India has witnessed a sustained increase in domestic and cross-border mergers and acquisitions (“M&A”) transactions over the past few years. Despite global M&A activity being subdued this year, M&A deal volumes in India during the first half of 2025 saw an 18% increase in comparison with the first half of 2024. Multiple factors, such as large-scale digitization, favorable investor sentiment and increasing domestic consumption, have contributed to the significant interest of global investors to be a part of India’s growth story. Consolidation in sectors such as healthcare, renewable energy, artificial intelligence, information technology and financial services have also led to the growth in M&A activity. With India projected to become a USD 30 trillion economy by 2047, the investment ecosystem in India is only slated to expand and grow further from current volumes.

Acquisition financing, which refers to the process of securing capital to finance the acquisition of equity in another company, is critical to the success of M&A transactions. Such financing could be in the form of debt or equity, raised domestically or from offshore funding sources. In India, debt financing for acquisitions and, in particular, offshore debt, is highly regulated owing to various restrictions imposed by the Reserve Bank of India (“RBI”) and Indian exchange control regulations. This note explores the principal funding routes available for financing inbound and domestic M&A in India and the key considerations for market participants when structuring such financing.

Modes of Acquisition Financing in India

A. Offshore debt financing structures

Inbound M&A transactions are often financed entirely offshore with the offshore buyer procuring a loan from an overseas bank or financial institution to finance its acquisition of shares in the Indian target. In such cases, the loan transaction would be outside the purview of Indian regulations. However, there are significant restrictions under Indian exchange control regulations on the ability of overseas lenders to take security over the shares or assets of the Indian target. Indian companies are not permitted to grant security over their assets or provide guarantees for loans availed by their overseas parent companies. The shares of an Indian company may also not be pledged in favor of an overseas lender of its parent company if the proceeds of the loan are to be used in India. As a consequence, the security available in such offshore financing structures is a pledge over the shares of the offshore buyer (which would ultimately hold the shares of the Indian target), together with a non-disposal undertaking from the offshore buyer to the effect that it will not dispose of any shares in the Indian target.

B. Debt financing from foreign portfolio investors

Alternatively, inbound M&A transactions may involve the offshore buyer setting up a subsidiary incorporated in India for purposes of acquiring the Indian target. As a foreign owned and controlled company (“FOCC”) for purposes of Indian exchange control regulations, the Indian subsidiary would not be permitted to leverage the Indian domestic markets for debt financing. Further, the Indian subsidiary’s ability to raise loans from overseas lenders is limited by the RBI’s framework for external commercial borrowings (“ECBs”). Under the RBI’s Master Circular for External Commercial Borrowings and Trade Credits, last updated on December 21, 2023, Indian companies are not permitted to avail ECBs in cases where the end-use of the loan is the acquisition of equity shares in another company. In light of these restrictions, the only avenue for debt financing available for FOCCs for acquisition finance is through the issuance of non-convertible debentures (“NCDs”) to foreign portfolio investors (“FPIs”) registered with the Securities and Exchange Board of India (“SEBI”).

FPIs are permitted to invest in listed as well as unlisted NCDs issued by Indian companies as well as by real estate investment trusts and infrastructure investment trusts. However, unlisted NCDs issued to FPIs are subject to end use restrictions and cannot be used for investments in capital markets, investments in the real estate business and for purchase of land. Further, the NCDs subscribed by FPIs may be secured by a charge over the assets of the target company (where the target is not a public company), a pledge over the shares of the target company as well as corporate guarantees. The security would be created in favor of an Indian incorporated debenture trustee who holds such security, on behalf of and for the benefit of the FPI.

Debt financing by FPIs in India is regulated both by SEBI and by the RBI and has become a popular form of debt financing owing to the flexibility it offers on commercial terms and pricing when compared to ECBs. While for FOCCs, the FPI route is the only avenue for raising debt to finance equity acquisitions, Indian companies that are not FOCCs are also permitted to issue NCDs to FPIs to finance domestic M&A transactions, which gives them an opportunity to raise debt from a broader array of investors.

