In a much-anticipated move, the Reserve Bank of India (RBI) in early October announced an important decision: the central bank will now allow Indian banks to finance domestic mergers and acquisitions (M&A) of non-financial corporations (beginning with listed companies, most likely).
This marks a shift from long-standing regulatory constraints, and it could reshape corporate financing in India, with potential implications for credit markets, and deal structures. This move may also open up new opportunities for the corporate world and investors. In this explainer, we break down: the earlier rules; what has changed; and what this could mean for markets and investors.
The old regime and why banks could not fund M&A
Under prevailing RBI norms, Indian banks were generally barred from lending to support acquisition of equity shares in Indian companies. That is, a bank could not directly provide funds to a company to acquire shares of a target company. This prohibition was put in place largely to prevent misuse of bank credit for promoter-level financing or over-leverage, which may not contribute to real growth or asset creation.
There were a few narrow exceptions, though. Banks could lend to finance acquisitions only in the context of corporate insolvency resolution proceedings (i.e. to refinance debt of a debtor under the Insolvency and Bankruptcy Code), because such lending was more akin to restructuring than a fresh leveraged bid.
Due to the existing restrictions, domestic acquirers often had to turn to non-banking financial companies (NBFCs), foreign banks, alternative lenders, private credit funds, or issue debt instruments (like non-convertible debentures) to fund M&A deals, which were often costly.
The new rules and what has changed
On October 1, 2025, the RBI unveiled a major set of reforms that include a provision to allow banks to finance acquisitions by Indian corporates.
The RBI:
- Will provide an “enabling framework” under which Indian banks can lend to Indian companies for acquiring other companies, specifically non-financial corporates.
- Has already raised the lending cap/ceiling on loans against listed debt securities and loans against shares.
- Will withdraw the 2016 ‘guidelines on enhancing credit supply for large borrowers’ that restricted loans to corporates with over ₹10,000 crore in total bank borrowings, a move which may unlock capital and improve credit flow to large borrowers.
- For IPO financing, the per-person limit is also proposed to be raised — from ₹10 lakh to ₹25 lakh.
What this means for markets and investors
This regulatory pivot has consequences for stakeholders across the board, including corporates, banks and investors.
- Lower cost of capital: Banks tend to have lower cost of funds compared to many NBFCs or private credit players. Allowing banks to participate could reduce financing costs for corporate acquirers. This might make more deals viable.
- More domestic deal activity and deal transparency: Right now, many acquisition deals rely on external or private capital. The new regime may encourage more onshore consolidation, leading to cluster deals, tie-ups, rollups, or mergers within sectors. The discipline of bank credit evaluation could act as a filter against speculative deals.
- Disruption in the credit landscape: With banks entering the acquisition finance space, the bargaining power of nonbank lenders like NBFCs, alternative credit, and private capital etc may erode.
- New lending sphere for banks: Allowing banks to finance M&A opens up a new revenue source, thanks to fees, interest income, structuring income, and advisory roles. It broadens the lending pool beyond traditional sectors such as infrastructure, retail, and wholesale credit.
- Stronger deal pipeline that unlocks more value: With banks now allowed to lend for M&A activities, more companies can afford to acquire others or join forces. This means businesses can grow faster, become more efficient, and expand into new areas. As more deals happen, the markets may respond, with potential for a new wave of consolidation across key sectors.
To manage risks, RBI said that existing frameworks such as the Large Exposure Framework would continue to apply (at the individual bank level), while macroprudential tools would be used to manage systemic concentration risk where necessary.
A new chapter
While the detailed rules, risk weights, terms, collateral norms, and qualifying criteria for acquisition financing are not all finalised in the announcement (and likely to be laid out later), the RBI’s announcement marks a new chapter in corporate lending.
The decision to permit banks to finance acquisitions serves is a structural change in how Indian corporates can raise capital. So far, Indian companies have depended largely on non-bank lenders, overseas loans, and private equity to fund takeovers. By allowing banks into the mix, the policy has the potential to make funding more affordable, broaden domestic financing avenues, and strengthen capital markets.
Sources
Financing M&A Transactions in India: An Overview | Article | Chambers and Partners
What are the pros and cons of allowing banks to fund M&As?
RBI to permit banks to fund acquisition activity
India central bank allows banks to fund acquisitions, lend more for IPOs | Reuters