Time right for banks to star in the M&A story

The Reserve Bank of India’s (RBI's) draft guidelines on financing mergers and acquisitions (M&As) signal that these are no more episodic but have become a strategic lever for growth, enabling companies to acquire technology, enter new markets and strengthen themselves against competition.

- SAMIR OJHA

Traditionally, acquisition financing has relied on offshore borrowing, private credit funds or internal corporate reserves. While this allowed firms to pursue deals, it also meant domestic banks remained passive observers. The historical reason for barring banks from this business was that deposit-taking institutions should not bear equity-linked risks. This stance sought to prevent excessive leverage and preserve systemic stability.

As a result, capital needs were primarily met by alternative investors: Private equity (PE), alternate investment funds or structured credit players. Such prudence was justified in an era when governance and disclosure standards were evolving. However, with stronger balance sheets, more-disciplined leverage and enhanced risk-assessment frameworks, the time is opportune for banks to participate — selectively and prudently — in the M&A story.