Forex rules hinder foreign participation in debt unwind

“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.

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.

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.