Financing Corporate Acquisitions: RBI’s Framework and the Case for Linked Reforms
Introduction
The Reserve Bank of India (‘RBI’) finalised and issued Amendment Directions on Capital Market Exposure on 13 February 2026 (the ‘CME Directions’), which come into effect on 1 July 2026, outlining a system for banks to lend money for company takeovers. Previously, firms had no choice but to turn to foreign lenders or private financing sources to fund mammoth acquisitions. Historically, Indian banks faced regulatory restrictions on financing acquisitions. This was initially done to limit speculative lending and protect depositor funds from high risk, leveraged transactions. As a result, borrowers were left with no choice but to approach foreign lenders who had higher interest rates and stricter covenants, thereby increasing transaction costs while having to channel money abroad. Now, acquiring businesses through Indian bank funds is officially recognised, subject to strict limits on risk exposure, stringent lending structures, and multiple checks and approval steps built into the process.
Acquisition finance encompasses several legal fields, including banking regulations, bankruptcy laws, taxation, market regulations, and fund arrangements. In India, these laws were not designed to fit one another precisely, so problems arise even when the RBI grants permission. For example, the IBC’s avoidance provisions could invalidate the financing obtained to purchase an asset which was made during a period of bankruptcy. In addition, under the tax statutes, loss carry forwards may no longer be available to the lender for making projections of future cash flows. Additionally, due to securities regulations, secondary markets may not be able to trade in the debt securities; therefore, they will operate separately and have no coordination with each other.
On the other hand, the European Union (‘EU’) has been working for twenty years to link everything, utilising tools such as the Capital Requirements Regulation (‘CRR’), the European Central Bank (‘ECB’) Guidance on Leveraged Transactions (2017) and Directive (EU) 2019/1023 on restructuring which addresses the resolution of troubled firms. These EU precedents are drawn upon not as a blueprint to be replicated, but as evidence that such regulatory coordination is institutionally feasible and economically beneficial in comparable market economies. This piece breaks down the RBI’s latest setup, points out key legal hurdles associated with it, and offers specific fixes inspired by European models.
The RBI’s 2025 Acquisition Finance Framework
The CME Directions define ‘Acquisition Finance’ as a financial facility or assistance provided to an eligible borrower entity to acquire equity shares or compulsorily convertible debentures (‘CCDs’) in a target company or its holding company, with the objective of gaining control over it. The definition also covers acquisitions of additional stake that result in crossing material voting-rights thresholds (specifically 26%, 51%, 75%, or 90%) each conferring enhanced governance or control rights under applicable law. A company’s existing debt is also allowed to be refinanced when the same is integral to the acquisition.
Eligible acquiring entities include Indian non-financial companies, listed or unlisted, demonstrating a net worth exceeding ₹500 crores and a three-year track record of profit after tax. Unlisted companies must additionally hold an investment-grade credit rating (BBB- or above). Financial entities such as NBFCs and AIFs are excluded as acquiring companies, though financing to InvITs for acquisitions continues to be permitted. Separately, through the RBI (Commercial Banks – Undertaking of Financial Services) Amendment Directions, 2026, the CME Directions extend the applicability of acquisition finance and lending-against-securities conditions to NBFCs and HFCs within a bank’s group in their capacity as lenders, ensuring consistent prudential standards across the banking group.
By restricting eligible acquiring entities primarily to non-financial corporates borrowing from banks, the RBI preserves its ability to monitor concentration risk and maintain consistent oversight over this high-risk lending activity within a single regulatory perimeter. Each bank must have its own board-approved policy on acquisition finance, detailing underwriting benchmarks, exposure limits, equity contribution norms, leverage multiples, and cash-flow certainty requirements , mirroring what the ECB outlines in its Leveraged Transactions guide. The CME Directions further clarify that finance may be extended directly to the acquiring company or routed through an existing non-financial subsidiary or a step-down SPV set up specifically for the purpose, subject to certain conditions.
On quantitative limits, a bank’s overall CME cannot exceed 40% of its Tier-1 capital, with direct CME capped at 20%; within this, acquisition financing carries its own sub-limit of 20% of the bank’s eligible capital base (raised from 10% in the draft Directions following stakeholder feedback). Banks may finance up to 75% of the independently assessed acquisition value, with the remaining 25% to come from the acquirer’s own funds; listed acquirers may use bridge finance to satisfy this requirement, subject to additional conditions. The consolidated debt-to-equity ratio at the acquiring company level must not exceed 3:1 on a continuous basis post-acquisition. The acquired equity shares or CCDs serve as primary security and must be unencumbered, though other unencumbered assets of the acquirer or target may be taken as additional collateral. A corporate guarantee from the acquiring company or its parent/group holding company is mandatory in all cases. Valuation monitoring and periodic external assessments using SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, prescribed parameters play a significant role throughout.
