Summary: Indian banks are now permitted to finance acquisitions of ‘control’ over target companies, marking the most significant liberalisation of acquisition financing in India in decades. However, where the target is a listed company, the mandatory open offer obligations under the SAST Regulations introduce a series of interpretive questions regarding the interplay between the CF Directions 2026 and the open offer financing obligations.
The Reserve Bank of India, vide the RBI (Commercial Banks – Credit Facilities) Amendment Directions, 2026 (Revised) (“CF Directions 2026”), effective July 1, 2026, represents a paradigm shift in its approach to acquisition financing. Indian banks are now expressly permitted to finance transactions involving the acquisition of “control” over the target by listed or unlisted acquirers, either directly or indirectly through a special purpose vehicle or subsidiary.
This reform has important implications for acquisitions of listed companies. Acquisition of control in a listed company triggers a mandatory open offer (“Open Offer”) under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“SAST Regulations”), requiring the acquirer to fund both the underlying acquisition and the Open Offer.
While the CF Directions 2026 expand funding options for acquirers, they also raise interpretive questions regarding Open Offer triggering transactions, specifically relating to Open Offer consideration, escrow funding, and takeover-related bank guarantees.
Is Open Offer consideration a part of acquisition finance?
Under the CF Directions 2026, “Acquisition Finance” is a financial facility or assistance provided to an eligible borrower entity for the purpose of acquiring “control” in a target company (including through a scheme of amalgamation or merger), including to refinance existing debt of the target company if such refinancing is integral to the acquisition finance. The Directions further cap the total bank financing at 75% of the “acquisition value”, as determined by the bank based on an independent valuation.
The critical interpretive question is whether the CF Directions 2026 only intend to cover financing for the underlying control transaction or also extend such directions to the consideration payable to public shareholders by the acquirer under the Open Offer. While the CF Directions 2026 have expressly included target debt refinancing within the scope of “Acquisition Finance”, similar regulatory clarity is currently lacking on the treatment of Open Offer consideration.
A narrow interpretation limited to cover only the underlying control transaction could create a substantial gap between lending limits and the actual acquisition consideration payable by the acquirer for the acquisition of control in the listed company, materially impacting transaction leverage and economics.
Conversely, since an Open Offer is a mandatory regulatory consequence of acquiring control in a listed company, it should be viewed as an intrinsic and interlinked transaction in the overall control acquisition of the listed company and should accordingly qualify for funding as part of the overall control transaction.
Absent regulatory clarification, market participants may adopt divergent interpretations, leading to inconsistent approaches to facility sizing and leverage calculations.
Independent valuation for determining “acquisition value”
As per the CF Directions 2026, “acquisition value” must be determined based on a valuation undertaken by a bank-appointed independent valuer, in accordance with Regulation 8(2)(e) of the SAST Regulations, which prescribes valuation parameters (book value, comparable trading multiples, etc.) applicable to infrequently traded shares.
The negotiated price under the share purchase agreement may consider various factors other than the intrinsic value of the underlying shares such as control premium, anticipated strategies, expected future earnings, competitive bidding dynamics, etc. Similarly, under the SAST Regulations, the Open Offer price is determined by specified parameters such as negotiated price, volume weighted average market price, historical acquisition price, etc. However, the bank-appointed independent valuer may adopt conventional valuation methodologies and not consider the above factors, causing divergence between the fair value of the shares (on the basis of which the quantum of financing will be determined) and the actual negotiated price of the shares/Open Offer price payable. The difference is likely to be higher in competitive bidding where the acquirers may pay higher premiums to secure strategic assets.
To avoid unintended financing gaps, the quantum of finance should account not only for the independent valuation (as floor pricing) but also the actual negotiated price and the statutorily determined Open Offer consideration.
Value of “Open Offer consideration”
If Open Offer consideration is treated as part of “Acquisition Finance”, a question arises regarding the value of the Open Offer consideration to taken into account while computing the 75% acquisition limit. Under the SAST Regulations, before the launch of the Open Offer, acquirers must demonstrate firm financial arrangements by showing enough cash balance or producing binding equity/debt commitment letters for an amount equivalent to 100% of the consideration payable under the Open Offer, assuming full acceptance by all eligible shareholders.
