Enabling acquisition finance

THE RBI IS CAUTIOUSLY ALLOWING BANKS TO PLAY A MORE CONSTRUCTIVE ROLE IN INDIA'S M&A LANDSCAPE

- Coauthored with Manas Dhagat and Pranjal Kinjawadekar, associates, Finsec Law Advisors

MERGERS AND ACQUISITIONS (M&A) activity in India has entered a period of sustained strength. In 2024 alone, deal-making touched nearly $120 billion as Indian companies continued to acquire domestic businesses at a rapid pace. That momentum has carried into 2025, with another $50 billion in deals reported in the first half of the year.

Commercial banks in India, despite holding one of the country’s deepest pools of domestic capital, have largely remained spectators. This is largely attributable to the Reserve Bank of India (RBI) maintaining a conservative approach on permitting banks’ exposure to the capital markets. Under the provisions of the Banking Regulation Act, 1949 and the directives issued under the RBI Master Circular on Loans and Advances, banks are prohibited from granting loans or advances for acquiring shares of other companies, including financing corporate takeovers or management buyouts except to the extent of the infrastructure sector. The rationale behind this restriction is to ensure that banking funds, which are primarily public deposits, are not exposed to the inherent risks associated with volatile equity investments. But as M&A activity grows in scale, the RBI is rethinking these restrictions.