In 2016, the insolvency and bankruptcy landscape in India was radically overhauled by the introduction of the new Insolvency and Bankruptcy Code (IBC). In addition to consolidating the complex set of existing laws and regulations on insolvency and bankruptcy into a single law, the IBC introduced time bound and creditor driven resolution process for distressed companies overseen by the newly formed National Company Law Tribunal (NCLT).
These changes were supported by amendments to the Banking Regulation Act to enable the Reserve Bank of India (RBI) to force banks to file insolvency applications against defaulting borrowers under the IBC. Since the new law was enacted, more than 500 cases have been admitted by the NCLT with around 1000 applications pending. The restructuring and/or liquidation of these companies under the new system and the accompanying foreign investment reforms has opened up a number of opportunities through different avenues for foreign investors to invest in distressed Indian assets. Continue reading for a summary of the principal avenues for foreign investment in India.
Investments platforms in India for foreign investors
Asset reconstruction company (ARC)
- ARCs are specially licensed entities entitled to buy non-performing assets from banks and financial institutions.
- Foreign investment in ARCs can be achieved by either setting up and owning an ARC; or
- investing in existing ARCs.
- As the process for obtaining approvals to set up an ARC can be lengthy, it is more common for investment to occur through existing ARCs.
- A key way in which ARCs generate funds is by setting up and managing securitisation trusts. To do so, ARCs acquire and transfer non-performing assets into a trust. They then issue security receipts (SRs) to qualified institutional buyers in the trusts. SRs give purchasers the right to receive regular payments throughout the life of the trust and a final payment after all the assets of the trust have been realised. ARCs generate management fees and income by selling and/or enforcing the debt and security which has been transferred into the trust.
- A key advantage of ARCs is that, subject to certain restrictions, they have enforcement rights in relation to any secured debt they acquire.
- However, ARCs are extremely limited in terms of the types of assets that they can acquire and are restricted from borrowing outside of India.
Non-bank financial companies (NBFC)
- NBFC’s are companies registered under the Companies Act that provide financial services in India. They are able to undertake a broad range of finance activities, although the most common is as a platform for direct lending.
- Due to recent regulatory reforms, 100 percent foreign direct investment without any minimum capitalisation norms or government approvals is now permitted.
- A common way to invest in NBFCs is via the purchase of non-convertible debentures (NCD) issued by these entities. NCDs are unsecured bonds that cannot be converted to equity. NCDs generally have a fixed coupon rate and redemption date.
- NBFCs, as opposed to ARCs, are able to purchase debt before it is in default for more than 61 days. This means that NBFCs can acquire debt which has a better chance of recovery. There are however restrictions on the amount of stressed debt that an NBFC can hold at any time.
Alternative investment fund (AIF)
- AIFs are investment funds that can pool foreign and domestic monies for investment in India.
- Foreign investors can now invest in AIFs without needing to seek government approval. Investment in AIFs can be done passively or actively, for example via joint venture with a local partner.
- A key advantage of AIFs is that they can invest in SRs issued by ARCs.
- AIFs also allow foreign investors to invest in listed and unlisted debt instruments which would otherwise require RBI approval.
- In addition, if structured correctly certain categories of AIFs have “pass through status” under Indian income tax laws. This means that the rate of tax payable by a foreign investor is the same as what the foreign investor would have had to pay if the investment was made directly in the portfolio entity.
- A disadvantage of AIFs is that they have no special enforcement rights. For this reason it is common for foreign investors to also invest in ARCs and/or NBFCs.
Foreign portfolio investment (FPI)
- This is investment in shares, bonds, convertible securities, etc. To undertake investing as an FPI, an FPI licence must be obtained.
- It has been common for investors to use FPI licenses to purchase SRs issued by ARCs and to invest in Indian corporates via NCDs.
- There are however various restrictions on the level of investment by foreign investors in Indian companies through this platform.
External commercial borrowing (EBCs)
- ECBs are commercial loans raised from non-resident lenders in either Indian rupees or any freely convertible currencies.
- ECBs can be made available in many forms, including bank loans, bonds, securitized instruments, buyer’s credit, supplier’s credit, foreign currency convertible bonds, and foreign currency exchangeable bonds.
- Recognised foreign investors can purchase existing ECBs or lend directly to Indian entities via ECBs.
- Some of the key advantages of advantage of ECBs are that:
- the underlying contract agreements are often governed by English law;
- they can usually be traded on the secondary market; and
- the eligibility requirements for foreign lenders/investors are relatively easy to satisfy.
- A key disadvantage of ECBs is that they are generally subject to a number of restrictions, including limitations on the entities which can be lent to, the uses which the funds can be put toward, and the cost of borrowing.
- Economic liberalisation in India has opened up new platforms for foreign investors and/or made these platforms more accessible and attractive.
- The suitability of each platform will depend on each investor’s objectives and risk appetite. However, it is common for investors to utilise multiple platforms to enable them to enjoy the benefits of each.
The new time bound restructuring and insolvency process under the IBC has created huge opportunities for investors to acquire distressed assets in India.
The Hogan Lovells’ India Regional Practice is based in key locations for doing business in India, including Singapore, Hong Kong, Dubai, London, and Washington, D.C. As we are not able to advise on Indian law, we have formed strategic relationships with local counsel in key locations within India. Please contact us if you require further advice on foreign investment.