M&A financing to heat up in India
Mergers and acquisitions in India will be able to draw on a far bigger pool of liquidity after the central bank said it will allow domestic banks to provide financing for such deals for the first time in years.
The Reserve Bank of India will soon provide a framework that enables Indian banks to finance M&A, governor Sanjay Malhotra said in a monetary policy statement on October 1 after the central bank stood pat on interest rates.
Foreign banks, nonbanking financial companies, mutual funds, foreign portfolio investors and private credit funds have dominated domestic M&A financings as Indian banks have been barred from funding the acquisition of equity shares for more than two decades to restrict risky lending linked to takeovers.
“[The changes to] the RBI’s rules relating to M&A lending are a good development and bode well for the broader market for such financings,” said Abhishek Tiwaari, head of leveraged loans, infrastructure and fund financing for Asia ex-Japan at Nomura. “With Indian banks being allowed to fund such situations, it will lead to greater competition among lenders but also lead to larger M&A deal sizes. The cost of debt for M&A financings could potentially go down, which ultimately will help in improved valuations and confidence in doing larger M&A deals.”
Domestic M&A in India has been on a tear in 2025 with year-to-date volume at US$64.2bn, already eclipsing the US$44.9bn in deals transacted in all of 2024, according to LSEG data.
Increased competition
Indian banks have missed out on some of the largest M&A deals because of the regulatory restrictions, which have shifted activity to the bond market.
For instance, Torrent Pharmaceuticals is looking to raise up to Rs200bn (US$2.25bn) through non-convertible debentures to buy a controlling stake in India-listed JB Chemicals & Pharmaceuticals in what would be the largest M&A bond from India.
In September, JSW Paints raised Rs70bn from zero-coupon bonds to fund its acquisition of a majority stake in peer Akzo Nobel India. The same month, Manipal Hospitals printed Rs53.1bn two-year bonds to support its acquisition of a majority stake in Sahyadri Hospitals Group. In June, two units of Indian conglomerate Jubilant Bhartia Group raised Rs56.6bn from bonds to partially fund the acquisition of a 40% stake in Coca-Cola's bottling partner in the country.
The deals for Torrent Pharma, JSW Paints and Jubilant Bhartia are onshore acquisitions, while the Manipal Hospitals transaction involves foreign-owned or controlled companies. Under the current rules, non-convertible debentures provide the best financing option for onshore acquirers, whereas foreign-owned or controlled companies can tap NCDs or offshore loans.
Indian mutual funds have been heavily involved in recent M&A financings and were among the largest investors in the bonds for JSW Paints and Jubilant Bhartia. Private credit funds, which have proliferated in recent years, have also been big buyers of M&A bonds.
More options
Market participants expect the liquidity pool for M&A financings to grow significantly following the RBI’s relaxation of the rules, while also leading to more competition for arranger roles.
The country's largest state-owned and private sector banks are expected to become active players in M&A financings.
“We will participate in the M&A deals once the final framework is out. We will be able to provide tighter rates for longer tenors and fund larger sizes,” a domestic debt capital markets banker said.
With the addition of Indian banks to the mix, the ability to offer size, competitive pricing and terms will also change, according to a leveraged finance banker.
“Arranger banks will have one more structure to work with if the Indian bank liquidity pool opens up. They will now be able to pitch a loan structure that can be sold to Indian banks, an option that was not available earlier,” the banker said.
According to one senior loan banker in Singapore, Indian banks will disintermediate international arrangers over time unless they are able to demonstrate that they bring value.
Market participants also expect mutual funds to lose ground to domestic banks in onshore M&A. Under the current rules, mutual and private credit funds and nonbank financial companies have a lock on such financings.
“Mutual funds used to target or seek a pricing premium for acquisitions because they knew there was no competition from banks,” said the leveraged finance banker. “I think that premium will go down, which is good for borrowers.”
Private credit funds may also feel the squeeze. “They may face stiff competition and could be compelled to reprice loans to match the internal rates of return offered by banks,” said Manisha Shroff, partner for banking and finance, structured finance and debt capital markets at law firm Khaitan.
Corporates have to gross up the withholding tax cost on interest payments to FPI investors or foreign banks, but will not have to do that if they borrow from Indian banks.
“Acquirers will benefit from cheaper capital, wider access and more transparent structures, while governance standards are likely to improve," said Deepak Sood, head of fixed income at asset manager Alpha Alternatives.
Risks to increase
However, the influx of bank liquidity brings its own set of risks. India’s largest banks have experience of funding corporate acquisitions of overseas assets, but not necessarily LBOs involving international financial sponsors, according to bankers. Similarly, mid-tier public sector banks may not have the skillsets required to structure complex acquisition financings, they said.
“A wave of leveraged buyouts can strain balance sheets if discipline is compromised,” said Sood.
There could be inherent risks, “such as partially secured borrowings, potential asset-liability mismatches, valuation risks, et cetera”, said Shroff.
The bigger concern, according to the head of a mutual fund, is not pricing but “funding the wrong asset at the wrong value, which is a very high risk with the mid-tier public sector banks”.
In a separate announcement, the RBI proposed to ease restrictions on how much – and at what cost – Indian borrowers can raise money offshore.