These limits operate alongside the broader unwinding of the 2016 large borrower framework, which capped total system-wide bank lending to large companies at ₹10,000 crore. From July 2026, that flat ceiling disappears, with banks instead managing large exposures through their own internal frameworks. For acquisition lending specifically, the CME and sub-limits take precedence, reflecting a broader shift from blunt system-wide caps toward targeted, capital-linked oversight.
Insolvency and Tax: Core Structural Frictions
A. Insolvency Law and Protection for New Money
Sections 43 to 51 of the Insolvency and Bankruptcy Code (‘IBC’), 2016, give resolution professionals or liquidators the power to undo transactions made before bankruptcy if they were biased, underpriced, fraudulent, or involved shady loans. Takeovers funded by debt fit right into this rule. Such borrowings might still be reversed, just like earlier financing, even when those funds help keep a company running or boost repayments for lenders. In the Essar Steel India Ltd case versus Satish Kumar Gupta[1], experts highlight how the top court emphasized the importance of saving value and keeping firms alive as key objectives of the IBC. Still, the law does not single out fresh investments that enhance worth — it treats them no better than regular old debts piled up ahead of collapse.
The EU’s rules on restructuring takes a subtler approach. Article 17 of Directive (EU) 2019/1023 requires Member States to protect new financing reasonably necessary to implement a restructuring plan from subsequent avoidance actions, subject to exceptions for fraud or misuse. These safeguards apply to both fresh money and temporary support during the process. Countries can choose whether to rank this lending higher if the borrower defaults afterward, but the method by which they do so varies widely across Europe. This is because, unless lenders feel confident that their money will not simply vanish due to post-failure clawback, most will not bother offering help at all.
Borrowing from this idea, the IBC should be tweaked by adding a conditional safety net. Under Section 43, these loans may receive protection if an independent expert demonstrates that they enhance value, most arms-length lenders agree, and there is a limited ranking advantage under Section 53. Currently, new funding does not align well with recovery goals; however, this change aligns it better, while still blocking shady deals from insiders. Hence, this provision would apply only when loans truly help revive struggling firms.
B. Using tax losses: Rules from sections 79 or 72A
Tax losses are significant in buyout plans, as they impact cash flow and determine the ease of loan repayment. In India, buying shares outright works way differently from merging companies under tax rules.
Under India’s tax rules, when someone acquires over half of the real stake in a private firm, past losses are generally not eligible to be used later to offset taxes. According to Section 79 of the Income Tax Act, 1961, loss carry-forward and set-offs for closely held firms are limited to situations where there has been less than a 49% change in beneficial ownership between the time of the loss and the time of the set-off.
Even if names on record appear unchanged, shifting true power might still trigger this rule. If a buyer takes over using loan money from a bank, they could lose planned tax benefits due to this limit. That often means less tax savings after the deal is closed. Thus, if a company purchases its shares using debt from a financial institution, this may severely hinder its potential to utilise prior year losses as a means to offset tax liability on post-acquisition profit.
Comparatively, Section 72A allows companies to carry forward old losses and leftover depreciation when they merge or split, provided they continue to operate the same business and retain key assets. Instead of making straight purchases, many buyers opt for mergers to utilise Section 72A’s benefits — although that setup is not always practical or innovative for the deal. As a result, identical business moves may yield entirely different tax results, depending solely on the paperwork choices made. Lenders end up guessing what will happen next; their numbers depend entirely on whether a deal falls under Section 79 or manages to fit into 72A.
Some EU countries now use rules that focus on why losses are carried forward, allowing firms to do so if the deals represent genuine business changes and not just tax tricks. In India, tweaking Section 79 could achieve a similar outcome, mainly adding an escape clause for genuine corporate restructurings, much like Section 72A allows. The firm claiming the benefit must show actual ongoing operations, not just paper ownership links. That shift would clear up uncertainty around buyouts funded by loans, providing lenders with a better understanding of the risk they are taking.
Capital Structure and Mezzanine: The Missing Middle Layer
The CME Directions manage senior secured lending for acquisitions, however effective deal structures require a total capital stack whereby the subordinated layers absorb the initial losses, which is not presently provided for under the current regulatory structure in India.
In most acquisition finance transactions, the majority of the capital structure consists of layers of capital, with senior secured bank loans being the most senior debt, serving as a layer above subordinated/mezzanine capital that takes the first loss. The current structure of the Indian market makes it difficult for junior layers to be financed through onshore funding channels.
