India’s acquisition financing reform and the future of leveraged M&A
May 2026 | SPECIAL REPORT: MERGERS & ACQUISITIONS
Financier Worldwide Magazine
May 2026 Issue
For years, India’s dealmakers operated without a domestic leveraged buyout (LBO) market. Transactions were funded largely with equity, supplemented in more recent years by offshore borrowing structures. Domestic banks were, by regulation and temperament, not in the business of financing takeovers. That has now changed.
On 13 February 2026, the Reserve Bank of India (RBI) amended its Commercial Banks – Credit Facilities Directions to permit acquisition finance within clearly defined guardrails. The reform is less dramatic than it sounds: it is tightly drafted, exposure capped and procedurally constrained. Yet it marks a meaningful shift in how risk capital may be structured in India. India has not embraced leverage; it has authorised it, albeit conditionally.
The reform does not create an American-style buyout market overnight. Instead, it introduces a calibrated instrument into a system that has spent a decade repairing balance sheets and strengthening creditor rights. To understand its significance, one must situate it within that longer arc.
Insolvency first, leverage later
The chronology matters. Downside protection came first; the leverage to accelerate M&A arrived a decade later. India introduced the Insolvency and Bankruptcy Code in 2016, constructing a creditor led, time bound resolution framework. Judicial interpretation has since stabilised key provisions, and market participants now operate with relative clarity regarding committee authority, priority waterfalls and resolution mechanics. Only after that architecture matured has acquisition leverage been permitted.
In many markets, credit expansion preceded restructuring reform. India has proceeded in reverse: enforceability first, leverage second. That sequencing lowers the probability of systemic disorder, though it cannot eliminate behavioural excess. Capital markets advisers argue that this ordering materially reduces underwriting uncertainty. Predictable enforcement, they note, is a prerequisite for syndicated leverage markets; without it, pricing discipline erodes quickly.
The rules of engagement
The framework is explicit. Banks may finance up to 75 percent of independently assessed acquisition value, while buyers must contribute at least 25 percent equity. Consolidated post-acquisition leverage may not exceed 3:1 on a continuing basis. Acquirers must demonstrate a minimum net worth of R500 crore and three consecutive years of profitability, and unlisted acquirers require investment grade ratings. Corporate guarantees from the acquirer or its parent are mandatory.
Control is central. The acquisition must result in the acquirer obtaining control, whether through a single transaction or a series of interconnected transactions completed within 12 months. The thresholds echo the logic embedded in the Securities and Exchange Board of India’s Takeover Regulations and the Companies Act.
Valuation discipline is equally embedded. Listed targets require independent valuation; unlisted targets require two valuations, with the lower figure governing exposure computation. Credit assessment must be conducted on a consolidated post-acquisition basis. Acquired shares form the primary security, supplemented by additional collateral where necessary.
Acquisition finance is further tied into capital market exposure ceilings, which impose an overall 40 percent aggregate capital market exposure limit, a 20 percent cap on direct exposure and a 20 percent sub limit specifically for acquisition finance. The regime reads less like deregulation and more like calibrated containment.
The key linker: India’s private credit market
The RBI’s move does not occur in isolation. It arrives after a decade in which private credit quietly filled the leverage vacuum. Following the global financial crisis and India’s domestic non-performing asset cycle, banks retrenched. Distressed capital and special situations funds entered first, and real estate rescue financing, refinancing of asset reconstruction company exposures, structured non-convertible debentures and pledge backed promoter funding became commonplace.
The non-bank financial companies (NBFC) liquidity crisis of 2018-19 accelerated this evolution. As non-bank lenders pulled back, mid-market companies found themselves underserved. Alternative investment funds and offshore credit platforms stepped in, with annual private credit volumes rising steadily and approaching the high single digit billions of dollars in recent years. What began as opportunistic yield-seeking matured into structured financing, and acquisition-linked lending became increasingly prominent as private credit funds provided bridge capital for promoter buybacks, mezzanine tranches alongside private equity, structured bonds supporting control transactions and refinancing for acquisition-related debt. India thus developed a quasi-leveraged finance market, but largely outside the banking system.
