia, conditions on acquisition finance, revised LTV limits for lending against various securities, structured requirements for funding Capital Market Intermediaries (CMIs), prudential limits on Capital Market Exposures (CMEs) etc. Through a press release on 30th March 2026, RBI has deferred the applicability of the Amendment Directions, and has issued revised Directions to clarify on certain aspects relating to acquisition finance and exposures to capital market intermediaries.

The amendments were based on the Draft Reserve Bank of India (Commercial Banks – Capital Market Exposure) Directions, 2025 issued on 24th October, 2025. See an article on the Draft Directions here.

Effective Date

The applicability of the Amendment Directions have been deferred to 1st July, 2026 (from its original effective date of 1st April, 2026), however, may be adopted by a bank prior to that as well in its entirety.

Outstanding loans/ guarantees are permitted to run-down till maturity, however, any fresh loans/ guarantees or renewal of existing loans/ facilities shall be governed by the Amendment Directions.

Navigating through the Amendments

The amendments w.r.t. CMEs have been effected through issuance of the following Amendment Directions:

RBI (Commercial Banks – Credit Facilities) Amendment Directions, 2026 [“CF Amendments”]	Conditions w.r.t. Acquisition Finance, Loan against eligible securities, and funding Capital Market Intermediaries
RBI (Commercial Banks – Concentration Risk Management) Amendment Directions, 2026 [“CRM Amendments”]	Components of investment exposures and credit exposures in CME and prudential ceilings, exclusions from CME ceilings and
RBI (Commercial Banks – Financial Statements: Presentation and Disclosures) – Third Amendment Directions, 2026 [“FS Amendments”]	Revised format of disclosure of exposure to capital markets
Reserve Bank of India (Commercial Banks – Undertaking of Financial Services) – Amendment Directions, 2026 [“UFS Amendments”]	Applicability of conditions on acquisition finance and lending against securities to NBFCs/ HFCs within a bank group. Also see an article on the same here

Permitting Acquisition Finance by Banks

Chapter XI of the extant CF Directions dealt with “Acquisition Finance”. The existing provisions of the said chapter have been omitted and new provisions w.r.t. Acquisition finance has been incorporated therein, prescribing eligibility conditions and compliance requirements w.r.t. Acquisition Finance.

Meaning and Conditions for Acquisition Finance

Acquisition Finance has been defined as:

“Acquisition Finance” shall mean a financial facility or assistance provided to an eligible borrower entity for the purpose of acquiring control in a target company, (including through a scheme of amalgamation or merger). Such funding may also involve refinancing of existing debt of the target company if the refinancing is integral to the acquisition finance. [Para 4(1)(ia)]

The Revised Directions clarify that acquisition finance may be availed with respect to mergers and acquisitions as well.

The operating conditions are laid down in Chapter XI from Para 170A onwards.

Eligibility conditions: Acquiring company and Target company

Acquiring company*	Target company	Financing Parameters
● Indian non-financial company, ● May be listed or unlisted, ● Networth > Rs. 500 crores     ○ As per sec 2(57) of CA, 2013 ●  3 years’ track record of PAT ●  Investment grade rating (BBB- or above) from a CRA [in case of unlisted Acquiring company]   Financial criteria to be satisfied at a standalone and consolidated basis	● Domestic or foreign company ● Non-financial company ● Shall not be Related Party to Acquiring company (in case of first-time acquisition of control)    ○ u/s 2(76) of CA, 2013    ○ includes entities under common control, common management, or common promoter group, whether directly or indirectly	● Credit assessment based on combined balance sheet of Acquiring co and target co. ● Max 75% of acquisition value can be financed, ● Remaining  by Acquiring company using own funds.   ○ shall mean internal accruals, sale of assets or redemption of investments, or issuance of fresh equity   ○does not include Proceeds of any borrowing; instruments having  fixed repayment obligation or put option, any intragroup funding from borrowed funds ● Instruments through which control acquired by Acquiring company shall be free from any encumbrance ● Nature and extent of security cover to be determined by bank ● Post acquisition consolidated debt-equity ratio of Acquiring company shall not exceed 3:1 on a continuous basis

 

*Acquisition finance may be extended to the subsidiary or SPV set up by the Acquiring company, based on the strength of the Acquiring company. In such cases, corporate guarantee from the Acquiring company shall be mandatory.

Note that, while the Directions allow funding of upto 75% of the acquisition value, the same is subject to a more stringent condition of the post-acquisition debt-equity ratio of 3:1. The ratio is based on the consolidated financial position of the Acquiring company together with the Target company, meaning, the same is not only based on the debt position of the Acquiring company, rather, the existing debt of the Target company is also required to be taken into account. This may, in effect, reduce the total amount of acquisition funding that may be availed by the Acquiring company.

