Introduction to the New RBI Framework
In a detailed analysis, Abhimeet Sinha of Singhania & Partners discusses the Reserve Bank of India’s (RBI) 2026 framework that conditionally allows banks to engage in acquisition financing within India. The regulation introduces stringent conditions including narrow definitions and strict eligibility criteria for borrowers, securities, and valuations, while also setting concentration limits. Notably, it excludes related parties and certain intermediaries, raising questions about its implementation.
Historical Context and Rationale for Change
Historically, India’s regulatory framework restricted banks from lending against shares due to concerns over stock market volatility. The RBI’s 2014 notification highlighted risks such as market overheating, overexposure to specific stocks, and borrower overleveraging, which could lead to market instability when shares are offloaded following defaults. However, the need to provide Indian corporates with domestic bank capital for strategic acquisitions, alongside industry lobbying, prompted a reevaluation of this prohibition in 2026.
Defining Acquisition Finance
The term ‘acquisition finance’ was initially defined in a narrow context, limited to the acquisition of equity shares or compulsorily convertible debentures (CCDs). However, a revised RBI notification in March 2026 expanded this definition to include financial facilities or assistance provided for acquiring control in a target company, including mergers or amalgamations. It also allows for refinancing existing debt of the target company when integral to the acquisition process. Yet, restrictions on minority stake acquisitions and financial intermediaries remain unchanged.
Eligibility Conditions for Borrowers
The framework sets out specific eligibility criteria that borrowers must meet before banks can extend acquisition finance. It is restricted to Indian non-financial companies, defined as entities not primarily engaged in financial activities. Additionally, borrowers must have a minimum net worth of ₹500 Crore, report net profits over the last three years, and maintain an investment-grade credit rating of BBB- or above, particularly for unlisted companies. Related party transactions and entities under common control are generally prohibited from receiving acquisition finance, with limited exceptions.
Security, Valuation, and Concentration Risk Requirements
Acquisition finance must be secured by a corporate guarantee from the acquiring company, especially when financing is extended to a subsidiary or a special purpose vehicle (SPV). This guarantee complements a pledge over acquired equity shares or CCDs, ensuring banks have recourse beyond the pledged securities. The framework mandates that total bank financing not exceed 75% of the acquisition’s independently assessed value. Valuation for listed companies is conducted by independent valuers appointed by the bank, following SEBI’s regulations, to prevent conflicts of interest.
Implementation Challenges and Grey Areas
The new framework is fraught with complexities, leading to potential implementation challenges. The lack of a clear definition for ‘strategic investment’ or when refinancing is ‘integral’ to an acquisition could result in varied interpretations among banks. Additionally, for holding company acquisitions, banks must ensure synergy across subsidiaries, posing a significant due diligence burden. Recognizing these challenges, RBI has postponed the framework’s implementation from April to July 2026.
Abhimeet Sinha is a Partner at Singhania & Partners. Research assistance was provided by Aditya Kumar Yadav, an intern.
