1. RBI - Who can fund, 2. IBC - How you acquire, 3. SEBI - Market rules, 4. FEMA / ECB - Cross-border money

I. The Regulatory Evolution - From Prohibition to Permission

For 50 years, Indian banks were barred from funding acquisitions.

RBI Master Circular on Loans and Advances dated July 1, 2015 explicitly barred commercial banks from extending loans for acquiring shares of other companies, including financing corporate takeovers. It also rules out acquisition financing and creating hurdle in using target company's assets as collateral. Exception was only for overseas acquisitions viz. outbound LBOs while prohibiting domestic ones.

Limited exception: Banks could finance resolution under IBC / SARFAESI.

2025-2026 Paradigm Shift: RBI released Draft Directions on Acquisition Finance.

• Draft: acquisition finance only for listed entities, bank exposure not to exceed 10% of Tier 1, maximum 70% of acquisition value.
• Final Amendment Directions, 2026 effective April 1, 2026: minimum net worth of Rs 500 crore for borrower, even unlisted targets now eligible. This expands credit activities commercial banks may undertake, with acquisition finance at the centre.

What is now permitted:

• Acquisition Financing: Acquisitions of listed or unlisted companies where control is acquired as well as distressed acquisitions under IBC and SARFAESI are permitted.
• Minority acquisitions without controlling stake remain outside scope.
• ECB Route: RBI also amended ECB framework - distressed acquisitions under IBC/SARFAESI are now permitted under automatic route.

New safeguards introduced in 2026:

RBI's Resolution of Stressed Assets Directions, 2025 bars banks and NBFCs from selling specified non-financial assets (SNFAs) acquired during resolution back to defaulting borrowers or related parties from Oct 1, 2026. It is intended to block defaulting promoters indirectly repurchasing distressed assets through intermediaries or ARCs and reinforces Section 29A IBC principles.

II. Legal Framework for Distressed Acquisition in India

A. IBC, 2016 - The main gateway
IBC governs acquisition of distressed assets, allowing companies to acquire businesses through CIRP. Buyer submits Resolution Plan under Section 30, approved by CoC and NCLT.

Key restrictions:

• Section 29A: Disqualifies willful defaulters, undischarged insolvents, promoters of NPA >1 year, connected persons. Must clear dues to become eligible.
• Section 32A: Clean slate - criminal liability of old management ceases, no action against property for prior offences after resolution.
• Section 31: Approved plan binding on all stakeholders, including government.

B. SEBI Framework
For listed targets: SEBI (SAST) Regulations trigger open offer at 25% acquisition. However Supreme Court in Essar Steel ruled IBC overrides SEBI norms in insolvency cases.

C. Special Situation Funds (SSF) - The 2022-2026 Innovation
SEBI 2022 Amendment to AIF Regulations defines Special Situation Funds. Includes stressed loans available for acquisition under RBI directives or as part of resolution plan approved under IBC.

2026 Hybrid LBO Model: As era of "cashless" shortcuts ends, RBI draft serves listed/healthy companies, but 2026 shift opened compliant "loan-to-own" pathway for distressed assets via SSFs.

D. SARFAESI + ARC Route
ARCs can acquire debt and then convert to equity under RBI's Guidelines on Reconstruction. Financing via ARCs cannot be backdoor funding for old promoters - prohibited under new RBI norms.

III. Structure of Financing Today

IV. Landmark Case Laws

1. ArcelorMittal India Pvt Ltd v. Satish Kumar Gupta (Essar Steel) - SC 2018 & 2019 - Section 29A Bible
Facts: Essar Steel owed Rs 545,470 million. ArcelorMittal and Numetal (VTB + Rewant Ruia, son of Essar promoter) bid.

Ruling 2018: SC concluded both ArcelorMittal and Numetal were not eligible under 29A due to NPA linkage - ArcelorMittal via Uttam Galva and KSS Petron, Numetal via related party. Using Article 142, SC gave opportunity to pay off dues of related corporate debtors to become eligible.

Ruling 2019: ArcelorMittal paid Rs 42,000 crore and acquired. SC held: IBC overrides SEBI and Companies Act, CoC commercial wisdom supreme, CCI clearance operates independently and does not interfere with CIRP.

Principle: You cannot finance your own escape - promoter must purge NPA first.

2. Swiss Ribbons Pvt Ltd v. Union of India (2019) SC
Constitutional validity of IBC challenged. SC upheld IBC and distinction between Financial and Operational Creditors. For financing: It legitimized that secured financial creditors (who finance acquisitions) have priority, encouraging distressed debt financing.

3. Committee of Creditors of Essar Steel v. Satish Kumar Gupta (2019) - Distribution battle
SC set aside NCLAT equal distribution order. Held CoC can have differential payments, secured creditors get priority. Critical for acquisition lenders who take security over target.

4. Phoenix ARC Pvt Ltd v. Ketulbhai Ramubhai Patel (2021)
SC held ARC acquiring debt under SARFAESI is Financial Creditor and can initiate CIRP. Validates loan-to-own strategy by SSFs.

5. Edelweiss ARC v. Tab Carpets & Innoventive Industries v. ICICI Bank
Early cases establishing moratorium (Sec 14) cannot be circumvented by SARFAESI action once CIRP starts - protection for new acquirer financing.

6. Ghanshyam Mishra & Sons v. Edelweiss ARC (Supreme Court 2021) - Clean Slate Doctrine
After resolution plan approved, all claims prior to CIRP stand extinguished. Huge comfort to acquisition financiers - no hidden tax, ED claims post-deal.

V. Practical Compliance Checklist for a Distressed Acquisition Financing in 2026

1. Eligibility check: 29A affidavit, no willful defaulter tag, check RBI SNFAs ban - target assets not being sold back to old promoter.
2. Structure: If Indian bank debt >70%, top up with SSF/NBFC/ECB mezzanine. Avoid pledge of target shares as primary security - RBI still disallows advances against primary security of shares - use corporate guarantee, cash flow, asset charge post-merger.
3. CCI: File Form I if combined assets/turnover cross threshold. Can be filed parallel to CIRP.
4. SEBI: If listed, seek exemption from open offer under Regulation 10(2B) SAST - resolution plan approved under IBC is exempt.
   1. FEMA: For FDI in distressed asset, check Press Note 2026 - automatic route up to 100% in most sectors except specific restrictions. ECB end-use filing mandatory.