The Reserve Bank of India has introduced a framework allowing banks to fund company acquisitions, with rules taking effect on July 1, 2026. This policy change allows Indian firms to use debt for M&A, reversing a long-standing ban on lending against shares. Investors should track how this impacts banking credit growth and corporate debt, given the strict requirements like a ₹500 crore minimum net worth and a 75% loan-to-value limit.
What Changed
The Reserve Bank of India (RBI) has issued new guidelines that officially permit banks to provide financing for corporate acquisitions. This is a major regulatory shift, as the Indian banking system had previously prohibited lending against shares due to concerns over market volatility and excessive corporate leverage. The new rules are set to come into effect on July 1, 2026, giving lenders and borrowers time to prepare for the new operational requirements.
The Rules For Borrowers
To ensure that only financially stable companies can access this funding, the RBI has set strict eligibility criteria. The borrowing entity must have a minimum net worth of ₹500 crore and a proven track record of at least three consecutive years of net profit. For unlisted acquiring companies, an investment-grade credit rating of BBB- or higher is mandatory. These guardrails are designed to ensure that the debt is taken on by companies with the ability to repay.
Funding Limits And Collateral
Banks are now allowed to fund up to 75% of the acquisition value. This is a significant change, as it allows companies to fund a large portion of an acquisition through bank debt rather than relying entirely on their own cash reserves or equity issuance. To protect the banks, the framework requires mandatory corporate guarantees from the acquiring company and a pledge over the shares being acquired. For listed companies, the valuation of these shares must comply with existing SEBI takeover regulations.
Why This Matters For The Market
For Indian corporations, this move increases the flexibility to pursue mergers and acquisitions. Previously, companies were largely restricted to internal accruals or equity-diluting methods to fund buyouts. Access to bank credit could make it easier for domestic firms to compete for assets.
For banks, this opens a new avenue for credit growth. However, it also introduces new risk factors. Banks will need to be cautious in evaluating the target company's business prospects and ensuring that the valuation of the acquired entity is accurate.
Risks And Implementation
While the change is positive for M&A activity, it brings the risk of higher corporate debt levels. If the acquired businesses do not perform as expected, the debt burden could weigh heavily on the acquirer's balance sheet, eventually impacting the bank’s loan book. Additionally, the RBI’s decision to defer the effective date to July 1 suggests that there are still technical and operational hurdles to clear. The market will need to see how banks interpret these rules and what internal risk assessment policies they develop before extending such loans.
What Investors Should Track Next
Investors should monitor bank commentaries in upcoming quarterly result briefings to understand their appetite for this new loan segment. The key monitorable will be how banks structure these deals and whether they maintain the 75% limit or adopt stricter internal policies. Furthermore, the market will watch to see if this leads to an increase in corporate M&A activity and how the credit quality of these acquisition-led loans holds up over time.