Leveraged Buyouts in Essential Services: Does Shareholder Primacy Fail the Indian Healthcare Market?

The Reserve Bank of India (RBI) February 2026 decision to permit bank-financed leveraged buyouts (LBOs) transactions in which an acquirer borrows heavily against a target company’s assets to fund a purchase opens domestic acquisitions to new capital but applies a sector-agnostic design to an industry where that uniformity creates predictable harm. In particular, this applies to sensitive sectors such as health care. This piece argues that the permitted 3:1 debt-to-equity ratio is structurally incompatible with healthcare’s cash flow realities, that existing governance mechanisms cannot compensate for this misalignment, and that evidence from the United Kingdom and United States supports targeted regulatory reform rather than a ban on private equity participation.

Existing scholarship on private equity in healthcare has focused on entrenched markets, mainly the United States, where the harms of the leveraged payout model are visible in mortality data and hospital distress. India’s directions create these conditions before the harms exist, while the market is still small enough for calibration rather than correction.

A Sector-Agnostic Rule for a Sector-Specific Problem

Historically, the RBI restricted commercial banks from financing domestic acquisitions. This changed with the issuance of the Reserve Bank of India (Commercial Banks – Credit Facilities) Amendment Directions, 2026 (Revised), which permit bank-financed LBOs. Under the new framework, banks can finance up to 75% of an acquisition’s value, provided the acquiring entity maintains a post-acquisition consolidated debt-to-equity ratio that does not exceed 3:1 on a continuous basis. As a healthcare governance instrument, it does not exist because the directions draw no distinction between acquiring a logistics company and acquiring a regional hospital network.

Why Hospital Cash Flows Cannot Bear This Debt

Hospital cash flows are rigid in a way that most businesses are not, which acts as a constraint. On one side, clinical capacity is fixed by infrastructure, medical registrations, and staffing and cannot be scaled to service debt on demand. On the other side, nursing shortages, which are chronic across Indian private healthcare, constrain patient throughput further. Additionally, payments from government insurance schemes like Ayushman Bharat and from insurance intermediaries are delayed, sometimes by months. Accordingly, under a 3:1 leverage ratio this results in almost no operational margin. 

Private equity sponsors working within a five-to-seven-year investment horizon need returns, and under maximum leverage, the pressure to generate cash translates predictably into cost-cutting and a shift toward profitable elective procedures over community care. This is not speculation about intentions but rather what the debt structure incentivizes. Moreover, in India’s context much of private hospital revenue now flows through Ayushman Bharat and state health insurance schemes. When a private equity-owned hospital cuts cost from wards funded by public insurance, the savings accrue privately while the fiscal exposure stays public. That is not a marginal inefficiency; it is a direct pipeline from public funds to private equity returns, and current frameworks treat it as no one’s problem.

The Governance Gap the New Rule Ignores

The standard response to governance concerns is that existing mechanisms such as directors’ duties, bank oversight, and competition regulation provide adequate safeguards which do not actually reach the problem.

As per Section 166(2) of the Companies Act, 2013, directors are required to act in the best interests of the company, its employees, and the ‘community’. This provision is cited as India’s statutory departure from the shareholder primacy model to a stakeholder-centric model which does not focus on the shareholder maximisation principle. But when an LBO loads a hospital with maximum permissible debt, contractual obligations owed to syndicating banks simply come first. Community interest provides no defence against a debt covenant breach. Section 166(2)’s pluralism survives formally; practically, it is extinguished by the debt structure now sitting alongside it.

Bank oversight under the 2026 directions requires board-approved financing policies, but commercial lenders are built to assess credit risk rather than clinical risk. The RBI’s mandated 40% minimum haircut on equity collateral protects the lender’s position against fluctuations in the target’s valuation. This is a solvency metric, not a care-quality metric: a hospital can maintain its collateral value by cutting nursing staff or deferring maintenance, the very actions that erode care while leaving the lender’s security intact.

The Competition Commission of India’s expanded jurisdiction: the Deal Value Threshold of ₹2,000 crore introduced through the 2023 Competition Amendment brings previously exempt high-value hospital acquisitions within merger review, but what the Commission tests is whether the merger causes an appreciable adverse effect on competition; post-merger financial engineering and capital structure are not its concern.

Lessons from the UK and US and Where They Fall Short

As mentioned above, the risks are not hypothetical. In the United Kingdom, the Competition and Markets Authority’s private healthcare ordered a dominant hospital operator to divest, then withdrew that order as disproportionate after appeal. Even its strongest proposed remedy addressed concentration, not debt. A mature competition regulator with strong enforcement powers still has no mechanism for capital-structure risk in essential services, precisely the gap India’s framework needs to close, not inherit.

In the United States, Appelbaum and Batt document associations between leverage-driven cost pressure and deteriorating patient outcomes in private equity-owned hospitals and nursing homes. By 2025, a growing number of US states had enacted or introduced legislation requiring prior regulatory approval for private equity acquisitions of healthcare providers.

Fixing the Ratio, Not the Model

Private equity has a genuine role in Indian healthcare. India’s infrastructure deficit is real, and the capital private equity can mobilise for hospital construction and expansion is needed. The problem is that the LBO structure, with its emphasis on extracting maximum leverage within a short horizon, is poorly suited for an essential service.

Three reforms would address this without foreclosing private equity participation. The RBI should introduce a healthcare-specific sub-category within its Capital Market Exposure directions, imposing a lower consolidated debt-to-equity ceiling calibrated to actual hospital earnings margins. The Ministry of Corporate Affairs should require mandatory disclosure of post-acquisition financial arrangements for highly leveraged private healthcare entities. And regulators should prohibit debt-funded dividend distributions to private equity sponsors within the first three years of a healthcare LBO.

Conclusion

The 2026 directions are a legitimate step for Indian corporate finance. The problem is that healthcare is not a generic sector. Section 166(2) mandates that directors serve the community; Ayushman Bharat means the public already underwrites substantial portions of private hospital revenue. Allowing unconstrained shareholder primacy to determine the capital structure of institutions in that position converts a governance framework into a mechanism for extracting public value privately. Accordingly, sector-specific guardrails are not anti-market but are rather the condition under which this kind of financialization can be justified.

Rajdeep Dutta is a Legal Counsel at Intuitive (Bangalore, India).