Bank-funded acquisitions won't displace private credit

The Reserve Bank of India's (RBI) draft framework for bank-led acquisition finance marks a decisive policy turn: Indian banks can now enter the acquisition finance market within a clear perimeter, reshaping the competitive dynamics between banks and private credit funds.

- ZUBIN MEHTA & MOHIT BHATIA

RBI has adopted a calibrated approach. Funding has been limited to Indian listed companies acquiring 'control' in domestic or overseas companies, either at the acquirer level or through a special purpose vehicle (SPV) for strategic purposes, and creating long-term value rather than short-term financial engineering; the acquisition value must be backed by two independent valuations and banks must not finance more than 70% of that value, with a minimum 30% equity contribution in cash coming from the acquirer. Also, the post-transaction leverage is capped at a debt-to-equity ratio of 3:1.

This policy change will not displace private credit, but reshuffle the field, with a shift from an all-private-credit model for sponsor-driven acquisitions to a mixed bank-private capital architecture.

First, banks will reenter large-cap acquisitions for 'control deals' led by listed corporates with profitability and strong governance. With pricing determined by the use of public benchmarks, such acquisitions are likely to be cheaper than those done with private credit. One step still needed is to permit bank participation in providing acquisition financing to 'foreign owned and controlled companies.'

Second, private credit will retain primacy in sponsor-driven deals outside the RBI envelope—involving unlisted acquirers, new acquisition platforms, 'non-control' deals or structures requiring acquisition vehicles not backed by listed acquirers.