Bank acquisition finance: what the Reserve Bank has opened, and what company law has not
Since 1 July 2026 a commercial bank may fund the acquisition of control of an Indian company, up to 75 per cent of an independently assessed value. The Directions say what a bank may lend against. They do not say what a target may give, and on that question the Companies Act has not moved.
What has changed
For three decades, domestic bank lending for the purchase of shares was the exception. Section 19(2) of the Banking Regulation Act, 1949 capped a bank’s holding of shares, and the prudential practice built around it extended the same caution to lending against them; the loans and advances framework restricted financing of promoter contribution and of the acquisition of shares in other companies. Indian acquirers financed control transactions through external commercial borrowings by offshore subsidiaries, structured credit from alternative investment funds, mezzanine debt from non-banking financial companies, and offshore syndications in which Indian participation was confined to overseas branches.
The Reserve Bank of India (Commercial Banks – Credit Facilities) Amendment Directions, 2026 (Revised) of 30 March 2026 replace the old Chapter XI with a complete acquisition finance regime. They came into force on 1 July 2026, or earlier for a bank that adopted them in their entirety. Facilities outstanding at that date run to maturity; fresh sanctions and renewals are governed by the new chapter. A parallel amendment to the concentration risk framework sets the bank-side ceilings.
The framing in paragraph 170A is deliberate. Finance may be extended to an Indian non-financial company to acquire, or move towards, control of a domestic or foreign non-financial target, as strategic investment driven by long-term value and synergies rather than financial restructuring for short-term gain. Every operative condition that follows serves that distinction.
| Item | Position |
|---|---|
| Instrument | RBI (Commercial Banks – Credit Facilities) Amendment Directions, 2026 (Revised), DOR.CRE.REC.446/07-01-001/2025-26, dated 30 March 2026, superseding the version of 13 February 2026 |
| In force | 1 July 2026, or the earlier date on which a bank adopted the Directions in entirety |
| “Control” | As defined in Section 2(27) of the Companies Act, 2013 |
| Borrower structures | The acquirer directly; the acquirer on-lending to a non-financial subsidiary in India or overseas; an existing subsidiary on the acquirer’s strength; or a step-down SPV with no purpose other than acquiring and holding the target |
| Acquirer eligibility | Net worth of at least ₹500 crore and profit after tax in each of the three preceding consecutive financial years; an unlisted acquirer also needs a rating of BBB– or above before disbursal. Tested standalone and consolidated |
| Quantum | Up to 75 per cent of acquisition value. A listed target is valued by one valuer appointed by the bank; an unlisted target at the lower of two, in each case on the parameters in paragraph 8(2)(e) of the takeover code |
| Own funds | The balance from internal accruals, asset sales, redemption of investments or fresh equity. Borrowings, instruments carrying a fixed repayment obligation or an investor put, and intra-group funding from a source that has itself borrowed do not qualify. A listed acquirer may bridge the contribution for up to twelve months |
| Leverage | Consolidated debt to equity of the acquirer not to exceed 3:1 on a continuous basis after the acquisition |
| Timing | Control to be established within twelve months of first disbursal. Where control already exists, finance is available only for additional stake crossing 26, 51, 75 or 90 per cent of voting rights |
| Related parties | No finance where acquirer and target are related under Section 2(76) or under common control, common management or a common promoter group, except for the incremental-stake case above |
| Security | The instruments conferring control, which must themselves be unencumbered; other unencumbered assets of the acquirer or the target and a promoter’s personal guarantee may be taken at the bank’s discretion — in each case without prejudice to Section 19(2) of the Banking Regulation Act, 1949 |
| Bank-side ceilings | Aggregate capital market exposure capped at 40 per cent of eligible capital base, with acquisition finance capped at 20 per cent within it. The portion applied to refinancing the target’s debt as part of the acquisition is excluded from the computation |
| Outside the regime | Financial-sector acquirers and targets, and any non-financial target that has a financial entity as a subsidiary or joint venture |
The shape of a compliant facility
Read together, the conditions describe a narrower product than the coverage has suggested. The borrower is a substantial, consistently profitable company; the twenty-five per cent contribution must be genuinely unlevered, which rules out a leveraged holding company, a co-investor holding an instrument with a put, and most structured equity; the acquirer’s consolidated balance sheet must stay within three times debt to equity after the acquisition, continuously and without any stated cure period; and all debt claims of the acquirer or its group on the target rank behind the bank for the full tenor of the facility.
