“Big Bang” Credit Reforms
in India: LBOs and the Opportunity
for Private Equity and Private Credit
Under the New ECB Regime
April 2026
“Big Bang” Credit Reforms in India: LBOs and the Opportunity for Private Equity and Private Credit Under the New ECB Regime
April 2026
India, with its large, fast-growing economy that includes sophisticated corporates and a deep pool of investible targets, has long been an attractive market for private capital. However, there was always one historic constraint that affected private equity and private credit relative to other markets: restrictions on acquisition finance.
Previously, in the domestic market, banks could not lend to finance the acquisition of shares. Loans from offshore lenders, known as external commercial borrowings (ECBs), were previously prohibited from funding equity acquisitions. What remained was a patchwork of workarounds: Non-Banking financial Companies (NBFCs) lending under concentration rules, Foreign Portfolio Investor (FPI) registered credit funds lending through listed non-convertible debentures, and alternative investment funds operating within their own constraints. Sponsors could invest equity into India but could not lever up as easily as in other jurisdictions, and offshore credit funds could only participate in acquisition finance through these narrow avenues.
What Has Changed?
In February 2026, the Reserve Bank of India (RBI) notified the Foreign Exchange Management (Borrowing and Lending) (First Amendment) Regulations, 2026 (the “New ECB Regulations”), effective prospectively. In parallel, the RBI introduced domestic acquisition finance for banks through the RBI (Commercial Banks — Credit Facilities) Amendment Directions, 2026 (the “New Domestic Acquisition Finance Regulations”) and, on March 30, 2026, the RBI issued further clarifications on this. The New Domestic Acquisition Finance Regulations are effective from July 1, 2026 (or on the date of earlier adoption in full by the relevant lenders). Acquisition finance is now expressly permitted under both regimes.
Private Credit Investments in India: 2024 vs 2025
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Source: EY
What Has Changed?
In February 2026, the Reserve Bank of India (RBI) notified the Foreign Exchange Management (Borrowing and Lending) (First Amendment) Regulations, 2026 (the “New ECB Regulations”), effective prospectively. In parallel, the RBI introduced domestic acquisition finance for banks through the RBI (Commercial Banks — Credit Facilities) Amendment Directions, 2026 (the “New Domestic Acquisition Finance Regulations”) and, on March 30, 2026, the RBI issued further clarifications on this. The New Domestic Acquisition Finance Regulations are effective from July 1, 2026 (or on the date of earlier adoption in full by the relevant lenders). Acquisition finance is now expressly permitted under both regimes.
Private Credit Investments in India: 2024 vs 2025
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Source: EY
Apart from permitting acquisition finance, there are several other significant changes with regard to ECBs. The key earlier hindrance in relation to ECBs, namely a cap on the cost of debt, has been removed for ECBs with a minimum three-year maturity. Minimum maturity periods for ECBs have also been reduced to three years, with some structural options for debt takeouts (also shorter maturities of a year are permitted for loans not exceeding $150mn in the manufacturing sector). Real estate construction and development are now expressly permitted across a wide range of sub-sectors. These are the most significant reforms to India's acquisition finance and private credit markets in recent times.
Apart from permitting acquisition finance, there are several other significant changes with regard to ECBs. The key earlier hindrance in relation to ECBs, namely a cap on the cost of debt, has been removed for ECBs with a minimum three-year maturity. Minimum maturity periods for ECBs have also been reduced to three years, with some structural options for debt takeouts (also shorter maturities of a year are permitted for loans not exceeding $150mn in the manufacturing sector). Real estate construction and development are now expressly permitted across a wide range of sub-sectors. These are the most significant reforms to India’s acquisition finance and private credit markets in recent times.
ECB vs Domestic Regime: What Is the Right Toolkit?
For international sponsors and credit funds, the New ECB Regulations are the most suitable operative framework as they can be used by a broader set of lenders and have fewer constraints. The domestic regime is targeted at banks operating in India (not credit funds) but imposes some constraints such as a minimum borrower net worth of INR500 Crores, a minimum three-year profitability track record, an investment grade credit rating for unlisted borrowers, a mandatory parent guarantee (where the acquisition finance is extended to a subsidiary or a SPV of the acquiring company), and a 75:25 debt-to-equity ceiling. The refinancing of the acquisition finance is also subject to certain restrictions affecting the timing and purpose of such refinancing.
