Indian financing reforms spur activity
India's move to ease offshore borrowing rules and allow domestic banks to fund mergers and acquisitions will broaden financing options available to corporates and fuel dealflow, bankers say.
The Reserve Bank of India has relaxed its external commercial borrowing rules by raising limits and removing a pricing cap. The central bank also said lenders will now be able to finance up to 75% of the acquisition value in M&A deals, reversing an over two-decade ban on local banks funding purchases of equity stakes.
Indian companies can now raise up to US$1bn or 300% of their net worth, whichever is higher, from ECBs, according to an RBI gazette notification on February 17. The previous limit was US$750m, above which prior RBI approval was required.
The central bank has removed the all-in cost ceiling, which had been capped at 500bp over the relevant benchmark in the borrowing currency – for instance, SOFR for US dollar borrowings. Now, the cost of borrowing must be "in line with the prevailing market conditions", the notification said.
Separately, the RBI on February 13 allowed domestic banks to take overall capital market exposure for M&A funding up to 20% of their Tier 1 capital, doubling the 10% limit proposed in an October draft. The 75% cap on acquisition financing is also higher than the 70% limit proposed in October.
The changes give Indian corporates a plethora of onshore and offshore funding options.
"With domestic lenders able to participate in M&A and the ECB route also liberalised, companies can choose the most efficient structure for acquisition and financing needs," said Rahul Chhaparwal, partner at Kotak Alternate Asset Managers.
Offshore borrowing boost
The new ECB regime is expected to boost debt issuance. "I think ECB volumes (both bonds and loans) can increase by around 25%–30% following the rules," said Akshay Naik, India head of debt capital markets at Citigroup.
Gross ECB approvals are estimated to have fallen to US$50bn–$55bn in the fiscal year ending March 2026 from a record US$61.2bn the previous year, according to a note by ratings agency Icra in January, as domestic lenders offered more competitive funding following RBI rate cuts.
The requirement to issue debt with minimum maturities of seven to 10 years prevented many companies from refinancing rupee loans, depending on the category of issuer. This has now been reduced to a minimum of three years.
"Removing the pricing cap and simplifying the tenor requirements to three years will open the door for more issuers, especially nonbanking financial companies and infrastructure companies," Naik said.
He said the new rules would make it easier for issuers like infrastructure and renewable energy companies to raise offshore debt for capex and refinancing rupee debt, giving both lenders and borrowers far more flexibility.
"We’re already seeing interest from energy sector borrowers," said Ambarish Mohanty, partner at law firm Talwar Thakore & Associates.
Large NBFCs will also benefit because the earlier US$750m cap often forced them to seek RBI approval; that restriction is now gone. However, withholding tax of 9% or more on interest payments could still discourage issuance, Citi's Naik said.
Issuers that raise debt through treasury centres in offshore finance hub Gujarat International Finance Tec-City can benefit from withholding tax exemptions. In January, ReNew Energy Global became the first issuer to issue bonds through GIFT City, raising US$600m.
A boost to issuance may come from the property sector, as the RBI has clarified that these companies can raise ECBs and lifted earlier restrictions on using offshore proceeds for real estate. Lower-rated property companies could issue through GIFT City to achieve cost efficiencies.
"This will add an entirely new segment of borrowers and be a game changer for ECB volumes," Naik said.
Under the ECB route, the borrowing limit has tripled to US$150m from US$50m for manufacturing companies, with maturities of one to three years allowed. The pricing will be aligned with the rules for trade credit, currently capped at 350bp over SOFR.
The RBI has also expanded the pool of eligible borrowers to include limited liability partnerships, which will make it easier to do structured deals, according to lawyers.
Unlocking M&A opportunity
Meanwhile, Indian banks are already preparing for the first M&A financing under the new rules as volumes are forecast to rise by 10% to 15% in 2026 compared with last year, according to Kotak's investment banking outlook published in January.
Indian M&A deal volumes more than doubled to US$113bn in 2025 compared with US$52bn in 2024, according to LSEG data.
State Bank of India has already said that it can fund up to Rs940bn (US$10bn) of M&A deals under the new rules and is in discussions with Japanese banks to jointly finance a transaction, according to media reports on February 20.
“Domestic banks will have appetite to do M&A worth Rs3trn to Rs4trn,” said K Ravi Chandran, executive vice-president of Icra.
The total M&A lending capacity for domestic banks is estimated at Rs5.2trn based on 20% of their Tier 1 capital, according to a banking analyst. The total Tier 1 capital for domestic banks was at Rs26trn as of September 30, according to Icra.
Analysts expect the largest lenders such as SBI, Axis Bank, Bank of Baroda and HDFC Bank to dominate the market.
"It can be anticipated that more banks will enter the fray and thus competition will increase with the opportunity for incumbents to gain further market share," said Raghu Narain, head of Asia Pacific investment banking at Natixis.
Greater domestic bank participation in M&A will also heighten competition with private credit funds and mutual funds that have been active in funding acquisition finance deals.
"While there will be appetite to fund larger deal sizes, there could be a potential for pricing to be tighter and covenants to be looser,” said a domestic fund manager, noting that this could potentially increase risks in the system in the long run.
Still, guardrails are in place. M&A funding will only be available to companies with a minimum net worth of Rs5bn and that have reported a profit in the last three consecutive financial years, whether listed or unlisted. Unlisted companies will also need to have a minimum domestic credit rating of BBB–.
Acquisitions eligible for bank financing must result in the acquirer taking control of the target company through a single transaction, or a series of interconnected transactions to be completed within 12 months of the date of the agreement, the RBI said.
In cases where the acquirer already owns a significant stake in the target company prior to seeking acquisition finance, banks will be able to provide financing only if the acquiring company is buying an additional stake crossing a "substantial threshold" of 26%, 51%, 75% or 90% of voting rights, the RBI said.