Forex rules hinder foreign participation in debt unwind

By Apurva Jayant and Amritha Kumar, L&L Partners

“It is said that the world is in a state of bankruptcy, that the world owes the world more than the world can pay.” (Ralph Waldo Emerson.) Whether or not universally true, this quotation certainly applies to India. Since the introduction of the Insolvency and Bankruptcy Code, 2016 (IBC), gross overleveraging by companies is no longer only discussed in boardrooms of large banks but also in courtrooms. Foreign investors (FIs) have been visibly absent from the frantic M&A activity brought about by IBC, with only a few brave enough to participate. This may be because the first businesses to enter insolvency under IBC (the “dirty dozen”) were complex, or because the new framework brought uncertainty. IBC’s teething troubles are lessening and the assets now available may better suit the appetite of FIs in terms of size, sector and complexity. It is therefore timely to re-examine foreign exchange laws, and their restrictions on foreign bidders.

Apurva JayantPartnerLuthra & Luthra
Apurva Jayant
Luthra & Luthra

Some corporate debtors undergoing restructuring under IBC are carrying on regulated businesses, where foreign investment is regulated, in such sectors as telecoms, real estate and defence. The Ministry of Corporate Affairs stated that IBC will not be a “protective shield” against sectoral caps on investment under the Foreign Direct Investment (FDI) Policy. Thus, the government may have to approve bids by FIs to invest over 50% in these strategic businesses. The procedures for processing an FDI proposal have streamlined the approval process. Nonetheless, it may still take at least ten to twelve weeks. This may be too long to complement the IBC process. Lawmakers should consider integrating timelines for obtaining FDI approvals into IBC processes as they did with the approval timetables of the Competition Commission of India in the June 2018 amendments to IBC. Consideration of FDI proposals may include factors such as investment size and timing of payments, and the approval process may start only once a bid has been accepted by creditors. It should ideally run parallel to National Company Law Tribunal’s approval process. There are also sectoral conditions under the FDI policy to consider, such as the lock-in of FIs, local procurement obligations and minimum production obligations. These may have to be relaxed for foreign bidders to make competitive bids.

Amritha KumarAssociateL&L Partners
Amritha Kumar
L&L Partners

Resolution processes primarily involve capital and debt restructuring. FIs and lenders may face restrictions under the Foreign Exchange Management Act, 1999 (FEMA). On the capital side, the securities regulator has liberalized share pricing norms otherwise applicable to acquirers in a listed company. Reserve Bank of India pricing guidelines, however, continue to hinder FIs. Securities and Exchange Board of India’s pricing exemptions mean that, while non-resident acquirers may have flexibility in pricing acquisitions of listed companies under IBC, non-resident investors in unlisted companies may have to pay assessed fair value. Important opportunities, especially for institutional FIs under IBC framework lie in assisting Indian partners to finance acquisitions, particularly when incumbent promoters are required to discharge bank debt before reacquiring their assets. FIs may require more flexibility with transaction structuring than in traditional acquisition deals, given the complexity involved in stressed assets. Overseas investors may be constrained by restrictions on indemnity, deferred consideration and exit pricing under FEMA, when allying with local bidders or incumbent promoters.

Restrictions on external commercial borrowings (ECB) under FEMA also raise challenges in IBC restructuring processes. These apply in existing foreign debt of stressed borrowers, who face restrictions on repayment in advance of the minimum maturity period, as well raising new debt. New debt raisers are subject to many restrictions on the eligibility of lenders and borrowers, the cost of debt, the creation of security and end use. For example, foreign debt funds, significant sources of global funding in insolvency, often do not qualify as eligible lenders under ECB rules, thus barring local bidders from an attractive source of funding. Alternative sources of foreign funding such as structured debts and NCDs are also restricted, for example, by caps on aggregate amounts of debt.

Successful implementation of IBC will depend on India’s ability to attract foreign money to the stressed asset market. Global institutional funds are large and lawmakers may have to reform foreign exchange laws to ensure that investors have access to such capital. FEMA should run alongside IBC and its administrators should have power to complete the approval processes in an integrated fashion with IBC timelines.

Apurva Jayant is a partner and Amritha Kumar is an associate at L&L Partners. The views expressed are personal and intended for general information purposes. They are not a substitute for legal advice.

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