MUMBAI: The Reserve Bank of India’s ( RBI) decision to allow bidders of insolvent companies to raise external commercial borrowings (ECB) to refinance rupee debt of insolvent companies could see increased India-focussed activity by overseas distressed assets investors. On Thursday, the RBI decided to ease the existing limitation on end-use of ECB proceeds to allow companies to raise foreign funds via the approval route from all eligible lenders except from overseas branches and subsidiaries of Indian banks.
As per the existing norms, the proceeds of ECBs are not permitted for refinancing or on lending for repayment of rupee loans of companies under corporate insolvency resolution process (CIRP) under the Insolvency and Bankruptcy Code (IBC).
Industry watchers say that distressed assets funds who typically invest in high-yield debt would look at India with renewed interest once the RBI releases the new guidelines by the end of February. “It will permit resolution applicants to access cost-effective ECB funding to refinance rupee debt," said Rohit Raghavan, partner, L&L Partners.
“It will be a boon, particularly to overseas investors, interested in taking over stressed assets. This will provide foreign investors the ability to demonstrate that they have funding tied up to honour their obligations under their resolution plans and enable them to count on their own banking relationships to avail funding in India," he added.
But experts maintain that the impact of the relaxation will finally depend on the fineprint of the new guidelines. “Overall, it’s a positive development for the industry but the fineprint will make the difference," said Anuj Kapoor, managing director and head of investment banking UBS India.
“For instance, it remains to be seen whether the current pricing cap on ECB loans is also relaxed for distressed companies," Kapoor added.
Under the current RBI guidelines, pricing of all foreign currency loans by domestic borrowers is capped at Libor plus 450 basis points.
“This may not be a practical solution for bidders that don’t have an investment grade rating per se but may work in favour of acquirers with robust credit rating," said Ravi Chachra, co-founder, Eight Capital Management LLC, an India-focused distressed assets fund.
“The question remains which lender’s bank will give a low-cost ECB to a company coming out of NCLT," Chachra added.
Under the existing regulations, resolution applicants typically depend on debt financing to close acquisitions or to implement resolution plans for distressed assets. As things stand, many successful applicants are said to be facing problems in securing full funding for assets won through competitive bidding. This has in some cases resulted in cancellation of the bidding by creditors.
“The external commercial borrowings’ end use relaxation for CIRP is a welcome move to ease the debt market in order to facilitate resolution of the distressed assets. However, the approval route does not provide the deal/resolution certainty, and, to this end, it would be helpful to get relaxation up to certain amount under the automatic route," said Nishant Singh, partner, IndusLaw.