Mergers and acquisitions (M&A) in the banking, financial services, and insurance (BFSI) sector constituted approximately 10% of all M&A activity in India in 2024, exceeding USD 12.1 billion^[1] in value, making it the second highest among all sectors. Infrastructure and BFSI are expected to continue driving M&A deal activity in India. Recently, India is seeing several large M&A transactions involving complex structuring, regulatory approvals on account of change in control, bespoke due diligence and documentation considerations and nuanced approach to regulatory interface before and after deal signing to obviate deal failure risks. Basis our recent experience, and change in control provisions applicable to banks, non-banks, payment system operators (PSOs), mutual funds and insurance players, this paper provides an overview of the specific deal and change in control linked regulatory approvals and learnings / considerations relevant from a transaction structuring and deal execution perspective, across each of the BFSI verticals.

Approval Triggers for Banks, Non-banks and PSOs – Reserve Bank of India (RBI)

Banks
Law	Acquisition of 5% or more (no approval till 4.99%) triggers approval, where “fit and proper” status of acquirer is assessed.
	Acquisition of 10% or more requires additional eligibility and “fit and proper” criteria to be satisfied. Acquisition of more than 15% requires approval of RBI as “promoter” of the bank.
	Acquisition of more than 49% and up to 74% in private sector banks by non- residents requires government approval.
Learnings	Acquisitions in the banking space in India and RBI approvals involve several subjective and objective parameters, including significant regulatory discretion, based on the nature and type of acquirer, source of funds, beneficial ownership details of acquirer, and other public policy considerations.
	Such transactions, in addition to being commercial, require regulatory interface at the deal ideation and structuring stage to obviate deal failure risks.
Non-Bank Financial Companies (NBFCs):
Law	Takeover or acquisition of control[2] of the NBFC, which may or may not result in the change of management, requires prior approval.
	Acquisition of 26% or more of the shareholding requires prior approval, including progressive increases calculated over a period of time. For example, after five transactions of 5% each, even 1% acquisition will trigger approval.
	Change in one-third of the board (excluding independent directors) triggers prior RBI approval. For example, even a 100% shareholder in an NBFC looking to appoint one nominee director on the board that has two or three directors (excluding independents) would trigger prior RBI approval requirement.
	Foreign direct investment (FDI) is allowed up to 100% under the automatic route (i.e., no government approval required).
Learnings	Key considerations, basis recent deal experience, include jurisdiction of the acquirer (not being from financial action task force (FATF) countries), lending experience, source of funds, proposed business plan and projections, nature of the target NBFC (whether substantive lending operations or a shell), track record, and prosecution history, if any, of the acquirer, including its senior management.
	Even in case of 100% acquisitions with RBI approval, it may need to be considered whether further RBI approval would be required for post facto change in shareholding. Indeed, a post facto dip in the shareholding to less than 26% and a subsequent increase to 26% or more will again necessitate a prior RBI approval.
	Deal approval timeline varies significantly and can range between 4 to 18 months, including to address regulatory questions and interface. Since 2021, several applications appear to have been returned or rejected by the RBI, including to discourage opportunistic acquisitions.
	The buyer’s dilemma for NBFCs often is buy v. build; i.e., whether to acquire one or apply for a greenfield NBFC license, because the timelines, effort, and risks involved vary considerably.
PSOs
Law	Acquisition of control (i.e., acquisition exceeding 50% or the right to appoint majority directors – both directly and indirectly) by or business transfer to, in each case an entity not already authorised under the same category of payment service provider triggers approval.
	No approval is required if the acquirer has the authorisation under the same category of PSOs.
	FDI is allowed up to 100% under the automatic route.
Learnings	Since the RBI’s PSO change in control circular was issued only in July 2022, and given the relatively short time span, the regulatory jurisprudence including in particular the deal specific considerations are evolving, and recent deal experience has been mixed as change in control applications have been referred by the RBI to Government of India.
	Card networks and inward money remittance players are seen differently from payment aggregators or wallets providers as there are 7 licensing categories prescribed by the RBI with different change in control rules and accordingly, the regulatory sensitivities involved in such approvals can vary.
	Opportunistic takeover or otherwise, compliance history of the target and the critical market infrastructure nature of the relevant category play a pivotal role in deal execution.

