New Rules for M&A Loans in India

For years, buying companies in India mostly relied on owners' own money, loans from overseas, or complex financial setups. That began changing in February 2026 when the Reserve Bank of India (RBI) issued new rules. These rules create a formal system for Indian banks to offer loans for company takeovers and deals aimed at gaining control. These loans will have strict limits and safeguards. The RBI's move simplifies earlier guidelines into one clear framework, aiming to open up markets while maintaining strong supervision. The loans can fund initial takeovers or when an investor buys more shares to reach key voting thresholds like 26%, 51%, 75%, or 90%. 'Control' is defined similarly to the Companies Act of 2013, meaning the power to steer major decisions or appoint most directors.

Key Restrictions Limit New Rules' Reach

Despite the importance of these new rules, several strict conditions limit how they can be used right away. Companies owned and controlled by foreigners (FOCCs) cannot easily use Indian bank loans for buying shares due to foreign investment rules. Regulated financial firms like non-bank lenders (NBFCs) and alternative investment funds (AIFs) – except for infrastructure trusts – are also barred. This exclusion significantly affects buyouts led by private equity firms, which often use special companies set up to hold assets and limit risk, funded by sponsors. Rules against borrowing from related parties between buyers and sellers, except in certain share-building situations, add more complexity. Unclear guidelines also remain, covering how banks pick collateral and set exposure limits, what counts as refinancing existing debt, and what happens if deals take longer than 12 months to complete. These issues point to a slow, careful market start.

Global Context for India's New Rules

Many developed countries, like the U.S. and Europe, have long had robust markets for financing buyouts, where banks lead in providing loans for these deals. These markets typically use a mix of different loan types and owner investments, with bank commitments being key to closing deals. Emerging markets are also developing similar systems but often face challenges like regulatory issues, currency swings, and less developed financial markets. In India, M&A financing has historically depended heavily on owners' funds, investment from foreign partners, or non-bank lenders. Direct bank loans for takeover deals were very limited. This meant India's M&A activity, even while growing, was often restricted by available funding. The RBI's new framework is a significant move to bring India closer to global standards for M&A financing, which could free up more capital for company growth.

How Deals Will Change

This new system for M&A loans will change how deals are done. Due diligence will now involve checking not only the buyer's side but also the bank's credit risk, requiring deeper investigation. Structuring deals will mean carefully considering rules like SEBI's Takeover Code and company laws on providing funds for share purchases. This might need complex arrangements like joint borrower groups or staggered pledges, especially due to banks' limits on how much they can hold. Banks will assess deal valuations independently, which could differ from market prices and require additional funding to cover gaps. Deal certainty will depend more on bank approvals and clear plans for what happens if financing falls through. After a deal closes, borrowers will have ongoing compliance duties throughout the loan period.

Challenges and Concerns

Putting these new M&A loan rules into practice could be a slow and lengthy process. Strict eligibility rules, especially blocking private equity-backed special companies and foreign-owned firms, greatly limit who can use them now. Different internal policies at banks about collateral, loan limits, and how they value assets could lead to uneven use and make deals with multiple banks harder. Unclear rules on refinancing and what happens when deals run over time create uncertainty and could cause disputes, possibly leading to loans being recalled. This complexity might discourage many borrowers and lenders, suggesting a cautious "crawl before you walk" approach. It will take time for banks and deal makers to fully understand and use these rules, meaning a quick boom in buyouts is unlikely.

Analyst Opinions and What's Next

Most analysts see the RBI's decision as a positive, fundamental change that moves India closer to international M&A financing standards and improves access to capital for key deals. However, most agree the initial impact will be cautious. Banks are expected to proceed carefully, establishing successful early deals that will help shape how the rules are understood and used. The impact of these new rules will depend on how well these first deals are handled and how unclear points are clarified by regulators or market use. How this framework develops will be closely watched, as it could affect India's M&A market and company funding plans.