The junior layer in India has limitations due to the existing structure regarding the fund and portfolio framework from the Securities and Exchange Board of India (‘SEBI’). Category III AIF under SEBI (Alternative Investment Funds) Regulations 2012 may have access to leverage, however, they generally will have a 10% single-investor concentration cap with a possible allowance of up to 20% for certain ‘large value’ accredited investor funds; while Category I and II AIFs would be subject to stricter leverage restrictions and nearly similar concentration caps.
Foreign Portfolio Investments under SEBI (Foreign Portfolio Investors) Regulations, 2019 will also be limited to no more than 10% of any one company’s equity, subject to sector-specific limits where they make their investments. As a result, more and more large, deal-specific subordinated debt is being provided by offshore private credit funds or through structures that are sometimes not transparent compared to onshore institutions that are regulated.
In the EU, unlike elsewhere, rules like the CRR and EU law 2017/2402 on securitisation let banks plus big investors keep layered investments ,say, mid-level or ownership slices , as long as there is clear information and skin in the game, especially when deals count as ‘simple, transparent, standardised’ (‘STS’). Top layers may incur lighter capital demands as long as they meet STS standards, provided they are backed by well-governed lower tiers.
India does not have to mimic these regulations; instead, it might set up a special kind of acquisition-finance AIF category. In order to mitigate concentration risk, mandatory requirements for portfolio diversification may be imposed upon such funds. For example, an individual borrower’s exposure should not exceed 25% of the fund’s corpus. Additionally, there should be limits on individual industry sectors to prevent excessive concentration within any one sector. This version could allow for larger stakes in one borrower, use cautious borrowing levels, while demanding stricter disclosure norms. Alongside, the RBI could suggest lower risk scores for top-tier loans tied to these funds. Banks then gain more reliable local allies for mid-level funding, reducing their dependence on opaque overseas setups.
Concentration Risk, Connected Clients, and Long-Term Funding
Acquisition loans often come in large chunks, which can accumulate risk for a single borrower or an entire sector. The CME Directions tackle this by allowing no more than 40% of Tier-1 capital for overall CME, while direct lending, like buying assets ,is capped at 20%. These limits work in conjunction with the RBI’s existing framework on significant exposures, which controls the amount of lending that banks can make to single entities or groups based on their available capital; this framework has now been revised through the RBI (Commercial Banks – Concentration Risk Management) Amendment Directions, 2026, as part of wider safety updates.
The EU’s CRR rules stress spotting ‘groups of connected clients’ instead of just single companies. According to Article 4(1)(39), linked clients have specific traits; meanwhile, the European Banking Authority guidelines (EBA-GL-2017-15) outline how control or financial ties are considered when assessing significant exposure risks. In India, many business groups are centered around promoters who share loans and money across firms, so using this link-based method helps track concentrated risk more effectively. Adding these links to the Large Exposure setup, while clearly referencing them in the updated CME guidance, would more closely reflect real ownership patterns compared to checking each firm alone.
A second issue is the duration of funds. Loans for acquisition usually last five to seven years, while what banks owe runs for a shorter time. The CME Directions stipulate that banks must adhere to current balance sheet practices; however, India’s loan-backed securities market remains small and primarily focused on consumer lending. In Europe, the STS setup under their Securitisation Regulation promotes higher-quality deals, and the European Commission’s 2025 suggestions target lowering capital charges for specific securitisations to ‘revitalise’ this market segment. A similar ‘STS-style’ tag in India for top-tier buyout finance deals, backed by tight entry rules, transparent reporting, and skin-in-the-game requirements, could allow banks to reuse risk more easily and ease timing mismatches — without compromising safety standards.
Conclusion
The CME Directions, which come into force on 1 July 2026, signal significant changes in how India’s banks are run. These guidelines provide local lenders with a means to support key takeovers at home, tied to capital levels and built-in checks. Still, they will not by themselves build a strong or lasting market for takeover loans.
The RBI’s plan will only work if changes happen in four related spots: safe rules for fresh capital during IBC cases that add value, clearer ways to use losses when fixing real business deals, homegrown mid-level financing options under current regulations, and better controls on linked borrowers and big exposures — alongside a clear route to turn long-term buyout loans into solid securities. European rules do not provide a fixed blueprint, yet they offer practical guidance. With clever tweaks for local reality, these elements could enable India’s CME Directions to do their job — establishing a clear, steady, and homegrown system for financing takeovers.
[1] Committee of Creditors of Essar Steel India Limited v Satish Kumar Gupta (2020) 8 SCC 531.
*Anasruta Roy is a final year student at the National University of Advanced Legal Studies, Kochi.