Setting the Stage: What M&A Really Is
Mergers and Acquisitions (M&A) are the heartbeat of modern corporate strategy. A merger combines two companies into a single legal entity, whereas an acquisition involves one company taking control of another, often through cordial negotiation or aggressive bidding.
Why does this matter? M&A is often a key strategy for companies to scale quickly, expand into new markets, acquire technologies, or eliminate inefficiencies. In today’s hyper-competitive economy, M&A frequently determines not only which companies lead, but which fade.
But there’s one unavoidable truth: M&A cannot happen on strategic intent alone. Deals close on financing. Without deep pockets, even visionary combinations remain on paper.
The Hidden Costs: Where the Money Actually Goes
An acquisition is more than just buying a company’s shares; it’s a multi-layered financial exercise. Money flows into:
- Paying shareholders: The centerpiece of any deal is the purchase price, often structured as cash payments.
- Debt refinancing: Many target companies already carry debt. Acquirers frequently refinance this to secure a “clean balance sheet.”
- Transaction costs: Legal teams, bankers, consultants, stamp duty, and regulatory filings add significant costs.
- Integration and restructuring: post-acquisition, funding is needed for IT integration, layoffs, rebranding, harmonizing HR policies, and additional working capital.
The upshot: even a “simple” takeover quickly becomes a massive financing challenge, often running into thousands of crores.
How the World Finances M&A and India’s Gap
Globally, banks are at the center of acquisition financing. In the US or Europe, large investment banks provide “acquisition loans” or underwrite bonds used in leveraged buyouts. Deals are often debt-heavy, with the acquired company’s cash flows servicing the debt.
India, however, took a different path. In the 1990s, scarred by reckless lending and defaults, the Reserve Bank of India (RBI) barred banks from directly financing the acquisition of shares. The logic was straightforward: protect depositors’ money from speculative, politically connected takeovers.
But the world changed. India now has:
- The Insolvency and Bankruptcy Code (IBC) provides better creditor rights.
- Improved corporate governance norms.
- Banks with sophisticated risk management tools.
Yet the ban persists, forcing corporates to lean on NBFCs, private equity funds, or foreign lenders. The price? Higher borrowing costs, reliance on offshore credit markets, and Indian banks missing out on an increasingly lucrative business line.
The New Push: RBI Asked to Reconsider
Momentum is building for change. India recorded 700 M&A deals worth $24 billion in the first half of 2025. None of these was financed by domestic banks.
At the FIBAC 2025 conference, State Bank of India’s Chairman, C.S. Setty, confirmed that the Indian Banks’ Association would formally request the RBI to revisit the ban at least for listed, shareholder-approved deals.
The case is compelling: as India seeks to become a $10 trillion economy, excluding its largest financial institutions from a core driver of corporate growth looks self-defeating.
Real Case Study: Yes Bank and SMBC
When Japan’s Sumitomo Mitsui Banking Corporation (SMBC) acquired a sizable stake in Yes Bank, the deal went through smoothly, with Competition Commission approval. Yet Indian banks played no financing role. Instead, foreign capital stepped in to bankroll the acquisition.
The irony? An Indian bank’s acquisition deal was financed overseas, while domestic lenders watched from the sidelines.
Why Financing M&A Matters
Enabling banks to fund acquisitions will change the corporate lending landscape:
- Competitiveness: Level the playing field for Indian companies against foreign rivals.
- Onshore oversight: Keep financing under RBI and SEBI’s regulatory umbrella.
- Credit growth: Diversify banks’ loan books into structured corporate finance instead of relying solely on infrastructure or retail loans.
- Ecosystem development: Spur demand for lawyers, advisors, analysts, and structuring professionals in India’s capital markets space.
Risks and Guardrails Needed
Of course, risks remain. History shows that over-leveraged acquisitions can wreck balance sheets if synergies don’t materialize. But the answer is not prohibition, it is calibrated regulation.
Guardrails could include:
- Lending only for shareholder-approved, transparent, listed-company deals.
- Mandating exposure caps for banks to prevent over-concentration.
- Linking loans to sustainable, cash flow-generating assets.
- Securing strong collateral and covenants.
- Relying on IBC protections for speedy resolution of bad deals.
A pilot program could safely test the framework before full-scale liberalization.
Global Comparison: How Others Do It
- United States: Banks regularly provide “acquisition loans” and underwrite leveraged buyouts. Deals are often debt-heavy but strictly monitored under Basel norms.
- United Kingdom: British banks participate in M&A financing, often through syndicated loans and bonds, subject to FCA and PRA oversight.
- China: State-owned banks back strategic acquisitions by Chinese firms at home and abroad, aligning financing policy with national industrial goals.
Takeaway: Major economies allow bank participation but with oversight. India remains an outlier with its blanket ban.
Real-World Lessons from Indian Cases
India already has landmark M&A stories worth learning from:
- HDFC Ltd–HDFC Bank Merger (2023): One of the largest financial mergers in India, valued at $40 billion, was funded largely without bank-led acquisition financing, highlighting the gap.
- Tata Steel–Corus (2007): A $12 billion overseas acquisition where international banks stepped in; Indian banks had little role, despite Tata being a domestic giant.
- Reliance–Disney India talks (2024): Potentially transformative for India’s media landscape, but again, financing came from internal accruals and foreign partners, not Indian banks.
These examples underline the recurring problem: Indian institutions are missing out on their own economy’s most transformative deals.
My Take: Time for a Controlled Leap Forward
The RBI’s blanket ban was justified once. It isn’t anymore. With IBC, stronger governance norms, and capital buffers, the financial system can handle cautious entry into acquisition finance.
Keeping banks out leaves corporates at the mercy of expensive offshore borrowing and allows foreign capital to dominate Indian deals. Meanwhile, domestic lenders miss a chance to diversify revenue streams in a competitive banking environment.
The answer isn’t reckless liberalization but phased permission under strict rules. If banks can successfully fund a limited set of transparent deals, the framework can expand. If trouble arises, regulators can recalibrate.
Standing still, however, means Indian corporates remain underfunded at home, and M&A’s true potential to build global champions is throttled.
Closing Thought
M&A is the fuel for corporate growth. Financing is the engine that runs it. If India wants to empower its companies to scale globally, build national champions, and keep capital flows onshore, banks must be part of the equation.
The fears of the 1990s cannot hold back the ambitions of 2025. It is time for regulators and banks to take a controlled leap forward into financing the future.
Refrences
https://economictimes.indiatimes.com/industry/banking/finance/banking/state-bank-of-india-asks-rbi-to-allow-banks-to-fund-acquisitions/articleshow/123497551.cms
https://bfsi.economictimes.indiatimes.com/articles/should-banks-finance-mergers-and-acquisitions-in-india/123554050
https://economictimes.indiatimes.com/industry/banking/finance/banking/india-competition-regulator-approves-smbcs-stake-buy-in-yes-bank/articleshow/123656695.cms?from=mdr
https://www.theweek.in/wire-updates/business/2025/08/25/dcm52-biz-iba-mergers.html
https://www.ey.com/en_in/insights/mergers-acquisitions/navigating-the-m-a-landscape-of-india-insights-of-h1-2025
Author Bio
