[By Isha Khurana]
The author is a corporate lawyer.
Introduction
Over the last decade, Private Equity (PE) has emerged as a primary financing mechanism for Indian corporations. Previous literature has examined how the typical leveraged buyout (“LBO”) model employed by private equity investors in other jurisdictions was not feasible in India due to regulatory restrictions.Thus, PE investors structured their investments as minority shareholdings, with a wide range of investor rights to protect their investments.
While the investor rights typically granted to PE investors are beneficial for both the investor and the firm, the investor rights so granted have faced severe scrutiny by Indian authorities, such as the Competition Commission of India (CCI). Moreover, the 2025 Commercial Banks – Capital Market Exposure Draft Directions (2025 Directions) by the Reserve Bank of India (RBI) seek to open the door for banks to fund corporate acquisitions. The 2025 Directions allow banks to increase their capital market exposure (an area that has been heavily regulated so far) while also limiting the participation of PE funds in raising capital.
This paper analyses the two developments collectively and argues that they may alter the mergers and acquisitions landscape in India while simultaneously limiting the growth of PE investments.
CCI’s Concerns with PE investors
CCI, as the anti-trust authority of India, is concerned with ensuring fair competition and equitable investor rights. The CCI had earlier taken a quantitative approach to assessing competition where “control” was seen only through the lens of shareholding percentages. Until this time, the CCI did not scrutinize PE investments due to their position as minority shareholders.
Over time, however, the CCI integrated the substance over form approach in its assessments and began delving into qualitative features such as the investor rights.
As a part of these investor rights, PE investors typically negotiate for, inter alia, information rights, veto rights, right to board representations, reserved matters, and exit rights. From their standpoint, this helps them protect their investments in a largely family-business controlled business environment wherein promoter opportunism is a major obstacle. However, from the CCI’s perspective, these rights move the investment outside the ordinary course of business and make PE investors privy to sensitive information. While PE investors may not exercise control through shareholding, their veto rights and director appointment powers enable them to influence a firm’s business decisions. Thus, the CCI views such influence as a strategic investment, making it reportable under prevailing laws and regulations. This background led to the CCI’s scrutiny of Goldman Sachs’ investment this year, as the authority found that the investment goes beyond the scope of a minority investment.
The CCI’s approach is a departure from its earlier quantitative approach, but still aligns with global practice. Interestingly, the EU’s competition commission has similarly found that governance rights amount to strategic investments and go beyond the scope of a minority investment due to the element of decisive influence.
These events mark a shift in the regulatory approach, since anti-trust and competition authorities have typically focused on competition at the market level but now are venturing into competition concerns at the investor level as well. Authorities across jurisdictions seek to prevent any fund or group of funds from engaging in transactions that may accord it strategic control or market influence over any industry.
What remains concerning, is the PE funds primary focus to build their portfolios and maximise returns. So, in theory, PE funds may share important business and market information of firms that they have invested in (belonging to the same industry) to maximize their returns. This may lead to serious competition concerns, thereby warranting concerns from competition authorities. Moreover, most PE investors negotiate for exit rights, as they leave an investee firm after maximizing returns ( through an IPO or otherwise). However, this raises concerns regarding market and industry stability that must be addressed.
We have established that the CCI’s approach in the Goldman Sachs decision aligns with that of the competition authorities of other jurisdictions. However, it is worth noting that in the Indian landscape, PE investors have had to modify their investment model (moving away from an LBO). PE investors in India have no alternative but to rely solely on investments as minority shareholders, while this may not hold true in other jurisdictions. While PE Funds’ governance and exit rights may raise concerns, one cannot ignore their importance, since they are key to maintaining a favorable investment landscape for PE investors.
Unfortunately, the CCI’s recent findings have distinct implications for the PE industry in India, as they severely increase the compliance and reporting burdens. Due to the CCI’s recent findings and scrutiny of most governance rights, PE investors may be forced to report perhaps all their investments, which is extremely cumbersome. These compliances may eventually deter PE investments and work against the PE framework, which has grown in India. In the larger scope, it could substantially alter the investment landscape in India altogether when viewed with the RBI draft master directions discussed hereinafter. Consequently, a revised PE model addressing competition concerns whilst maintaining essential investor protections is essential for sustainable PE growth in India.