The New ECB Regulations are materially more permissive: no net worth, profitability, or rating requirements in relation to the borrower; borrowing is permitted up to the greater of $1bn or total outstandings of 300% of the borrower’s net worth; related party lending permitted on arm's length terms; credit funds expressly included as eligible lenders; debt in INR or foreign currency; no pricing cap for loans with maturities of at least three years and refinancing (in the form of other ECBs) is expressly permitted. For these reasons, the New ECB Regulations are likely to be the more attractive route for international lenders.
Key Dates for the RBI’s Credit Reforms
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The Opportunities These Changes Generate
The changes can be used in several situations and will benefit a range of market participants as described in the potential use cases below.
Key Dates for the RBI’s Credit Reforms
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The Opportunities These Changes Generate
The changes can be used in several situations and will benefit a range of market participants as described in the potential use cases below.
Potential Use Case 1: The Advent of a True Indian Leveraged Buyout?
The New ECB Regulations could potentially be used to structure transactions that come close to international leveraged buyouts (LBOs) if the strategic purpose test (see below) is met.
Offshore lenders — credit funds, foreign banks, GIFT City banks — could lend to a borrower that is seeking to acquire control of an Indian target, with security taken over the target's shares and assets. Post-closing, the acquisition vehicle could merge into the target (potentially using the new “fast track merger” route under Section 233 of the Companies Act 2013), making operating cash flows directly available for debt service. Within the regulatory borrowing ceiling, leverage parameters, EBITDA-based covenants, and permitted indebtedness baskets are left to market practice — consistent with international leveraged finance conventions.
On refinancing, initial acquisition debt can be taken out by another ECB (for instance, a bond, syndicated loan, or longer-dated private credit facility) provided the refinancing does not shorten the minimum maturity period of the original ECB. The ECB can also be taken out before the lapse of the minimum maturity period through the issuance of equity (on a repatriable basis) or through corporate actions such as mergers, demergers, liquidation, and others as, in each such case, these operate as exceptions to the minimum maturity requirement.
However, in structuring any LBO there are a few questions that will need careful consideration. For instance, the absence of any net worth, profitability, or rating requirement means that there is no RBI restriction on the use of a newly incorporated borrower, but whether this is possible on a deal will depend on careful case-by-case analysis factoring in the strategic purpose requirement, tax issues (including thin-capital rules), and other practical issues. Similar to English law, there are also restrictions on unlawful financial assistance under Section 67 of the Companies Act, 2013 that affect public companies.
Potential Use Case 2: Corporates — Shareholder Loans and Cash Extraction
Beyond pure acquisition finance, the New ECB Regulations create new optionality for international corporates with Indian subsidiaries. Related party ECBs, including parent-to-subsidiary shareholder loans, are now permitted on arm's length terms for acquisition purposes, making group treasury financing of Indian acquisitions structurally viable. Also, debt servicing (in relation to an intercompany ECB) would provide a cash upstreaming route, mitigating any “trapped cash” issues.
Dividends remain available but only out of current year profits, accumulated profits, or free reserves under the Companies Act, 2013. Share buybacks must be funded from free reserves or the securities premium account. Structures assuming rapid upstream extraction through special dividends or aggressive buyback programmes must account for these constraints in financial modelling, and treaty-efficient dividend flows should be structured from the outset.
Potential Use Case 3: OCDs — Downside Protection and Mezzanine Finance
The New ECB Regulations permit the use of optionally convertible debentures (“OCDs”) in the context of an acquisition of control. Compulsorily convertible instruments, which because of their mandatorily convertible nature, have historically been treated as equity instruments for regulatory purposes, but they offer more limited downside protection. OCDs, in contrast, are treated as debt and therefore as ECBs.
Under the previous regime, the all-in-cost cap made OCD structures with credit fund appropriate economics impractical, but with the pricing cap removed for three year-plus maturities, an OCD issued to an offshore credit fund can now provide genuine downside protection through debt repayment if the equity upside does not materialise, while preserving the right to participate in upside through conversion. However, as indicated above, these are only available in the context of the permitted end uses for ECBs, which in the case of acquisition finance will, until the RBI clarifies otherwise, need to be for the acquisition of control.
