The Reserve Bank of India’s “Commercial Banks Credit Facilities Amendment Directions, 2026,” notified on 13 February 2026, and effective from 1st April 2026, signal a significant change in the mode by which Indian banks can access capital markets and finance Mergers and Acquisitions. These Directions lay down a risk-calibrated system for “Acquisition Finance” and rationalize credit to securities and capital market intermediaries. These Directions are intended to facilitate genuine strategic transactions while preventing leverage-driven excesses.

How RBI’s Capital Market Exposure Framework Evolved

The RBI has kept a watchful eye on the manner in which banks operate in the equity and capital markets ever since the process of liberalisation was set in motion. While the market has boomed several times over the years, it has also faced periods of strain on bank balance sheets. The rules pertaining to the capital markets were framed with broad guidelines of 40% of the net worth of the bank. Further, the rules were framed with sub-guidelines for direct equity investments, loans to shareholders, and investments through brokers.

However, the rules were revised in the wake of the dot-com bubble burst in 2000 and the GFC of 2008. This was because the leverage in capital market investments was adding to the overall losses of the banks. It is a journey towards the formulation of the ‘Commercial Banks – Credit Facilities Directions of 2025,’ which has been revised under the ‘2026 Amendment Directions.’

The Pre‑Amendment Problem: Under‑Served M&A and Over‑Complex Rules

India’s M&A market had become far more sophisticated by 2025 has deal values crossing 100 billion dollars and transactions spanning distressed acquisitions, sectoral consolidation and cross‑border strategic buys. The banks have often played a modest role in financing such deals, with corporates turning instead to NBFCs, private credit funds and offshore borrowing. The key reason for such regulatory uncertainty and fragmentation was the rules governing bridge loans, loans against shares, financing of brokers, underwriting commitments and exposure limits which were scattered across multiple circulars, sometimes inconsistent.

Banks also faced hard as there were undifferentiated caps and conservative loan‑to‑value (LTV) ratios on loans against such shares and market instruments, which constrained their ability to use these assets as collateral for genuine business credit. Risk committees became especially reluctant to back leveraged buyouts or acquisition structures that could push debt‑equity ratios to unsustainable levels after episodes like IL&FS and the pandemic‑era volatility. This meant that even well‑run companies with strong cash flows struggled to raise such bank‑backed acquisition finance at scale, which slowed the domestic consolidation and tilted the playing field towards deep‑pocketed global buyers.

What the 2026 Amendment Directions Set Out to Do

The 2026 Amendment Directions are RBI’s effort to inject some sense and sophistication into this area. They do not fling prudence out of the window, but rather, they established a specific, well-crafted regime for acquisition finance, updating the provisions on loans against securities, and established a specific chapter on credit to capital market intermediaries (CMIs). The Directions operate by introducing newer definitions, which strike down older provisions that were inconsistent with the new framework and introduced new chapters and paragraphs to the 2025 framework.

Most importantly, there was a requirement in banks to craft specific, board-approved policies on each of these fronts, that included; acquisition finance, loans against eligible securities, and loans to CMIs, outlining internal exposure limits, risk appetites, LTVs, haircuts, and monitoring frameworks. This marked a significant shift from RBI micromanaging every sub-limit to RBI establishing outer limits and requiring boards and risk committees to take certain genuine ownership of the bank’s behaviour within those limits.

Defining “Acquisition Finance” for Strategic M&A

These reforms specifies a “Definition of Acquisition Finance.” According to the Directions, it is a financial arrangement provided to an eligible borrowing entity (a non-financial company) for the purchase of equity shares or compulsorily convertible debentures of a target company or its holding company, with the effect that the acquirer obtains control of the target. The Directions define control as being in accordance with the definition under Section 2(27) of the Companies Act, 2013. This ensured that banking regulation is consistent with Companies Act and the SEBI takeover regulations.

The Directions also include the refinancing of such existing debt of the target company, but only when the refinancing is part of the acquisition arrangement. This ensured that the Directions are not completely exploited by debt rollovers that are opportunistic in nature and merely masquerading as acquisition finance. The Directions also provide that the acquirer can use the subsidiaries or SPVs as the borrowing vehicle, if such vehicle is a non-financial company and if the ultimate acquisition of control of the target is determined at the consolidated level.

