Financing Corporate Acquisitions: RBI’s Framework and the Case for Linked Reforms

Abstract

The Reserve Bank of India’s amendment to the Commercial Banks- Capital Market Exposure Directions, 2025, effective 1 July 2026, formally permits Indian commercial banks to finance corporate acquisitions. This marks a significant departure from decades of regulatory restrictions. While the Directions establish a coherent regulatory regime through capital-linked exposure ceilings, board-approved lending policies, and defined collateral requirements, they leave critical adjacent questions unaddressed. Four structural frictions undermine the framework’s effectiveness: IBC avoidance provisions expose acquisition debt to clawback without protection for value-enhancing new money; the asymmetry between Sections 79 and 72A creates unpredictability in loss utilisation for leveraged purchases; the absence of a regulated onshore mezzanine layer pushes subordinated capital offshore; and underdeveloped connected-borrower norms leave concentration risk inadequately mapped. Drawing on EU regulatory experience, this piece argues that the Directions can function as intended only if these four domains are reformed in tandem.