However, in these circumstances, there may now be opportunities for more creative structuring. For example, for OCDs to sit alongside senior ECB acquisition debt, creating a two-tranche capital structure with differentiated risk and return profiles.
Key Flexibilities Under
the New ECB Regime
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Potential Use Case 3: OCDs — Downside Protection and Mezzanine Finance
The New ECB Regulations permit the use of optionally convertible debentures (“OCDs”) in the context of an acquisition of control. Compulsorily convertible instruments, which because of their mandatorily convertible nature, have historically been treated as equity instruments for regulatory purposes, but they offer more limited downside protection. OCDs, in contrast, are treated as debt and therefore as ECBs.
Under the previous regime, the all-in-cost cap made OCD structures with credit fund appropriate economics impractical, but with the pricing cap removed for three year-plus maturities, an OCD issued to an offshore credit fund can now provide genuine downside protection through debt repayment if the equity upside does not materialise, while preserving the right to participate in upside through conversion. However, as indicated above, these are only available in the context of the permitted end uses for ECBs, which in the case of acquisition finance will, until the RBI clarifies otherwise, need to be for the acquisition of control.
However, in these circumstances, there may now be opportunities for more creative structuring. For example, for OCDs to sit alongside senior ECB acquisition debt, creating a two-tranche capital structure with differentiated risk and return profiles.
Key Flexibilities Under
the New ECB Regime
Click to find out more
Potential Use Case 4: Real Estate Construction and Development Finance
The expansion of permitted ECB end-uses to cover real estate construction and development is equally transformative for private credit funds with real estate mandates.
Although dealing in land or immovable property with a view to earning profit is still a prohibited end-use, private credit funds can now lend directly to Indian residential developers, logistics park operators, hotel and hospital developers, and township projects at market rates (where the minimum maturity is at least three years), in foreign currency or INR, with security over project assets. This presents an attractive commercial opportunity.
Two restrictions remain in this particular context. Construction-development borrowers must also ensure plots are sold only after development of trunk infrastructure. In the case of borrowing for industrial parks, such parks shall comprise of a minimum of 10 units with no single unit occupying more than 50% of the allocable area and the minimum percentage of the area to be allocated for industrial activity should not be less than 66% of the total allocable area. Lenders should build compliance covenants around both requirements into their documentation.
Grey Areas to Watch
Several structural uncertainties require active monitoring.
The strategic purpose standard remains undefined, and market practice will need to emerge around this point. Share pledge mechanics under the Non-Debt Instruments (NDI) Rules do not sit comfortably with the New ECB Regulations — security structuring requires careful case-by-case analysis. Payment in kind instruments in the context of debt servicing are not explicitly addressed in the New ECB Regulations, and their viability will need to be considered in each transaction, bearing in mind various company law and exchange control regime requirements.
There are other granular interpretational issues on multiple other provisions that will need consideration in the context of each deal. However, the market expects the RBI to issue a set of frequently asked questions in the next few months which may address some of these points.
Grey Areas to Watch
Several structural uncertainties require active monitoring.
The strategic purpose standard remains undefined, and market practice will need to emerge around this point. Share pledge mechanics under the Non-Debt Instruments (NDI) Rules do not sit comfortably with the New ECB Regulations — security structuring requires careful case-by-case analysis. Payment in kind instruments in the context of debt servicing are not explicitly addressed in the New ECB Regulations, and their viability will need to be considered in each transaction, bearing in mind various company law and exchange control regime requirements.
There are other granular interpretational issues on multiple other provisions that will need consideration in the context of each deal. However, the market expects the RBI to issue a set of frequently asked questions in the next few months which may address some of these points.
Conclusion
India’s 2026 reforms create, for the first time, the legal architecture enabling some forms of LBOs, private credit deployment into real estate construction and development, OCD-structured mezzanine positions, and group treasury financing of Indian acquisitions.
The grey areas are real and require careful navigation on each transaction, but they do not diminish the fundamental significance of what has changed. Those who engage early will be best positioned as India enters its most active phase of private capital market development.
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