RBI’s Move Towards Acquisition Financing
The RBI on 24th October 2025 issued the 2025 Directions for capital market exposures by commercial banks, thereby allowing Indian banks to finance corporate acquisitions, which was previously off-limits. The 2025 Directions define acquisition financing as the lending funds to a company (acquiring company) for the purchase of all, or a controlling portion of the target company.
Interestingly, acquisition financing seems to follow the same model of financing or investing as an LBO. An LBO is the acquisition of a target company by an acquirer, where the acquirer company uses debt for such acquisitions. Such debt is typically borrowed from one or multiple lenders (which are usually commercial banks). Since there is a high risk of non-payment here, the assets of the target company are often provided as security against the debt undertaken.
It is interesting that the RBI now allows commercial banks’ entry in the M&A landscape via acquisition financing, since PE investors were disallowed from the same activities through an LBO. A 2015 RBI master circular creates restrictions on lending by banks for an acquirer to purchase the target company while using the target company’s assets as collateral, thus limiting the possibility of an LBO. With the participation of commercial banks in financing, PE investors face an added disadvantage, coupled with the increased regulatory scrutiny and compliance. However, the draft master directions are still welcome, as they could substantially strengthen and boost the Indian economy.
Through the 2025 Directions, the RBI has prescribed certain prudential ceilings on the capital market exposures of commercial banks. It is expected that these prudential ceilings will ensure transparency and caution in the lending practices of commercial banks, especially to prevent instances such as the 2018 IL&FS crisis. The prudential ceilings are further expected to to ensure that banks deemed systematically important or, “too big to fail,” continue to abide by the exposure limits without increased risks of default. The draft master directions adequately regulate the funds that commercial banks may allocate to acquisition financing, while imposing requirements on eligibility of borrowers, security, margin, risk management, and monitoring norms. Notably, the RBI in Chapter VI has focused on the finances of both the target and acquirer companies and requires an assessment of both firms before acquisition financing progresses. Chapter VI also requires that at least 30% of the financing must be by the acquirer, which is another step at limiting the commercial bank’s exposure.
A possible concern here is that debt, the key element in acquisition financing, differs fundamentally from typical equity investments. Thus, for commercial banks to seamlessly engage in acquisition financing requires specialized skills and foresight to assess the future management and performance of the target and acquirer company.
From the firm’s perspective, equity shareholders involved in the day-to-day management and with a vested ownership shall prioritize profitability. Contrastingly, creditors providing debt would be more focused on enhancing the firm’s capacity to repay debt, conflicting with the shareholders’ goals. Moreover, it is not unheard of that commercial banks may at times appoint directors to the board for protection and oversight or also seek other governance rights. There may even be instances where commercial banks fixate on particular industries or sectors as a part of their acquisition lending. There may thus be concerns regarding CCI’s perception of these practices or if acquisition financing and debt by commercial banks also have the potential to lead to any form of collusion.
Thus, balancing the interests of the various stakeholders – regular shareholders, PE investors, and commercial banks, engaged in acquisition financing, while ensuring statutory and regulatory compliance will be a key challenge. It will be interesting to observe how this unfolds in the future corporate landscape of India.
Aftermath of CCI Scrutiny and RBI’s 2025 Directions
On one hand, PE investors face an increased likelihood that minority investments with extensive veto, information, and board rights will be treated as conferring “control,” thereby triggering notification obligations. On the other hand, banks are being invited into a space with leveraged acquisition financing, that has been historically closed to them. The developments thus, raise the cost of PE minority control structures and lower the barriers for acquisition structures backed by commercial banks.
For future transactions, the interplay of these developments may shift deal structures away from PE and governance-rights models, towards debt-centric bank acquisition structures. This could reduce PE investors’ leverage in negotiations, while increasing the appeal of bank-led acquisition financing for promoters who seek to avoid the grant of PE investor rights.
Conclusion
This paper has analysed two key developments that have taken place in 2025, affecting the investment landscape in India with a special focus on PE investors. The paper asserts that the developments, collectively, are a clear sign to restructure the prevailing PE model, to ensure continuous growth of PE investments. If such a model is developed to the satisfaction of, both, the investors and regulatory authorities like the CCI, it would result in increased benefits to stakeholders. Further, the 2025 Directions on commercial banks and their capital market exposure by RBI were examined and seen as a welcome, much-awaited change in the corporate landscape.
The 2025 Directions, although in draft stages, have been analysed cautiously, to assess whether acquisition financing will boost the M&A landscape while ensuring a robust regime and transparent lending practices in India.