Fuelling domestic capital formation via acquisition finance

Throughout the history of capitalism, enterprises have utilised mergers and acquisitions (M&As) as a strategic tool for transformation and growth. Global M&A activity continues to surge and is expected to surpass the $2-trillion mark. India is also gaining momentum, with M&A activity in CY25 expected to exceed $130 billion.

A multitude of policy and regulatory steps have been taken to attract foreign investments; however, domestic corporate sector participation needs to be deepened in the growth cycle.

Levelling the playfield 

Global players, including strategic and financial investors, have traditionally leveraged their home or international financial systems to execute deals in India as well as globally. The Indian corporate sector has faced a setback as capital from Indian banks was not available for acquisitions. Reliance on foreign capital increased the cost of capital and enhanced currency volatility exposure for corporates. Indian corporates aiming to acquire international assets faced an even more challenging task in raising capital from the domestic system.

The Reserve Bank of India (RBI) has recently introduced a framework that allows Indian banks to extend credit for acquisitions by listed Indian corporates. Under the framework, Indian banks can fund up to 70% of the purchase consideration for profitable corporates, subject to an overall cap of 10% of the bank’s Tier I capital.

On the one hand, this measure exponentially increases liquidity while simultaneously reducing the cost of capital by 200-300 basis points for acquisitions. On the other hand, it opens a growing pool of business for banks. The measure also enhanced deal momentum as financing could be arranged at a higher speed and reduced uncertainty.

We estimate that the overall Indian M&A market makes up 15-20%, while the U.S. market sees approximately 22% of M&A activity as “leveraged buy-outs”. Based on this, we assume that the recent RBI framework could spawn a leveraged buyout market of $20-30 billion annually over the next 24 months. 

A two-edged sword

Naved Abdali, an investor and noted commentator on investment theory, said, “Leverage is a two-edged sword. The edge that can cut you, cuts deeper”.

While opening a significant business segment for banks, banks will need to underwrite risks and cash flows differently compared to the traditional asset-plus-cashflow-backed financing that they are accustomed to.

To truly capitalise on this shift, we believe banks must reposition from traditional lenders to strategic deal enablers, playing a more active role in shaping transactions, advising clients, and structuring innovative financing solutions. This requires building specialised structuring capabilities, deepening risk expertise, and executing with the agility of investment banks, along with a deep understanding of sector dynamics, valuation models, and deal execution strategies.

Amping up the animal spirits

The availability of credit for M&A is likely to fuel greater momentum in India’s domestic capital-intensive sectors and in sectors where India aims to acquire international significance, such as technology and automotive.

The energy sector has witnessed the highest M&A activity in India, led by a heightened renewable energy deal flow and a resurgence in conventional power fortunes. We see a further leg up in this segment for M&A, as the target assets have strong contracted cash flows, well-suited for leveraged buyouts. Infrastructure sectors with similar cash flow characteristics, such as highways, ports, and data centres, are likely to benefit, too.

Indian corporates in the technology and automotive sectors use M&A as a tool to acquire new markets and capabilities. We foresee that this measure will support the internationalisation of these businesses and would be a small yet vital cog in bringing “Brand India” to the world.

The scale and scope of Indian corporate M&A are already transforming from a mid-market-dominated to a large-cap one, and we only see this trend taking deeper root in the near future.

 (The author is Partner, Deloitte India. Views are personal.)