The RBI’s February reform formalises, and partially internalises, that development. Banks may now participate directly, though within defined limits, in a segment previously dominated by funds and offshore lenders.
Strategic consolidation emerges
The practical impact lies in capital efficiency. Consider a founder buyback in the consumer sector. Under the prior regime, such a transaction would likely have required substantial equity or offshore leverage. Under the revised framework, a domestic banking syndicate can structure acquisition finance within the 75 percent cap, secured against pledged shares and backed by corporate guarantees. Return on equity improves without breaching leverage ceilings.
For strategic acquirers, such as healthcare platforms pursuing regional roll ups, the reform reduces reliance on offshore debt and compresses transaction timelines. Credit underwriting on a consolidated pro forma basis aligns lender assessment with anticipated synergies. Bounded leverage, in this context, facilitates disciplined expansion rather than speculative risk.
RBI takes notice
The central bank is not unaware of the parallel ecosystem it is now partially absorbing. Recent financial stability reports have explicitly referenced private credit, highlighting interconnectedness with banks and NBFCs, layered leverage and data opacity. Regulators have warned of complex structures, multiple layers of leverage and gaps in visibility, particularly where NBFCs fund acquisition structures or participate in structured credit alongside funds.
This is the crucial linkage. As private credit expanded, risk migrated outside the traditional banking perimeter. Banks provided backstop liquidity, NBFCs originated or co-lent, and funds structured mezzanine layers, creating a more interconnected system. By permitting acquisition finance within prudential guardrails, the RBI may be attempting two objectives simultaneously: enhancing domestic capital efficiency in M&A while re-anchoring leverage within a regulated banking framework.
It is a subtle rebalancing. Rather than suppressing private credit, the regulator is acknowledging its systemic relevance and ensuring that incremental leverage develops within monitored parameters. Scrutiny is not a sign of fragility; it is a sign of maturity.
The path to a US-style LBO market?
India is not yet an LBO market in the American sense. In the US, buyouts rest on deep high-yield bond markets, unitranche capital, standardised intercreditor frameworks and active secondary trading. Cashflow-based leverage is the norm.
India possesses elements of this architecture, but not its full depth. Bond market liquidity remains modest, secondary loan trading is limited and covenant-lite senior debt backed purely by operating cashflow is rare. For now, leverage remains ringfenced, collateral heavy and covenant protected.
Advisers suggest that the near-term impact will concentrate in mid-market sponsor transactions, where moderate leverage enhances returns without approaching systemic thresholds. A full LBO ecosystem, however, requires repeat sponsor cycles, distressed refinancings and multi-tranche syndication depth – ingredients that develop through stress, not regulation. India appears intent on building leverage capacity incrementally rather than importing a fully formed model.
Capacity and the next cycle
The framework will not be tested in benign conditions; it will be tested in stress. If underwriting discipline holds and documentation remains robust, acquisition leverage will function as a capital efficiency tool rather than a volatility amplifier. If covenant discipline weakens or syndication risk accumulates, particularly where NBFCs and private credit funds layer exposures, leverage may amplify cyclical fragility.
By sequencing insolvency reform before leverage authorisation and embedding acquisition finance within capital market ceilings while liberalising offshore borrowing in a calibrated fashion, regulators have attempted to engineer competition without instability.
India has discovered leverage – cautiously. Whether it evolves into a full scale leveraged finance ecosystem will depend less on regulation than on underwriting rigour, syndication depth and behavioural restraint. For now, the experiment remains bounded, and deliberately so.
Rahul Saikia is head of M&A and chief strategy officer at Rising Pharmaceuticals. He can be contacted by email: rahul_saikia@hotmail.com.
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