Let us consider an example:

• Target Assets : 1000; Equity: 333, Debt: 666
• Acquirer buys 100% of Target company, and has no other assets. Debt: 250, Equity 83
• Consolidated balance sheet Debt becomes 916 against assets of 1000, resulting in the debt-equity ratio breaching the limits

Therefore, the 75% of acquisition value will mostly not be possible, except in cases where the Acquirer has a lower than 3:1 debt-equity ratio.

Charge on acquired stake: operation of section 19(2) of BR Act

Acquisition Finance contemplates creation of security over the securities of the Target company acquired by the Acquiring company. However, section 19(2) of the Banking Regulation Act, 1949 puts a restriction on the creation of charge on a controlling stake in a company. The section reads as:

(2) Save as provided in sub-section (1), no banking company shall hold shares in any company, whether as pledgee, mortgagee or absolute owner, of an amount exceeding thirty per cent. of the paid-up share capital of that company or thirty per cent. of its own paid-up share capital and reserves, whichever is less:

Since acquisition finance is limited to acquisition of “control”, a substantial stake would be involved in every case, especially, where 100% of the Target company is being acquired. Assuming 75% of the acquisition value is being financed by the bank, the condition w.r.t. not holding more than 30% of the paid-up share capital of the (target) company may stand breached. Hence, the Directions use the term “without prejudice to section 19(2) of the BR Act, 1949”, thus, permitting a bank to create charge on as many securities of the entity as is possible without a breach of the requirements under the BR Act. Additional collateral may be sought on the other unencumbered assets of the acquirer and/or target company, and promoter’s personal guarantee, as per the bank’s policy.

Purpose of financing

Permitted for acquiring equity stakes as strategic investments, either leading to

• acquisition of control through a single or a series of transactions within 12 months from first disbursal of acquisition finance, or
• increase in stake towards acquiring control over the target company, or
• acquisition of additional stake crossing substantial thresholds [26%, 51%, 75% or 90% of voting rights], in a target company where control already exists.

The meaning of control is to be taken from section 2(27) of CA, 2013 thus, meaning to include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner;

The Revised Directions clarify that the scope of acquisition of target company includes:

• Acquisition by the Acquiring company directly, or
• On-lending to its Indian or overseas non-financial subsidiary for such acquisition.

Indirect control through target company

With respect to indirect acquisition of control over subsidiaries or joint ventures, through acquisition of control over the holding target company, the Revised Directions clarify that the criteria w.r.t. creation of potential synergies for the acquirer must be suitably assessed considering all such companies.

Further, the acquisition finance cannot be extended towards acquisition of a target company having any financial entity as its subsidiary or JV.

Inconsistency between conditions for Acquisition Finance and purpose of Acquisition Finance

In the context of first-time acquisition of control, the CF Amendments require that the Target company and Acquiring company shall not be related parties. This would make an Acquiring company to raise funds through Acquisition Finance for acquiring control in its associate, where it already holds significant influence, but not control.

Further, the acquisition of “control” should, generally speaking, mean at least more than 50% of voting rights is acquired by  the Acquiring company, in which case, the 26% threshold as referred to as substantial stake in an existing controlled entity becomes meaningless.

While in case of NBFCs, a change in 26% shareholding is considered as change in control by the RBI, the same is not the case under CA, 2013 – which distinguishes between significant influence and control, and hence, the reference to the definition of control as per CA, 2013 in the CF Amendments has resulted in these inconsistencies. 

Bridge Finance

As regards Acquisition Finance, in case of a listed Acquiring company, the condition w.r.t. funding 25% of acquisition value through internal accruals may be met through bridge finance, subject to the specified conditions.

The Directions define bridge finance as:

“Bridge Finance” shall mean financing a borrower for an interim period, not exceeding one year, for a legitimate business purpose where the borrower has a firm plan and capability to repay such loans by raising financial resources either through issuance of equity, debt or hybrid instruments or by divestiture/hive-off of a part of existing business/assets within the interim period.