Approval Triggers for Securities Market – Securities and Exchange Board of India (SEBI)

Mutual Fund / Asset Management Companies (AMCs):
Law	Acquisition of 10% or more (including indirect acquisition) triggers SEBI approval in addition to the approval of trustees.
	In case of change in control, exit option must be given to the unitholders, with no “exit load”.
	In 2023, SEBI introduced alternate eligibility criteria for ‘sponsors’ of mutual funds, allowing entities not meeting the original eligibility criteria, to capitalise the AMC upto INR 150 crore (~USD 17,498,940), amongst other requirements, and become ‘sponsors’.
	FDI is allowed up to 100% under the automatic route.
Learnings	Given the exit option requirement (at #(ii) above) has a bearing on the price (mutual fund acquisition price being driven by assets under management), the exit option and necessary adjustments to purchase price need to be built into the transaction documents.
	Even indirect acquisitions beyond the control of the AMC (e.g., offshore entity acquiring AMC’s offshore holding company) may trigger regulatory scrutiny.
	Alternate eligibility criteria facilitate new-age tech players not meeting the original eligibility criteria (such as profitability track record) to now be eligible bidders in cases of sale through the bid process or insolvency-related bids.
Foreign Portfolio Investors (FPIs):
Law	Any material change in the information, including any direct or indirect change in structure, ownership, control or investor group, previously furnished need re-intimation to the SEBI or to the designated depository participant (DDP) (who acts as the quasi-regulator for FPIs).
	Certain material changes, such as change of jurisdiction or name change on account of merger / demerger, restructuring and change in regulatory status of the FPI, may trigger requirements for fresh registration.
	The DDP will examine all the material changes informed by the FPIs and re-assess their eligibility, including requiring them to seek fresh registration. In case of certain material changes as at #(ii) above, the DDP will mandatorily require the FPI to seek fresh registration.
Learnings	FPI Regulations were amended in the second half of 2024, so the position around notifications is not entirely settled. The practice may vary across DDPs – some require a notification both upon the signing of any definitive agreements / MOUs as well as upon the completion of the transaction, whereas others require only a one-time notification at the time of transaction completion.
	Depending on the nature of the transaction involved, the DDP (on a no-name basis) may be engaged early in the process including to mitigate risks of post completion rejections and understand any DDP specific procedural aspects, including the application format (not prescribed under law).
	Key considerations include identifying the nature of the material changes in the information submitted to SEBI or the DDP and whether it would trigger fresh registration and evaluating the timing for engagement of DDP, including to understand whether a one-time notification is sufficient or if a pre-notification/consultation with the DDP is required, including seeking an in-principle pre-closing approval.

Insurers – Insurance Regulatory and Development Authority of India (IRDAI)

Law	Unlisted	Listed
	If an acquisition leads to the acquirer holding 5% or more, approval is triggered. Any subsequent acquisition in the same financial year that leads to an increase in another 5% or more triggers another approval.	If an acquisition leads to the buyer holding of 5% or more, approval is triggered. If any subsequent acquisition(s) increasing the shareholding to 10% or more, triggers a fresh approval.
	Sale of shares exceeding 1% (including on an aggregate basis in the same financial year) triggers approval for the seller.	Any transfer exceeding 1% but below 5% requires reporting by the seller. No reporting / approval is necessary for transfer below 1%.
	Cross-border acquisition up to 74% is permitted under the automatic route, with sectoral approval from IRDAI.
	The Insurance Law (Amendment) Bill, 2024, intends to modernize the insurance landscape in India, and two of the key changes proposed pertain to a composite licensing regime (replacing the current requirement for different licenses to be housed in different entities) and permitting mergers between insurance and non-insurance companies.
Learnings	Key considerations include a review of the transaction structure from a solvency ratio perspective (i.e., ability of the promoter to infuse capital), track record, business plan, including the plan to increase insurance penetration (given IRDAI’s goal of Insurance for All by 2047). In case of special purpose vehicles (SPVs), IRDAI requires capital lock-in at the SPV level.
	Since 2020, IRDAI has granted approvals (as insurers) to tech players with experience as service providers in the insurance space.
	For the acquisition of banks with an insurance subsidiary / joint venture, the application for approval must be submitted to the RBI for consideration in consultation with IRDAI.
	For insurance companies seeking FDI: (a) majority of the directors and key management personnel must be resident Indian citizens, and (b) at least one among the Chairperson of the Board, the Managing Director and the Chief Executive Officer must be a resident Indian citizen.
	Dividend upstreaming by insurance intermediaries requires prior IRDAI approval.

