RBI’s rulebook for bank-financed buyouts will reshape M&A market dynamics but not leave private credit without a role

RBI has adopted a calibrated approach.

Funding has been limited to Indian listed companies acquiring ‘control’ in domestic or overseas companies, either at the acquirer level or through a special purpose vehicle (SPV) for strategic purposes, and creating long-term value rather than short-term financial engineering; the acquisition value must be backed by two independent valuations and banks must not finance more than 70% of that value, with a minimum 30% equity contribution in cash coming from the acquirer. Also, the post-transaction leverage is capped at a debt-to-equity ratio of 3:1.

This policy change will not displace private credit, but reshuffle the field, with a shift from an all-private-credit model for sponsor-driven acquisitions to a mixed bank-private capital architecture.

First, banks will re-enter large-cap acquisitions for ‘control deals’ led by listed corporates with profitability and strong governance. With pricing determined by the use of public benchmarks, such acquisitions are likely to be cheaper than those done with private credit. One step still needed is to permit bank participation in providing acquisition financing to ‘foreign owned and controlled companies.’

Second, private credit will retain primacy in sponsor-driven deals outside the RBI envelope—involving unlisted acquirers, new acquisition platforms, ‘non-control’ deals or structures requiring acquisition vehicles not backed by listed acquirers.

Third, hybrid deals will become common, with banks anchoring senior secured tranches against target shares and private credit providing second-lien, seller-deferred consideration financing or bespoke facilities.

Finally, banks will have to operate within capital market exposure (CME) ceilings, capping acquisition finance at 10% of their Tier 1 capital. Such finance is classified as direct CME, which overall must not exceed 20% of Tier 1.

These constraints limit the extent to which bank balance sheets can migrate to merger and acquisition (M&A) credit, and will tighten bank appetite during periods of busy dealmaking or equity-market volatility. Private credit’s ‘dry powder’ and flexibility will help bridge M&A funding requirements, and its ability to construct deals suited to sponsors lend it an advantage.

The RBI draft framework will shape deal mechanics in visible ways. The twin requirements of a listed acquirer that’s also profitable tilt transaction flows toward corporates over pure sponsor platforms. Private equity sponsors may need to partner with listed companies for certain bespoke acquisitions to access bank financing at the operating level, while funding control premiums and holding company layers with private credit.

The 70% bank financing cap and 30% cash equity requirement reduce reliance on stapled vendor financing or deeply back-levered holding companies. RBI has emphasized that security must be anchored in a pledge of the target’s shares; the regulatory challenge is that Indian banking laws restrict an equity pledge to 30% of a company’s capital at most. How this will be resolved is yet to be seen.

Finally, the draft framework’s insistence on unrelated parties and independent valuations reduces the space for intra-group restructurings to tap bank finance.

Private credit funds should expect tighter risk pricing of senior debt in cases of large acquisitions by listed buyers. Relationships with banks will become a differentiator for large corporates, enabling coordinated inter-creditor arrangements, shared diligence, and, importantly, lower legal and regulatory costs, as borrowers will not have to take the ‘listed debenture’ route, which is compliance heavy.

Unlisted platforms, early-stage roll-ups, bespoke transitional solutions, sponsor-led deals that take companies private with complex pre-closing paths, elaborate turnaround plans and other special situations will remain the terrain of private credit, given the latter’s better underwriting models.

Acquirers needing to be listed and profit-making skews bank finance away from sponsor innovation, as it excludes new platforms, turnaround investors and private acquirers with strong parentage but a limited track record as listed entities. The exclusion of non-banking financial companies and alternate investment funds as acquirers forecloses common market structures. This may be overly blunt in today’s market context.

Further, the 3:1 post-acquisition debt-to-equity ratio is rather tight for capital-intensive or stable-cashflow sectors. A sector-calibrated approach would work better. The mandate of two valuations adds time and cost, and may be impractical in the face of competitive timelines, especially for cross-border deals. And the 30% equity pledge limit for banks needs a regulatory change.

Overall, RBI’s draft directions are pragmatic. They will lower costs and help listed profitable corporates pursue strategic acquisitions, while leaving room for private credit in M&As. The shortcomings are fixable. Even if they persist, they will not diminish the fact that Indian acquisition finance is set to become deeper, more diversified and cheaper for the most credit-worthy, with private credit remaining indispensable.

These are the authors’ personal views.

The authors are partners, Shardul Amarachand and Mangaldas.