Business EconomyPosted at: Oct 5 2025 5:06PM


Bank funding of M&A opens $40 billion opportunity: Bank of Baroda

Chennai, Oct 3 (UNI) The Reserve Bank of India’s (RBI) green signal to banks to fund mergers and acquisitions (M&A) has the potential to open the doors for about $40 billion or Rs 3.5 lakh crore business, states Bank of Baroda in a report.
Clearly, this adds a fresh dimension to the scope of banking in India and comes at a time when this activity has hitherto been funded by non-banking sources.
Also, given the pace of M & A activity in the country, the growth potential is significant.
Given that the RBI has also rolled back the 2016 regulation on large exposures for banks, the scope to fund M & A involving large corporates opens further, the report adds.
According to the report, with this avenue opening for banks, there is an opportunity. Presently, growth in credit to large manufacturing is muted at 1.8% while that to medium is at 13.1%.
There is scope for these numbers to improve as most of the M & A activity would involve the medium to large companies. As most of these companies already have loans from the banking system, evaluating their creditworthiness in the context of new M & A activity would be an extension.
These companies would be more on the radar of banks in the first phase. The final guidelines will, however, provide direction on this issue, the report states.
According to Bank of Baroda, currently, the routes considered for financing M & activity include debt financing. So far, debt financing has taken place through institutions mainly by the NBFC route, which is used for buying equity shares in the concerned company. Alternate Investment Funds (AIF) are also allowed to invest in debt securities of Indian companies. Here, security in the form of a pledge or hypothecation is allowed to be created in favour of a debenture trustee. Provisioning norms in this context are considered to be strict, which can be a disincentive.
Secondly, Non-Convertible Debentures (NCD) issuance for this purpose has also been used by companies for M&A where the subscribers could be mutual funds, insurance companies, provident and pension funds.
Foreign portfolio investors (FPI) are another source of financing where offshore buyers set up subsidiaries. As foreign-owned entities cannot access the Indian debt market, the way out is to issue NCDs to FPIs which are registered in India. This way funding takes place.
Foreign banks in other jurisdictions can lend for this purpose though they are not allowed to take any security in the form of shares or assets. But this is still an option available for companies which want to take over another entity.
Equity is a route where when a share swap takes place, it provides a means of covering the overall deal value. Offering equity to the owners of a target firm can be an excellent way of smoothing the process, particularly where they’re interested in maintaining some control. Equity could also be raised for both unlisted and listed companies as per the regulatory system in place that helps funding the enterprise.
Globally leveraged buyouts have been used for such acquisitions. Leveraged Buyouts (LBO) gained importance in the 1980s. They allow the buyer to commit very little of their own capital. Instead, leverage (debt) on the assets of the business being purchased is used for funding the acquisition. This would mean that the company can generate enough cash flows to cover the debt service from the cash flow generated by the acquisition. It hence involves fairly wide payoffs if they work, the report adds.
Presently, Indian banks are not allowed to fund M & A activity for various reasons. First, banks run into an asset-liability mismatch given that deposits are of a shorter tenure, while M&A loans would be for a long time.
Second, such loans are considered to be risky as the ability to service the debt would depend on the success of the merger. This would be hard to guess to begin with, as profitability would remain uncertain.
Third, after the various global crises witnessed, especially post-Lehman, banking regulation has been very circumspect when it comes to taking risk. Fourth, as often promoters are involved when such activity takes place, regulation for any kind of lending tends to become finer and stricter.
Fifth, banks normally lend for activities that are related to productive sectors. M & A was not considered to be a productive activity to warrant lending, though all such deals work on the assumption that it will not just add to shareholder value but also to the aggregate output of the company and industry.
The final guidelines of the RBI would put in place the regulatory ambit within which banks have to operate when funding acquisitions, Bank of Baroda said.
Interestingly, Indian banks can fund acquisitions when the corporate insolvency resolution process (CIRP) under the Insolvency and Bankruptcy Code (IBC) is involved. However, bank financing cannot be used for the acquisition of shares, but for repayment of existing lenders of the target company.
As per the report, in 2024, there were 683 deals valued at $ 44.1 billion, with domestic deals numbering 479 valued at $ 23.5 billion. In 2023, the number was 494 valued at $ 25.2 billion.
The factors which are driving such activity in M&A space are linked to the overall pace of growth in the economy and the rapid global integration that is taking place.
Investor sentiment towards India is very positive, with the consumption story playing out in a big way. There is a lot of interest in being part of the evolution of the India growth story, where there are swift expectations of becoming a developed economy by 2047.
The Indian economy has been the fastest-growing one in the last three years and will continue to be a major growth centre in the years to come. This will lead to heightened activity in the M&A space as companies keep scouting for opportunities to expand and grow.
The sectors which are witnessing such activity are healthcare, renewables, technology, including artificial intelligence, and financial services. Going ahead, the automotive industry is also likely to see traction. Such activity is also likely in the infrastructure space, with industries like metals and engineering witnessing traction based on the evolving synergies that companies see given the scale of operations that are involved, the report notes. UNI VJ SSP
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