Since actual tendering under the Open Offer may be substantially lower than full acceptance, banks would need to upfront sanction debt facilities well in excess of likely drawdowns. Given that 4–6 months (or longer) typically elapse between the Open Offer launch and actual payment, depending on SEBI’s timeline for commenting on the draft letter of offer, this raises capital allocation concerns, as banks must earmark lending capacity against a contingent liability that may not materialise, with consequent impact on facility pricing and internal exposure limits. The RBI may therefore be required to clarify how financing limits will apply to sanctioned versus disbursed amounts.
Bank guarantee for early closure of the underlying transaction
Regulation 22(1) of the SAST Regulations restricts acquirers from completing the underlying transaction during the Open Offer period. However, the exception in Regulation 22(2), subject to fulfilment of the relevant conditions precedent, allows the acquirer to close the underlying transaction during the Open Offer period upon depositing 100% of the Open Offer consideration (assuming full acceptance under the Open Offer) in a separate escrow account.
In 2022, to balance the competing regulatory objectives of protecting public shareholders’ interests and acquirers’ liquidity concerns, SEBI introduced an amendment to Regulation 22(2) allowing for funding of the escrow through an unconditional and irrevocable bank guarantee by a scheduled commercial bank (with “AAA” rating from a SEBI-registered credit rating agency), of an amount equivalent to 100% of the Open Offer consideration, “subject to approval of the RBI”. The RBI approval requirement, likely rooted in the then-prevailing restrictions on acquisition financing by banks, was never specifically clarified. In practice, regulatory uncertainty and extended timelines have made market participants reluctant to use escrow funding.
With the CF Directions 2026 now permitting banks to participate in acquisition financing, the bank guarantee route may become a viable substitute for cash funding for early closure of the underlying transaction. This would, however, require harmonising the SAST Regulations with the CF Directions 2026, which do not currently address the provision of a bank guarantee under Regulation 22(2) or the RBI approval requirement specified therein. Moreover, the RBI will also be required to provide clarity on how the provision of a bank guarantee will be calculated towards the 75% financing cap and on the security/collateral requirements for such arrangements. The current provisions of Regulation 22(2) would continue to apply, pending clarification from SEBI and RBI and requisite amendments to the SAST Regulations.
Security package
The CF Directions 2026 require the financing facility to be secured primarily by the shares or instruments through which control is acquired while permitting banks to seek additional security, such as corporate guarantees and promoter guarantees. From the takeover perspective, under the SAST Regulations, Scheduled Commercial Banks and Public Financial Institutions are exempt from mandatory open offer requirements when acquiring/transferring shares of a listed company upon exercise of pledge.
However, the Banking Regulation Act, 1949, limits the percentage of any company’s shares a bank can hold (including shares held as security) to 30 %, creating a structural constraint on the security package in transactions where the acquisition finance quantum implies pledging a large block of target shares (potentially 30% or more of the target’s total shares). Moreover, for listed companies, the pledged shares value would be subject to market fluctuations, creating potential gaps in security coverage if the company’s share price fall.
Banks would require supplementing the share pledges with other forms of collateral to achieve adequate overall security coverage. In overseas debt financing structures, banks typically ask for a pledge on the shares of the holding company and/or promoter guarantees.
Concluding Thoughts
The CF Directions 2026 mark the most significant liberalisation of acquisition financing in India in decades, bringing acquisition finance into the mainstream of the Indian banking system. While the reforms can materially improve the financing of public M&A transactions and Open Offers, several practical issues require clarification: (i) whether Open Offer consideration falls within ‘Acquisition Finance’; (ii) how the independent valuation will be assessed vis-à-vis the actual negotiated acquisition consideration and the Open Offer consideration determined in accordance with the SAST Regulations; (iii) computation of financing limits vis-à-vis sanctioned amounts v. disbursed amounts; and (iv) harmonisation of the CF Directions 2026 and the SAST Regulations to accommodate bank guarantees for escrow funding under Regulation 22(2) of the SAST Regulations.
The next phase will require clarification at the intersection of banking regulation and takeover regulation to fully realise the benefits of the new acquisition finance framework.
For further information, please contact:
Aditya Prasad, Partner, Cyril Amarchand Mangaldas
aditya.prasad@cyrilshroff.com
