India: Debt Funding: India Inc. Gets More To Cheer

While debt funding has been the preferred mode of investment, historically India has offered very few routes for offshore debt investment into Indian entities. Over the last 18 – 24 months, the government and the exchange control regulator, the Reserve Bank of India ("RBI") have been relaxing regulatory norms around debt funding, especially overseas debt funding. Recently, the regulatory regime for the external commercial borrowings ("ECB") was overhauled in a substantially liberalized manner1.

Background

The Monetary Policy Committee of the RBI on February 7, 2019 issued its 'Sixth Bi-monthly Monetary Policy Statement, 2018-19' and also issued the 'Statement on Developmental and Regulatory Policies'2 The 'Statement on Developmental and Regulatory Policies' ("RBI Statement") has proposed a number of regulatory changes such as permitting ECBs to be raised for refinancing rupee debt in certain cases, removal of certain concentration norms, harmonizing categories of non-banking financial companies ("NBFC") and amending risk weightage for NBFC. Some of these changes are expected to have substantial bearing on debt raising options by Indian corporates. In this hotline, we have dealt with some of the important changes proposed in the RBI Statement, and the potential impact of the same.

Regulatory changes proposed

Raising of ECBs for companies under the CIRP process

The RBI under the RBI Statement decided to permitt ECB to be raised for refinancing of Rupee loans of corporates which are under the corporate insolvency resolution process ("CIRP") of the Insolvency and Bankruptcy Code, 2016 ("IBC"). This was not allowed under the current regulations, and ECB could only be used to retire foreign debt. The RBI has also issued a Circular on February 7, 20193 amending the existing ECB framework to permit this.

With the introduction of the IBC, a large number of companies have gone / are undergoing the CIRP. Under the CIRP process, potential bidders prepare and submit resolution plans which are evaluated by lenders of the company under the CIRP process (known as 'corporate debtor'). One of the main features of the resolution plans for large companies has been the manner in which the existing outstanding debt has been dealt with by bidders. These include repayment of existing debt, restructuring existing debt and even refinancing existing debt. In most of the important cases thus far, the amounts owed by the corporate debtor have been substantially large, running into billions of dollars. In these cases, refinancing of existing debt has not been feasible for bidders. Restructuring of loans (where lenders have agreed to re-set interest rate, repayment schedules and moratorium) have been preferred by bidders, but this has faced hurdles by lenders (mainly being banks and financial institutions) wanting to completely exit their exposure from these stressed companies.

The only other option open for dealing with existing debt is refinancing of loans. Considering the quantum of loans involved, funding from resident sources (mainly banks) have been a challenge. This coupled with restriction on Indian banks to lend for acquisition financing restricted borrowing in India by potential acquirers. Borrowing offshore was considered more palatable to bidders, especially to non-resident bidders, since they could raise such leverage on the back of their global financial wherewithal and at more competitive rates. These funds could be raised in two modes – raising acquisition financing offshore and then using the funds to acquire the target in India and repay the existing loan through fresh investment into the target; or by re-financing existing loans. The former was not preferred by bidders, since the inability of the target to benefit from interest expense in India made it tax inefficient. In addition, the funds raised were directly on the books of the acquirers / bidders, instead of the target. The other option of refinancing existing debt is generally preferred by all bidders.

Most of the debt raised from offshore banks and financial institutions are by way of ECBs. However, the ECB norms prohibit ECB to be raised for certain end-uses, which include refinancing of Rupee loans. This restricted the ability of potential bidders to raise ECBs for refinancing debt. To further encourage bids under the IBC, the RBI Statement has now proposed to permit ECBs to be raised for refinancing of Rupee loans of companies under the CIRP process. The RBI has, on February 7, 2019 issued a Circular4 permitting companies under CIRP to raise funds under the ECB route for the purpose of refinancing existing Rupee loans. These are however, subject to certain conditions, being (i) the company under the CIRP, which shall be the borrower shall be an eligible borrower generally; and (ii) the raising of the ECB shall be under the automatic route.

The relaxation in the end-use restriction for ECB should provide a major fillip to potential bidders under the CIRP process, considering that they are now entitled to raise fresh ECB in the target for refinancing both Rupee and foreign currency loans.

Relaxation of risk-weightage of lending by banks to NBFCs

Under the existing regulatory framework applicable, banks lending to NBFCs are required to have a risk-weightage of 100% for all lending to NBFCs. The RBI Statement has proposed to remove the requirement for banks to maintain a risk weightage of 100% uniformly and instead apply a risk-weighted approach based on ratings assigned by rating agencies.

