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Foreign participation in India’s debt market is regulated and must be routed through one of three main avenues: The Foreign Portfolio Investment (‘FPI’) route, the Foreign Venture Capital Investment (‘FVCI’) route or the External Commercial Borrowing (‘ECB’) route. The FPI and FVCI regimes are subject to compliance requirements mandated by the Securities and Exchange Board of India.

At the beginning of this year, the RBI reformed the ECB policy to relax certain restrictions on external borrowings. The ability to tap into cheaper foreign currency loans to fund immediate requirements may come as a material relief to the better-rated Indian companies, at a time when domestic interest rates remain quite sticky. The simplified ECB restrictions expand the pool of eligible lenders and borrowers, and permit funds to be used for a wider range of purposes, including working capital and refinancing.

First, the streamlining of the complex four-track structure for ECBs into just two for foreign currency and Rupee borrowings simplifies procedures for borrowers. Second, as opposed to multiple loan caps, the RBI has now proposed a uniform cap of $ 750 mn for borrowers from different segments seeking to use the automatic route. Third, the minimum maturity for ECBs beyond $ 50 mn has been pruned from five to three years, allowing eligible companies to tap this route for their more immediate requirements.

This relaxation may also aid bidders willing to acquire distressed assets under the Insolvency and Bankruptcy Code. The Code has drawn massive attention from global private equity players. Such players are looking to tie-up with local companies to bid for stressed assets or set up country-focused special situation funds to explore opportunities. Further, making long-term and cost-effective capital available to prospective bidders is fundamental for the success of the corporate insolvency resolution process (CIRP).

Recognizing this need, the RBI further relaxed the framework vide circular dated 7th February 2019 to allow the applicants to borrow ECBs from recognized lenders (other than the branches or overseas subsidiaries of Indian banks) for repayment of rupee-term loans of a corporate debtor under CIRP.

Apart from these advantages, the relaxed framework can also help reduce the haircuts taken by banks, as the availability of ECBs will bring liquidity in the market and increased the availability of funds for stressed assets. When a bidder raises debt in the domestic market, the risk stays within the system. With this relaxation, the applicant will be able to raise money in the foreign market at a competitive rate while leaving the domestic banks to deploy funds in other avenues. Despite all these benefits, there may still be hiccups owing to the all-in cost ceiling of LIBOR plus 450 basis points, which may limit ECBs for low investment grade or distressed firms.

With over $150 Billion of NPAs in the Indian banking system, many foreign hedge/distressed debt funds are lining up in the market to help banks clean up their balance sheets. These hedge funds operate on a high risk - high return strategy which the current ECB interest rate caps may not support. While pure distressed debt buying will not be impacted by the ECB caps; however, any further fund infusion for turnarounds will be difficult due to ECB interest rate caps. With existing distress in the business, the working capital concerns continue to mount and make it difficult to save its operations.

It is very important for the economy to save distressed companies from liquidation and focus on turnarounds. Banks have been very selective in lending to companies with a history of default. As a consequence, strategic buyers have expressed limited interest in these companies, as well as in the overall distressed space.

With limited experience of turnaround investors in India, foreign funds can play a constructive part. An investment relaxation specifically for such investors can help the IBC realize its full potential by engaging higher participation in the resolution process.

In order to do so. the regulators will have to address the question of whether the current pricing cap on ECB loans will be relaxed for stressed companies. They may also have to consider allowing a certain amount of debt infusion through the automatic route, which will help in avoiding the existing mandatory approval route which is time-consuming, lacks certainty and finality.

To sum up, these changes have significantly relaxed restrictions on foreign borrowings and are expected to further encourage the inflow of funds. With further clarity on some sticky points related to using ECBs for stressed companies, the relaxation has the potential of changing the landscape of debt financing and restructuring in India, and further integrating the domestic market with its global counterparts.

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