Mint Explainer | RBI tightens rules on bank M&A loans: What it means for corporate buyouts

The move comes as India sees a surge in corporate dealmaking funded largely by private credit. By defining a framework for bank participation, the RBI seeks to balance growth in buyout financing with systemic stability.

On 1 October, the central bank had first proposed allowing banks to fund corporate buyouts as part of its Statement on Developmental and Regulatory Policies released alongside the monetary policy statement. The 24 October draft now details the prudential guardrails for such lending.

Mint explores what the draft norms entail, how they could reshape M&A financing, and what bankers and experts think of the proposal.

What has the RBI announced?

Under the draft norms, banks’ capital market exposure, which includes loans for acquisition of shares, will be capped at 20% of their tier 1 capital. This is part of the RBI’s broader attempt to ring-fence banks’ exposure to equity markets and make acquisition financing more prudent.

RBI has proposed that only listed companies will be eligible to receive acquisition financing from banks, and that the debt-to-equity ratio of the acquiring company or the company being acquired must not exceed 3:1.

Funding should be structured such that not more than 70% of the acquisition cost is financed through bank debt, and the remaining 30% must come from the acquirer’s own funds.

For retail loans backed by shares, such as loans against shares for individuals, a loan-to-value (LTV) ratio of 60% will continue to apply, given the smaller ticket sizes and granular risk.

The proposal also asks banks to assess the earnings capacity and debt serviceability of both the acquiring and acquired companies rather than rely solely on the debt-to-equity metric.

These proposals are open for stakeholder comments until 30 November, after which the RBI will finalize the guidelines, which will come into effect from 1 April 2026.

What does this mean?

Acquisition financing, loans extended by banks to help companies buy controlling stakes in other firms, had so far operated in a relatively grey area, governed mainly by broad prudential limits on capital market exposure. The RBI’s move now explicitly defines the conditions under which such funding can take place.

This could potentially disrupt the fast-growing private credit industry in pricing and deal-picking, and over the long term, transform the way deals are structured. The proposal could have far-reaching implications for the booming private credit market, which has so far dominated India’s M&A financing landscape.

On 6 October, Mint had reported that private credit growth has been strong in 2025. Total private credit deployment touched $9 billion across 79 deals in the first half of calendar 2025—a 53% jump from the first half of 2024 and close to three times the value for the latter half of 2024, according to a report by EY in August.

The biggest of these was the $3.1 billion raised by Porteast Investment of the Shapoorji Pallonji Group—the largest onshore private credit transaction in India to date.

The proposed entry of banks—with their relatively larger balance sheets and readiness to lend amid muted corporate growth—could result in lower yields, looser terms, and weaker collateral structures. In some cases, enforcing collateral or ensuring debt coverage may be weaker than with traditional bank loans, experts told Mint.

Banks, with their lower cost of funds, will also have a pricing advantage that private credit funds cannot match. Experts said this will likely force private lenders to rethink their value proposition to clients.

Despite the proposed norms expected to open up capital for acquisition financing, some market participants remain sceptical and warn that this comes with a higher risk of bank exposure to certain corporates.

If implemented, the move could rebalance India’s credit landscape, shifting part of the booming buyout financing market from opaque private lenders to the regulated banking system.

Why is the RBI doing this?

The RBI’s rationale lies in curbing concentration risks. Loans for M&A financing are often secured only by the shares of the acquired company, making them inherently risky. If the company’s valuation falls or the acquisition fails to generate expected synergies, banks could face losses.

The regulator wants to avoid a scenario where aggressive financing of high-profile takeovers leads to stress in the banking system.

Moreover, with Indian companies increasingly eyeing large buyouts, both domestic and cross-border, the central bank’s move seeks to pre-empt the build-up of systemic risk.

What are market experts saying?

Bankers and analysts have welcomed the intent behind the RBI’s move but raised concerns about the rigidity of some thresholds.

Analysts believe that debt-to-net-worth is not the only measure of risk—the acquiring company’s cash flow and ability to service debt should carry more weight. A flat 3:1 cap may not be suitable across sectors.

Similarly, they argue that the 70% funding cap could constrain deal-making. “A 70:30 rule effectively sets a 70% loan-to-value (LTV) ratio. But in acquisition finance, the security is shares of one company, which can be volatile,” a senior bank executive said.

Foreign banks, which have long dominated acquisition financing in India, may benefit if domestic banks face tighter constraints. Global lenders already have well-developed M&A lending frameworks and may continue to capture a larger share of this business if domestic lenders find the rules too restrictive, an investment banker said.

Are banks ready for this move?

Most large Indian banks are already conservative in their acquisition finance exposure and say the rules are manageable. However, they emphasize the need for clarity and flexibility.

“We are comfortable with risk-based underwriting, but the framework should allow banks to assess viability case by case,” another bank executive said.

According to experts, Indian banks’ current exposure to acquisition financing is limited, meaning the transition will be smooth. Still, some believe the move could slow deal momentum in the short term, especially for mid-sized corporates without deep capital reserves.

While the banking industry broadly agrees with the intent, it will likely seek tweaks, particularly to the 3:1 leverage and 70:30 funding rules, before the circular is finalized.

The RBI’s move, though aimed at caution, signals a growing appetite to let banks play a bigger role in India’s M&A boom, albeit under tight supervision.