Where finance is extended to a subsidiary or an SPV, a corporate guarantee from the acquiring company is mandatory, and if the acquirer holds less than a majority of the SPV it must at least hold the single largest voting block with no other shareholder or concert group able to override or veto its control. Control must be established within twelve months of first disbursal, which converts what is usually a commercial timetable into a regulatory one.
Where the framework meets the rest of the statute book
Security at the target level, and Section 67
Paragraph 170P allows a bank to take, as additional collateral, unencumbered assets of the acquirer or of the target. For a public company target that permission is largely theoretical. Section 67(2) of the Companies Act, 2013 prohibits a public company from giving financial assistance, directly or indirectly and whether by loan, guarantee, the provision of security or otherwise, for the purchase of or subscription for its own shares or those of its holding company. The exceptions in Section 67(3) do not help here: the carve-out for lending by a banking company in the ordinary course of business protects the bank as lender, not the target as guarantor. Private company targets may be outside the section, but only where the conditions of the exemption notification are met, which turns on the target’s own shareholding and borrowing position and must be verified rather than assumed.
The practical consequence is that the collateral menu in the Directions and the collateral menu in company law are not the same menu. For a public company target, the security package is the controlling block, the acquirer’s own assets, and a promoter guarantee. Nothing at the target level, before or after closing.
Section 19(2) and the pledge of a controlling block
The Directions require the facility to be secured by the very instruments through which control is acquired, and then add, without further elaboration, that this is without prejudice to Section 19(2) of the Banking Regulation Act, 1949. That section prevents a bank from holding shares in any company, whether as pledgee, mortgagee or absolute owner, beyond thirty per cent of that company’s paid-up share capital or thirty per cent of the bank’s own paid-up capital and reserves, whichever is less.
A single bank taking a pledge over a fifty-one per cent block therefore runs into the first limb of the cap. The framework requires the security and the statute limits it, and the Directions leave the parties to resolve the tension. In practice that points to syndication so that no lender holds more than the permitted share, to staged or partial pledges supported by non-disposal undertakings and negative covenants, and to attention to the instrument used: a charge over compulsorily convertible debentures is not a holding of shares, but conversion changes the analysis, and the point at which conversion occurs belongs in the facility documents rather than in the assumptions.
Two definitions of control, and the open offer
The Directions borrow control from Section 2(27) of the Companies Act. The takeover code has its own definition and, more importantly, its own triggers, which are numerical and do not align with the milestones in paragraph 170N. An acquisition crossing twenty-five per cent of voting rights triggers a mandatory open offer for at least a further twenty-six per cent, regardless of whether the acquirer has reached the fifty-one per cent milestone the facility is drawn against.
Two questions follow that the Directions do not answer. First, whether the open offer outflow forms part of the “acquisition value” against which the seventy-five per cent is measured, or must be funded separately from own funds. Second, timing: escrow under the takeover code must be created before the detailed public statement and the manager to the offer must confirm firm financial arrangements, while a bank’s conditions precedent are typically satisfied only at closing. A sanction letter is not an escrow. Both points are negotiable with the lender, and both should be negotiated before the public announcement rather than after it.
The financial-sector exclusions
Acquirer and target must both be non-financial companies, and the proviso to paragraph 170B goes further: no acquisition finance for a non-financial target that has one or more financial entities as subsidiaries or joint ventures. Acquisitions of non-banking financial companies, housing finance companies, insurers and asset managers therefore remain where they were, funded outside the banking system and subject to their own change-of-control approvals. So does an otherwise ordinary manufacturing or services target that happens to hold a captive lending arm or a financial joint venture — a structure common enough in Indian groups that it is worth checking the target’s subsidiary list before assuming bank finance is available.
Merger structures and the push-down
The definition of acquisition finance contemplates acquisition through a scheme of amalgamation or merger. That does not make the familiar push-down straightforward. Merging the acquisition vehicle into the target requires a scheme sanctioned by the Tribunal under Sections 230 to 232, with the Regional Director, the Registrar, the Official Liquidator and the tax authorities entitled to be heard; and where the effect of the scheme is that the target’s assets come to secure borrowing raised to buy its own shares, Section 67 is engaged in substance rather than merely in form. The subordination requirement and the consolidated leverage covenant both survive the merger. Structures being planned now should also account for the Corporate Laws (Amendment) Bill, 2026, which proposes to rework Sections 230 to 233 and is awaiting passage, with commencement expected in phases.