Technology

Law	M&A in the technology sector offering services to financial institutions does not require sectoral regulators’ (such as SEBI / RBI) approval for change in control.
	FDI up to 100% is permitted in the “Other Financial Services” (OFS) sector, regulated by financial sector regulators, including the RBI. In all such OFS not regulated by any financial sector regulator or where there is doubt regarding the regulatory oversight, foreign investment up to 100% is allowed with prior government approval.
Learnings	The Indian fintech ecosystem assumes the position that the origination of an activity based on a “technology interface” or technological services and infrastructure would fall under Information Technology (IT) – IT Enabled Services (ITES) activity or payment infrastructure providers, and not necessarily under OFS.
	Entities in the IT-ITES or payment infrastructure providers space have received foreign investments under the automatic route. As such, it is ultimately the potential buyer who needs to be comfortable with the position taken. This leads to issues in case of M&A involving entities which are engaged in the financial services sector but not directly regulated, such as lending service providers (entities providing services to banks / non-banks for digital lending) and mutual funds distributors.

Approach to Transaction

• In addition to usual considerations, BFSI deal structuring requires assessment feasibility of the deal from a regulatory approval perspective.
• Deals in the BFSI sector are not completely price driven, as “fit and proper” status of the acquirer determines the receipt of approval, i.e., deal certainty. This requires assessment of potential acquirers, especially in bid scenarios.
• Deal structuring considerations, particularly cross-border include restrictions around pricing guidelines and their interplay with fair market value (FMV), deferred payments including nuances arising from the currency denomination of the consideration, indemnities, source of funds and jurisdictions, government / regulatory approvals, (cash/document) escrow arrangements, etc.
• Prior to due diligence, it is important to consider cross-holdings of the acquirer group, as there have been instances of regulators requiring divestment due to cross-holdings. v. Practical issues relating to procedural requirements for investing in India include obtaining registration, demat accounts, permanent account number (PAN), director identification number (DIN) / digital signature certificate (DSC) for nominee directors, and compliance with requirements for the appointment of India resident citizens in key positions, long-term service and transition agreements factoring in regulatory and foreign exchange considerations.

Legal Due Diligence

• Most BFSI groups have multiple licenses (across regulators), and each must be diligenced to identify the change in control / shareholding regime applicable.
• Regulatory inspections by the regulator vary in scope and periodicity, depending on the type of license. Review of inspection reports is important to assess compliance status and risk weigh the issues identified by the regulator.
• The nature of the regulators’ worries, which depends on the market cycle need to be factored in. For example, the RBI focuses on KYC-related issues and non-performing assets for banks / non-banks, whereas SEBI focuses on mis-selling practices by asset managers / distributors.
• All regulators are focused on data privacy, given data is monetised in the BFSI space, and as each regulator has its own sectoral data regulations, data privacy compliance becomes an important diligence item.

• Increased reliance on outsourcing has led regulators to closely scrutinise these arrangements (especially from a concentration risk perspective) and take penal action for any non-compliance. Hence, diligence must also focus on outsourcing arrangements.

Documentation

The following aspects, bespoke to the BFSI sector, must be considered for documentation:

• Material Adverse Event (MAE): In addition to usual construct of MAE, regulatory proceedings and on-boarding bans (recently RBI has been increasingly imposing on-boarding bans on its regulated entities, which leads to business disruption) must be included in MAE construct.
• Conditions Precedent: As BFSI deals are subject to regulatory approvals, the responsibility should be correctly allocated including jointly with the target / investee entity where relevant and the possibility including merits of a composite application should also be evaluated. For example, IRDAI approval will be required by both the seller and buyer in an M&A in the insurance space, and a composite application may be considered.
• Long Stop Date: Aside from the usual time required to close a transaction, regulatory approvals can take anywhere from 3 to 4 months (securities market intermediaries) and can go upto 12 to 18 months (mutual fund, banks, insurers), depending on the nature of license / authorisation and the transaction implementation timelines should be budgeted accordingly.
• Representations and Warranties: These need to be curated as per the nature of activity undertaken by the target and the existing regulatory landscape. v. In case of listed targets, additional considerations apply, such as approvals of stock exchanges (in case of primary subscription) and the approval of shareholders (in case of board representation and special shareholder rights) in addition to mandatory tender offer (MTO) requirements.

---

[1] ‘Deals at Glance: Annual Review 2024’ by PwC India (available here)

[2] Section 2(1)(e) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 – “control” includes the right to appoint majority of the directors or to control the management or policy decisions  exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner:

Provided a director or officer of a target company shall not be considered to be in control over such target company, merely by virtue of holding such position.