C. Debt financing from domestic sources

On account of restrictions prescribed by RBI, Indian banks are generally not permitted to finance the acquisition of equity shares of an Indian company. Nevertheless, funding from Indian banks can be availed to finance the acquisition of targets undergoing the corporate insolvency resolution process under the Insolvency and Bankruptcy Code, 2016 as financing in these situations is typically utilized to re-finance the existing debt of the corporate debtors and not for acquisition of shares.

Given the restrictions on bank financing for acquisition of equity, non-banking financial companies (“NBFCs”) registered with the RBI and alternate investment funds registered with SEBI (“AIFs”) serve as the primary domestic sources for debt financing. NBFCs are permitted to fund acquisition of equity shares of Indian companies, in terms of the applicable RBI regulations through loans or by subscribing to NCDs issued by the Indian company. However, the provisioning norms prescribed by the RBI for NBFCs, coupled with the diminished risk appetite of NBFCs in relation to acquisition financing transactions, make such financing expensive in comparison to other available financing routes. In general, NBFCs in India have pivoted towards retail lending, leading to a decline in acquisition financing transactions funded by them.

AIFs are permitted to invest in debt securities issued by Indian companies (e.g. NCDs, optionally convertible debentures) and are another preferred mode of acquisition financing in India. AIFs have the benefit of a more relaxed regulatory environment compared to NBFCs and are not subject to stringent restructuring and provisioning norms as prescribed for other RBI regulated entities. Further, security in the form of mortgage, pledge and hypothecation over assets (for non-public companies) can be created by Indian borrowers in favor of a debenture trustee (acting on behalf of and for the benefit of the AIF). Such relaxations and the ease of availing funds from AIFs have made them one of the preferred sources of acquisition financing, along with FPIs.

A final source of domestic debt financing for acquisitions by issuing listed NCDs to a broad cross section of domestic investors (excluding banks), such as mutual funds, provident and pension funds and insurance companies. Such listed NCDs would also have to comply with applicable SEBI regulations for non-convertible securities and, going forward, with ongoing disclosure obligations applicable for debt listed entities.

D. Equity financing

While acquisition financing is traditionally understood to refer to debt financing, equity financing is also available for both cross border and domestic acquisitions. Unlisted Indian companies may raise equity funding from domestic investors and overseas investors (subject to restrictions on foreign direct investment prescribed for the sector in which the company operates) through a preferential allotment or a rights issue under the Indian Companies Act, 2013. Listed companies may raise equity financing through a preferential allotment or a qualified institutional placement or a rights issue in compliance with SEBI regulations. While financing through an equity issuance has obvious advantages, it may be potentially dilutive for the existing shareholders. This could be a concern in situations where the promoters may not prefer excessive dilution of their shareholding.

Conclusion

The regulatory framework in India has evolved in recent years to provide multiple avenues for acquisition financing, despite regulatory restrictions on availing bank financing and ECBs. While cross border M&A has traditionally been financed through structures that were entirely offshore, the FPI financing route has now emerged as a popular option when cross border acquisitions are structured through FOCCs. Recent changes to the regulatory framework for FPIs by the RBI also accords greater flexibility in structuring the terms of the financing based on the commercial intent of the parties. For domestic acquisitions, the growth of debt financing through AIFs and the issuance of listed NCDs to FPIs and domestic investors is likely to ensure greater access of funds to service the acquisition related requirements of borrowers.

This insight has been authored by Rajat Sethi, Aparna Ravi and Manan Sheth from S&R Associates. They can be reached at [email protected], [email protected] and [email protected], respectively, for any questions. This insight is intended only as a general discussion of issues and is not intended for any solicitation of work. It should not be regarded as legal advice and no legal or business decision should be based on its content.