The succession of rule changes is response to a growing appetite for Indian companies to look abroad for funding and investment, and will be welcomed by international debt funds
The Reserve Bank of India (RBI) has announced a series of policy changes, which include (i) relaxation of its External Commercial Borrowing (ECB) framework and (ii) withdrawal of certain restrictions on investment by Foreign Portfolio Investors (FPI) in corporate debt. These changes open up new opportunities in the Indian market for international lenders and debt funds.
ECB Framework Relaxed For Bidders In An Insolvency Process
The ECB regime regulates the provision of loans and debt capital market instruments raised by domestic companies from foreign financial entities.
In a circular issued on 7 February 2019, the RBI set out certain policy changes to relax the rules which prevented proceeds of ECB denominated in either foreign currency or Indian Rupee (INR) from being utilized for the repayment or for onlending for the repayment of domestic INR loans. The new rules allow bidders to raise debt from international lenders or funds in order for the bidder to use the proceeds to repay the domestic INR denominated debts of an Indian target company, which is in the Indian corporate insolvency process.
Removing barriers for bidders to access foreign capital looks to bolster an active market in acquisitions of targets in insolvency, offering bidders a wider range of options to raise affordable debt.
Although lenders will still require RBI approval to lend to a bidder, the new rules raise an expectation that such approval should be straightforward and reflects a policy shift towards encouraging overseas investment in India. Lenders of such debt will also not have to register as FPIs. Loans can be denominated in any currency and governed by English law agreements, with lenders being able to take the direct benefit of security in more credit-worthy bidding companies.
Although this relaxation is limited to bidders for targets that are in insolvency (and not those undergoing pre-insolvency restructuring), it will help to relieve pressure on the domestic banking sector which is currently stressed and over-extended, and will grant international lenders and funds unprecedented access to the Indian distressed debt market and open up refinancing opportunities.
Restrictions To Be Lifted For Investment In Corporate Debt
Foreign investors seeking exposure to INR denominated debt (without being subject to the restrictions of the ECB regime) have historically been able to lend by procuring FPI registrations which enables them to invest in non-convertible debentures issued by Indian corporates. In 2018, the RBI had introduced restrictions preventing any single FPI from investing more than 20 per cent of its corporate bond portfolio in a single Indian corporate group and from holding more than 50 per cent of any tranche of non-convertible debentures. On 15 February 2019, the RBI eased this by removing the former 20 per cent concentration limit (but not the tranche restriction, which remains).
The tranche restriction was viewed as less problematic, but the 20 per cent concentration limit significantly disadvantaged new FPIs, without existing diversified portfolios in India. Therefore, this change will lower the entry threshold for international debt funds in India.
The succession of rule changes is a response to a growing appetite for Indian companies to look abroad for funding and investment and will be welcomed by international debt funds. It opens up a number of lending possibilities in the large Indian debt market.
Disclaimer – This is an analysis of Indian law and does not constitute legal advise.
Partner, Allen & Overy
Sanjeev is a partner in A&O’s London office in the Leveraged Finance Group and leads the firm’s direct lending practice. He has advised on a broad range of LBO financings including cross-border direct lending transactions from unitranche up to more complex PIK, first and second lien and Holdco PIK structures. Sanjeev has also acted on a broad range of high profile and cross-border structured banking transactions including syndicated loans and investment grade acquisition financings, direct lending, structured emerging markets financing, property transactions and international financing structures. In addition, Sanjeev has also worked on a number of project financing, ECA financing and infrastructure transactions and he has a particular focus on emerging markets. Sanjeev is Chairman of the India Group and a core member of the Africa Group at Allen & Overy.
Partner, Allen & Overy
Gautam Narasimhan is a banking partner in the Singapore office of Allen & Overy. His practice focuses on leveraged finance, structured finance and private equity in South and Southeast Asia, particularly in India, Indonesia, Vietnam and Singapore. He has advised many international banks, private equity funds and credit funds on numerous high-profile financings and structured transactions in the region, including some of the most significant acquisition financings on recent high value intra-Asia deals. Gautam has been practising in Singapore for the last 14 years and worked in London and New York previously. He is qualified in England, Singapore, New York and India. Chambers Asia Pacific 2019 states that Gautam is “’very commercial and solution-seeking and has the necessary gravitas…when you have a tricky situation he’s good at coming up with solutions.’”
Counsel, Allen & Overy
Rishi is of Counsel in our Restructuring and Recovery Group and advises banks, funds, borrowers and insolvency practitioners on all aspects of financial restructurings and non-litigious aspects of formal insolvency proceedings. He also advises on general banking transactions and distressed debt trading. He has worked on a range of finance transactions in London, including restructurings, syndicated lending and acquisition finance.