Eligibility, Financial Strength and Related‑Party Safeguards

The new regulations are not a free ticket for all. The acquirer has to satisfy tight financial criteria at the time of approval to raise acquisition finance. This requires a minimum net worth of ₹500 crore and a record of net profit after tax for each of the past three financial years for listed acquirers. The same net worth and profit record are required, along with an investment-grade rating of at least BBB at the time of sanction or achieved before disbursement for unlisted acquirers. The intention is to make sure only reasonably solid sponsors can leverage their balance sheets to raise finance for control acquisitions.

The Directions further provide that the acquisition must lead to the acquirer obtaining control, either in one go or through a sequence of related actions completed within twelve months. Acquisition finance is permitted only when crossing certain thresholds; 26%, 51%, 75%, or 90% of voting rights and each step conferring much larger rights of control under applicable law for acquirers already in control of the target. The acquirer and target cannot be related parties under section 2(76) of the Companies Act or otherwise under common control or promoter groups, with certain carve-outs for incremental purchases of stakes, blocking round-tripping, and self-dealing arrangements.

How the New Acquisition Finance Limits Work

The RBI specifies a tough rule that the total funding of the acquiring bank for the acquisition cannot exceed 75% of the acquisition value, and this value has to be determined independently. The acquisition value has to be determined using the SAST Regulations formula for infrequently traded stocks, using criteria such as book value and trading multiples for the publicly listed targets. For unlisted, private targets, two independent valuators are needed, and the lower of the two values is the one that will be used. The acquirer has to shell out at least 25% of the acquisition price in cash, whether from internal accruals or new equity, to ensure a tangible stake in the acquisition.

Risk is further hardened by a hard leverage ratio post-acquisition, i.e., on a pro forma consolidated basis, the debt/equity ratio of the acquirer has to remain at or below 3:1 and within that ratio at all times. The loan is collateralized by the equity or CCDs of the acquired company, and can also be collateralized, if appropriate, by other unencumbered assets of the buyer or target, as well as by corporate guarantees of the group. Bridge loans were permitted, but only for listed acquirers who may require a short-term boost to their equity contribution. Such loans has to be repaid or converted to equity within twelve months, sourced from specified sources such as a rights issue or asset sales.

Loans Against Securities: Rationalising Retail and Corporate Leverage

Apart from acquisition finance, the amendment also makes changes to the treatment of loans secured by “eligible securities.” This applies to listed Group 1 equity, investment-grade listed debt, units of mutual funds, ETFs, REITs, and InvITs. Banks are required to formulate policies regarding the acceptance of securities, defining concentration limits, and determining loan-to-value (LTV) ratios and haircuts.

The Directions lay down maximum LTV limits, such as 60% for listed shares and convertible debt, 75% for equity-oriented mutual funds, ETFs, REITs, and InvITs, and up to 85% for high-quality debt mutual funds and top-rated listed debt which was for individuals and HUFs. There are also prudential limits on the aggregate amount that can be lent to an individual against these securities, along with sub-limits on the use of such loans for the purchase of additional securities in the secondary market or for subscribing to IPOs, FPOs, and ESOPs. The former are generally limited to 75% of the subscription amount, with at least 25% paid as margin by the borrower, and banks are prohibited from lending to their own employees or employee trusts for the purchase of the bank’s own shares. All these loans are required to be included in the capital market exposure of the bank, as per the concentration risk directions.

Policy Rationale, Legal Interplay and Likely Impact

RBI is looking to encourage banks to pursue genuinely strategic mergers and acquisitions, develop the core infrastructure of the capital market, and offer controlled leverage to households and businesses using financial assets; all this while strictly suppressing speculative activities and related-party tunneling. The Directions integrate company law, securities regulation, and banking regulation into a single, seamless whole by linking acquisition finance to “control” as defined in the Companies Act and establishing valuation norms based on SEBI’s SAST Regulations. This will help close the interpretative gaps that have long bedeviled complex transactions.

For banks, the new framework presents a major new business opportunity; acquisition finance that usually carries higher returns than regular corporate loans, but within a carefully crafted framework of eligibility criteria, leverage ratios, security arrangements, and exposure limits. For corporates, particularly larger and more regularly profitable ones, it holds out the promise of more predictable access to rupee-denominated acquisition finance, which could speed up the consolidation process in areas such as infrastructure, manufacturing, telecom, and financial services. The clear view on loans against securities and cash-flow market infrastructure (CMI) lending should help improve last-mile settlement smoothness without promoting profligate borrowing for market intermediaries and investors.