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RBI's February 13, 2026, amendments to capital market exposure framework, effective from April 1, 2026 (or earlier if adopted by banks), enable Indian banks, for the first time, to finance LBOs/acquisitions up to 75% of deal value, subject to specified conditions. This represents a significant shift in deal structuring for promoters and private equity investors, while introducing strict eligibility, leverage and exposure limits to contain systemic risk arising from highly leveraged acquisitions and capital market funding during periods of volatility
Legal Framework & Nuances
Core Amendment: Banks can extend term loans for equity/CCD purchases in domestic and overseas targets, secured by acquired shares together with appropriate guarantees. This marks a departure from the earlier restrictive position under the RBI's Master Directions on Loans and Advances.
Key Reforms:
- Chapter XI limits acquisition finance to Indian non-financial companies (including their subsidiaries or step-down SPVs) with acquiring company maintaining a minimum ₹500 crore net worth, having a profitability track record (PAT) for the preceding 3 consecutive FYs, obtaining an investment grade ratings (BBB- or above) in the case of unlisted entities; funding cap being limited to 75% of the acquisition cost (minimum 25% equity contribution by the borrower); a 3:1 post-deal leverage cap, and mandatory guarantees/valuations requirements (lower of the valuation determined by 2 independent registered valuers in case of unlisted entities).
- Loans against securities impose loan to value (LTV) ceilings (e.g., 60% for listed shares and listed convertible debt securities; 75% for listed AA – BBB debt, MFs (excluding debt MFs), ETF units, REITs/InvITs units; 85% for listed AAA debt and debt MFs); per-borrower limits and ongoing monitoring requirements continue to apply.
- New Chapter XIII A mandates 100% collateral for capital market intermediaries (CMIs), minimum 40% equity haircuts, prohibition on financing proprietary trading, and strengthened margin and risk management safeguards.
- A listed acquiring company may use bridge finance to meet the minimum 25% equity contribution, provided there is a clearly identified take-out (such as an equity issue or asset sale) to replace the bridge facility with equity within a period not exceeding 12 months. Any bank-funded bridge facility must be secured and must not dilute the security cover required for the acquisition finance.
- Further, bridge finance for promoters now explicitly covers financing of promoter's stake in new companies' but remains subject to the same structured acquisition finance norms (75% funding cap, 3:1 post-deal leverage).
- Bank portfolio capped at ≤20% of its Tier 1 capital (revised upward from the draft's 10% limit following stakeholder feedback); overseas syndication per-bank capped at ≤20% of the total funding exempting such syndications from domestic chapter rules.
FEMA OI/SEBI Overlay: Outbound deals >400% net worth of Indian entity requires prior RBI approval; listed targets trigger open offers.
Deal Structuring Changes
- Pre-2026 Amendments: assumed reliance on non-bank financiers (NBFCs) and external commercial borrowings at elevated costs with higher/layered leverage multiples, typical structures involved substantial private equity alongside debt layers prone to forex volatility.
- Post-2026 Amendments: SPVs may layer domestic bank debt (at assumed lower benchmark rates) with NBFC and offshore/mezzanine tranches, assuming a blended cost reduction and forex risk mitigation through domestic priority. Where a sponsor holds controlling stake in the acquisition SPV, private equity support (including guarantees, where required) may be used to help satisfy eligibility and credit requirements, subject to regulatory compliance and lender credit assessment.
Conditions Precedent
Banks are likely to require:
- Acquirer board resolutions confirming ratings and consents.
- Target audited financials excluding material related-party exposures.
- Independent valuation(s) (e.g., discounted cash flow or multiples-based).
- Pro-forma financial projections demonstrating compliance with leverage and coverage thresholds.
- Sector-specific regulatory clearances (e.g., outbound investments exceeding the cap).
These amendments are expected to materially deepen domestic acquisition financing capacity by enabling bank-led leveraged transactions, potentially improving cost efficiency for promoters and expanding structuring options for private equity, while maintaining prudential safeguards.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