The conditions for availing bridge finance are:

• Repayment of bridge finance shall be done through internal accruals or an equity issue or sale of assets
• Bridge finance provided by the bank shall be on a secured basis
• Shall not result in dilution of security coverage for acquisition finance

Valuation requirements

• Bank to independently assess acquisition value 
• To be determined by bank-appointed valuer
• Based on guidelines prescribed under Reg 8(2)(e) of SEBI SAST Regulations for shares not frequently traded, viz., using valuation parameters including, book value, comparable trading multiples, and such other parameters as are customary for valuation of shares of such companies [for both listed and unlisted company].
• In case of unlisted company, based on lower of the valuation determined as above by two independent valuers

Prudential Norms and Other compliances applicable on Financing Banks

• Board-approved Policy on Acquisition Finance – incorporating underwriting benchmarks that address the structural complexities of such transactions, in particular relating to exposure limits, equity contribution, leverage multiples, and cash-flow certainty.
• Prudential ceilings on Acquisition Finance –  not more than 20% of Bank’s eligible capital base within the aggregate ceiling of 40% on CMEs, both on solo and consolidated basis [Para 98A of CRM Directions]. Bank may adopt a lower ceiling based on its overall risk profile and corporate strategy. 
• Disclosure in financial statements – disclosure of various forms of CMEs of the bank separately, including acquisition finance, with further segregation of bridge financing for meeting own fund requirements by acquiring companies and financing by overseas branches of the Indian banks etc [Para 10(5)(iia) of FS Directions]

Lending against Eligible Securities

• Board-approved Policy on lending against eligible securities – specify the criteria for selecting securities as collateral; determining portfolio-level as well as single borrower/group borrower limits; concentration limits for exposure to single securities; LTV/margins and haircuts for different securities; and rules for ongoing valuation and margin calls
• Lending to individuals, including non-commercial HUFs

Loan-to-Value (LTV) requirements
Nature of security	CF Amendments	Existing Provisions
Government Securities. incl. T-Bills	As per Bank’s Policy	75% in case of equity shares/ convertible debentures (50% if held in physical form)   In other cases, determined by Bank itself
Sovereign Gold Bonds (SGBs)	As applicable to lending against gold/ silver collateral
Listed shares and listed convertible debt securities	60%
Mutual Funds (excluding Debt MFs), Units of ETF (excluding commodity ETFs) and Units of REITs/InVITs	75%
Debt Mutual Funds	85%
Listed Debt Securities	85% – AAA rated 75% – AA-BBB rated
Prudential ceilings
Acquisition of securities in secondary market	Maximum upto Rs. 25 lacs	Upto Rs. 20 lacs (in case of dematerialised securities) Rs. 10 lacs (in case of physical)
Maximum cap on loans to individuals#	Upto Rs. 1 crore for eligible securities other than G-Sec, listed debt and units of debt mutual funds	–
IPO/ FPO/ ESOP financing#	Rs. 25 lacs per individual, subject to 25% cash margin (upto 75% can be funded)	Rs. 20 lacs per individual, subject to 90% of acquisition value

^#The aforesaid limits are applicable at a banking system level as clarified by the Revised Directions.

Lending to Capital Market Intermediaries (CMIs)

• Meaning of Capital Market Intermediaries:
  • regulated entities undertaking trade execution and market infrastructure services in capital markets, including  broking, clearing, custody, market making or other incidental services
  • shall not include Standalone Primary Dealers and Qualified Central Counterparty (QCCPs)
  • does not include Collective investment schemes such as mutual funds. AIFs, REITs, InvITs, etc.
• Eligibility criteria for CMIs: shall be registered and regulated by a financial sector regulator, and in compliance with the prudential norms of such regulator
• Conditions w.r.t. Security:
  • Facilities shall be fully secured, and the value of securities shall be adjusted for haircuts as appropriate based on nature of securities, with a minimum haircut of 40% for equity shares
  • Any guarantee issued shall be secured with minimum collateral of 50% including at least 25%  in cash
  • Eligible securities and cash pledged shall belong to borrower CMI

Restrictions on lending for proprietary trading

The Revised Directions clarify the scope and exclusions from the restrictions on lending to CMIs for acquisition of securities on its own account, including for proprietary trading and investments. The following are permitted on a fully secured basis:

• Finance to approved market makers in equity and debt securities
• Working capital finance for warehousing of debt securities, including Government Securities, upto a maximum period of 45 days for fulfilling firm demand/request from its clients
• Other working capital facilities against a 100 percent collateral of cash, cash equivalents and Government Securities (including T-Bills)

Guarantee may also be issued by banks for proprietary trading subject to the facility being fully secured collateral of cash, cash equivalents and Government Securities (including T-Bills), out of which a minimum 50 per cent shall be cash or fixed deposits maintained with the lending bank. Banks to ensure that guarantees issued for non-proprietary purposes are not used to facilitate proprietary trading.

Concluding Remarks

The amendments are a positive step towards facilitating bank finance for strategic acquisitions by Indian companies, balancing the funding requirements for acquisitions with prudential norms for banks to provide for safeguards against ambitious risky funding exercises.s.