Banks lending to NBFCs are required to assign a 100% risk weightage to such loans, thereby requiring banks to provision for such loans. This meant that a substantial portion of the bank's capital was blocked. This was considered to be a harsh requirement, considering some of these NBFCs were strong financially and did not merit a 100% risk weightage. To ensure that the risk-weightage was aligned to the actual risks involved, the RBI Statement now proposes that the risk weightage of loans to NBFCs by banks be linked to the actual risks involved, based on the ratings assigned to such NBFCs by accredited rating agencies. This is in line with the risk-weightage involved in lending by banks to corporates. This is a positive move and would free up additional capital on the balance sheet of banks, encouraging more lending by banks. The change however, excludes core investment companies ("CIC") from its purview, thereby meaning that banks would still need to assign a 100% risk weightage for loans offered to CICs.

The official circulars to effect such changes are awaited.

Relaxation in concentration norms for FPI investments

Foreign Portfolio Investor ("FPI") investments into non-convertible debentures ("NCD") issued by Indian corporates have been subjected to certain credit concentration norms since 2018 whereby no FPI was permitted to invest in excess of 20% of its total debt portfolio into a single corporate group. The RBI Statement has now proposed to remove this 20% restriction.

One of the most widely used routes for debt investments into India till early 2018 was investment through NCD under the FPI regime. In April – May 2018, the SEBI and the RBI introduced credit concentration / diversification norms to provide for the maximum portion of a debt issuance that a single FPI can invest, and also concentration norms for an FPI, i.e. the maximum portion of an FPI's portfolio that it can invest in a single corporate entity, along with its group entities.

RBI's circular No. 24 dated April 27, 2018 ("FPI Circular") prescribed that an FPI cannot invest more than 20% of its debt portfolio in a single corporate entity (along with its group companies). FPIs were required to comply with this requirement effective March 31, 2019.

However, FPIs were facing substantial challenges to meet this diversification requirement. The introduction of the 50% limitation on FPIs to invest in a single debt issuance has already resulted in substantial reducing of debt inflows into Indian corporates. Further, the requirement to diversify meant that FPIs were compelled to invest in multiple deals in a short span of time to ensure that the 20% restrictions are not breached. This requirement was putting further strain on FPIs to invest into India. The removal of this restriction is going to provide a major push to NCD investments by FPIs into India.

While the removal of the 20% concentration norm is an extremely positive move, the 50% limit is proving to be a much greater impediment to FPIs for their investments into India. The removal of this restriction would provide FPI- NCD investments the shot in the arm they seek.

The formal notification of the RBI and SEBI removing the credit concentration norms are still awaited.

Harmonization of NBFCs

The RBI Statement also proposes to harmonize various NBFCs to shift form an NBFC based regulatory regime to an activity based regulatory regime.

There are various categories of NBFCs under the RBI guidelines5 and the rationale for the categorization has been questioned time and time again. The RBI Statement proposes to now harmonize the NBFCs based on activities. Accordingly, the RBI Statement has proposed to harmonize NBFCs in credit intermediation, vis-à-vis asset finance companies, loan companies and investment companies into a single category. The final notification in this regard is still awaited and it is to be seen how the RBI decides to implement these NBFCs, considering these categories has different requirements and regulatory framework. It is likely that the RBI would prefer a phased approach whereby it requires the NBFCs being merged into a single class to start complying with the applicable regulations over a period of time. Further, it is also to be seen how RBI looks at investment companies which do not raise funds from external sources, namely, core investment companies.

Conclusion

The changes proposed by the RBI Statement would provide debt inflows into India a major push. Further, the changes to the risk weightage is also expected to encourage further lending by banks into NBFCs. While certain concerns have been addressed, the RBI Statement falls short in certain areas, such as removal of the 50% requirement, relaxing end-use restrictions for Rupee refinancing for companies not under the CIRP.

Footnotes

1 For a detailed analysis on this, please refer to our hotline available here. [Link: http://www.nishithdesai.com/information/research-and-articles/nda-hotline/nda-hotline-single-view/article/external-commercial-borrowings-regulatory-framework-substantially-relaxed.html?no_cache=1&cHash=225df0a15bad7dc66b993edb783fe9f8 ]

2 Available here and here respectively [links https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=46235 and 2 Available here and here respectively [links https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=46235 and https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=46237 ]

3 A.P. (DIR Series) Circular No. 18 dated February 7, 2019 available online at https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11472&Mode=0

4 A.P. (DIR Series) Circular No. 18 dated February 7, 2019 available online at https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11472&Mode=0

5 Asset finance companies, investment company, loan company, infrastructure finance company, core investment company, infrastructure debt fund, NBFC – micro finance institution, NBFC – factors, mortgage guarantee companies and NBFC – Non-operating financial holding companies

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions