RBI: 500 crore net worth must for M&A financing eligibility

MUMBAI: Reserve Bank of India has set a minimum net worth of Rs 500 crore for a company to be eligible for acquisition financing with even unlisted companies qualifying for such funding. Through its Amendment Directions, 2026, effective April 1, the central bank expands the credit activities commercial banks may undertake, with acquisition finance at the centre.

The final circular is also more liberal than last year's draft, which was announced as part of comprehensive reforms in the wake of Trump's tariffs, indicating a shift from caution to confidence on the economy. The financing ceiling rises to 75% from the draft's 70%, reducing the acquirer's minimum equity contribution to 25% from 30%. Eligibility is widened, as the final framework admits both listed and unlisted borrowers.

Ambiguity around balance-sheet strength is replaced by a minimum net worth of Rs 500 crore, while unlisted acquirers are explicitly permitted if they carry an investment-grade rating of BBB- or anything higher. Even the bar on related-party deals is refined and they continue to be prohibited in principle, but financing to increase stakes in already-controlled entities is now allowed.

With the latest circular, Indian banks have finally been given room to finance corporate buyouts, a territory which was long dominated by multinational lenders.

Lenders may fund Indian non-financial companies acquiring equity or compulsorily convertible debentures that confer control, subject to prudential caps on leverage, security and governance.

The lending architecture is liberal by Indian standards but tightly hedged: funding may cover up to 75% of deal value, borrowers must maintain a consolidated debt-to-equity ratio within 3:1, and facilities must be secured by the acquired securities with corporate guarantees.

The overhaul extends beyond buyouts. Banks can now lend against a defined pool of eligible securities including shares, govt securities and rated debt, within prescribed loan-to-value limits, with continuous monitoring and swift rectification of breaches. Capital-market intermediaries gain structured access to secured credit for operational needs, margin funding and settlement mismatches, though financing for proprietary trading remains barred and equity collateral attracts steep haircuts.

RBI also issued draft norms for lending to Reits, in which it barred use of proceeds for land purchases. Banks may lend only to Sebi -registered, listed vehicles with 3-year plus track record, two-year positive distributable cash flows, clean regulatory history and no stressed special purpose vehicles. Refinance of SPV loans can be done only for completed projects.