What is mezzanine debt in India and when should a business use it?

A typical leveraged capital structure in India using mezzanine debt looks like this:

Senior secured debt — first charge on assets, lowest coupon, repaid first: 50-60% of total capital.

Mezzanine debt — second charge or unsecured, higher coupon, repaid after senior debt: 15-25% of total capital.

Equity — residual ownership, no guaranteed return, highest upside: 20-30% of total capital.

The mezzanine layer allows a business to complete a transaction with less equity than a pure senior debt-and-equity structure would require. On a ₹100 crore acquisition, a promoter who can raise ₹50 crore in senior debt and ₹20 crore in mezzanine needs only ₹30 crore in equity — compared to ₹50 crore without the mezzanine layer. The equity saving comes at the cost of paying a higher rate on the mezzanine tranche.

Real estate development: Construction finance in India frequently uses a layered structure. A senior secured NBFC or AIF facility provides the primary construction capital. A mezzanine layer — sometimes called a "promoter contribution facility" — provides the promoter's required equity contribution into the project, which the senior lender requires before drawdown. The mezzanine facility allows the promoter to put less personal capital into a project while still meeting the senior lender's requirements.

Acquisition financing: When a business acquires another company, the combined entity's cash flows must service the total acquisition debt. Senior lenders will provide debt up to a coverage ratio they are comfortable with — typically 1.5-2.0x DSCR. If the acquisition price requires more debt than the senior lender will provide at that coverage ratio, mezzanine fills the gap. The senior lender's DSCR is maintained; the mezzanine lender accepts a higher return for the additional risk of being subordinated.

Growth capital for asset-light businesses: Companies with limited tangible assets — branded consumer businesses, service companies, specialty manufacturers — that cannot secure adequate senior debt against physical assets can use mezzanine financing backed by revenue streams and promoter guarantees. The absence of hard asset security is reflected in the mezzanine coupon.

Mezzanine debt in India carries effective yields of 16-22% per annum depending on the risk profile, security position, and the specific transaction structure. The yield combines a cash coupon component — typically 12-16% per annum, paid periodically — and sometimes a payment-in-kind (PIK) component or an equity kicker, where the lender receives a small percentage of upside if the business reaches defined milestones.

Equity kickers in Indian mezzanine transactions are less common than in Western markets — most domestic mezzanine lenders prefer a higher cash coupon over an equity upside. When they exist, they typically take the form of warrants exercisable at a predetermined price, providing the lender with participation in value creation above a defined threshold.

Mezzanine transactions require intercreditor agreements between the senior lender and the mezzanine provider — contracts that define the priority of payment, the conditions under which the mezzanine lender can enforce against security, and the restrictions on both lenders' ability to modify their respective facilities without the other's consent. Negotiating these intercreditor agreements adds 2-4 weeks to the transaction timeline and requires legal counsel experienced in structured finance.