Where the money or the target crosses a border
Paragraph 170A is expressed to be without prejudice to the Foreign Exchange Management Act, 1999. An Indian acquirer funding an overseas subsidiary or SPV to acquire a foreign target is making an overseas investment, with the financial commitment ceiling and the treatment of guarantees under the overseas investment rules applying to the whole structure, not merely to the equity leg. Where the acquirer is itself foreign owned or controlled, the downstream investment and pricing rules apply to the acquisition. Acquisition finance booked by overseas branches of an Indian bank as part of a syndication sits outside this chapter altogether, provided the bank’s contribution across all its overseas branches stays within twenty per cent of the deal.
The ANSV take
This is not a leveraged buy-out regime, and reading it as one will waste a quarter. It is a framework for well-capitalised strategic acquirers buying clean non-financial targets, with the leverage tested at the acquirer’s consolidated level rather than the target’s cash flows. A sponsor vehicle without a ₹500 crore parent does not qualify, the contribution cannot be engineered out of structured instruments, and the target cannot be made to carry the debt.
The more interesting shift is where the binding constraint now sits. For as long as banks could not lend, the banking rules were the whole answer. Now that they can, Section 67 and Section 19(2) do more work in a transaction than Chapter XI does: the first determines what security the target can give, which for a public company is nothing, and the second determines how much of the controlling block any one lender can hold. Neither has changed, and neither is addressed by the Directions beyond a cross-reference.
Three points we would want settled before a facility is signed rather than after. Whether the seventy-five per cent is measured against the whole acquisition including the mandatory open offer, or only the negotiated block. What happens on a breach of the 3:1 covenant that arises from a currency movement or an impairment rather than from new borrowing, since the Directions prescribe the ratio and say nothing about cure. And a security package built to work within Section 19(2) from the outset, which in most deals of size will mean syndication and staged pledges rather than a single charge over the controlling block. Bank policies under paragraph 170D are board-approved and will differ from lender to lender for at least the first year, so these are negotiations, not enquiries.
Deal team checklist
- Confirm eligibility on both sides before mandating: acquirer net worth, three years of profit, rating if unlisted; target non-financial, with no financial subsidiary or joint venture in its group.
- Test the twenty-five per cent contribution against the exclusions. Trace the source: intra-group funding from an entity that has itself borrowed does not qualify, nor does an instrument carrying a put.
- Check the related-party bar early. Intra-group consolidation is outside the framework except for incremental stakes crossing the prescribed thresholds.
- Map the security package against Section 19(2) lender by lender, and settle whether the charge is over shares or over convertible instruments and what happens at conversion.
- Take target-level security and guarantees off the table for a public company target, and verify the exemption conditions before relying on them for a private one.
- Align the twelve-month control milestone with conditions precedent, regulatory approvals and, where applicable, the open offer timetable.
- Resolve open-offer funding and escrow mechanics with the lender before the public announcement, including whether the offer outflow counts within the financed acquisition value.
- Negotiate cure mechanics, testing dates and carve-outs for the consolidated leverage covenant, and check the interaction with existing facility covenants.
- Document the subordination of all group debt claims on the target for the full tenor, and the corporate guarantee where the borrower is a subsidiary or SPV.
- For cross-border structures, size the financial commitment under the overseas investment rules, including guarantees, before fixing the funding split.
References
- Reserve Bank of India (Commercial Banks – Credit Facilities) Amendment Directions, 2026 (Revised), DOR.CRE.REC.446/07-01-001/2025-26, 30 March 2026, paragraphs 170A to 170S.
- Reserve Bank of India (Commercial Banks – Concentration Risk Management) Amendment Directions, 2026 (Revised), DOR.CRE.REC.447/07-03-001/2025-26, 30 March 2026.
- Banking Regulation Act, 1949, Sections 19(2), 21 and 35A.
- Companies Act, 2013, Sections 2(27), 2(57), 2(76), 67 and 230 to 232.
- SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, including paragraph 8(2)(e) and the provisions on escrow and financial arrangements.
- Foreign Exchange Management (Overseas Investment) Rules and Regulations, 2022.