[Utkarsh Jhingan is a fourth year BA LLB (Hons.) student and Rakshit Raj Singh a third year BA LLB (Hons.) student at NUALS, Kochi]
India’s corporate sector debt has become a cause for concern as the mounting debts of major companies are at an unsustainable level. In recent years some of the companies have been entangled in a debt trap as their debt payment requirements have grown at a higher pace compared to their sales and profits leading to their inability to service debts. In the last decade or so, External Commercial Borrowings (“ECB”) have emerged as a major source of funds for the corporate sector.
The Reserve Bank of India (“RBI”) issued a notification on 7 February 2019 (“Notification”) to relax the restrictions on ECB. This comes in the wake of observations made by the Allahabad High court in Independent Power Producers Association of India & Ors. Vs. Union of India & Ors. and the Supreme Court in Arcelor Mittal India Private Ltd. Vs. Satish Kumar Gupta & Ors. In these cases, the courts had resorted to the view that the primary objective of Insolvency and Bankruptcy Code, 2016 (“IBC”) was time bound resolution of the stressed assets of a corporate debtor and that all possible efforts shall be made to preserve the corporate existence of a corporate debtor on a going concern basis.
Prior to this circular, the RBI had issued a revised ECB Framework notification on 16 January 2019 (“New ECB Framework”), which sought to refurbish the existing regime on ECBs. The move witnessed a merger of various routes for raising ECBs and also substantially relaxed the provisions for eligible borrowers and recognized lenders. In a bid to expedite the corporate insolvency resolution process and to enhance the efficacy and accountability of India on the ease of doing the business front, the RBI, in consultation with the government has decided to relax the restrictions on ECB.
Clause 3 of the Notification states:
On a review it has been decided, in consultation with the Government of India, to relax the end-use restrictions for resolution applicants under the Corporate Insolvency Resolution Process (CIRP) and allow them to raise ECBs from the recognised lenders, except the branches/ overseas subsidiaries of Indian banks, for repayment of Rupee term loans of the target company under the approval route. Accordingly, the resolution applicants, who are otherwise eligible borrowers, can forward such proposals to raise ECBs, through their AD bank, to Foreign Exchange Department, Central Office, Mumbai of the Reserve Bank for approval.
Furthermore, only companies under IBC will come within the ambit of the Notification and the relaxation will not be provided to companies in the pre- IBC scenario. For instance, companies availing ECB funds for one time settlement to domestic lenders will be excluded. Moreover, such ECBs will be bound by hedging costs, pricing norms etc.
Henceforth, that the new policy is reflective of the aforementioned judicial decisions has facilitated an additional outlet to the corporate debtors under IBC, wherein they can now raise loans from offshore recognized lenders, except the overseas branches and subsidiaries of Indian banks, to repay their outstanding payment obligations within the domestic confines of India.
Analysis
The Sahoo Committee Report of 2015 pointed out that the:
extant framework is complex, prescriptive, discretionary and not neutral and has outlived its utility. The regulations lack clear legal and economic principles relevant today. Lack of predictability of regulations and ceilings on ECB makes it hard for corporations to plan to borrow, and even to service old loans that need to be refinanced. This creates added uncertainty and risk, and drives up the cost of financing.”
The New ECB Policy and the Notification are another step forward to deal with the issues pointed out by the Sahoo Committee.
The relaxation provided by the RBI for raising funds through the ECB route has a basic aim to provide the lenders under the IBC with cheap foreign capital that will make the resolution process cost effective. The banks in India (inclusive of foreign branches and overseas subsidiaries) are not allowed to provide finance for acquisition and the other sources (finance companies) available are very costly. Furthermore, financial distress in the banking sector has constrained credit to corporates, and the exchange rate depreciation in India has subsequently accelerated defaults under the corporate sector. Conversely, the effect of certain policies, motivated by the objective of maintaining the nominal exchange rate, has reduced the debt servicing capacity in India. Hence, utilizing the international resources which are cheaper, experienced and have the ability to take such risks would be beneficial for the lenders.
The liberalized way of funding provided under the notification will help the applicants to facilitate a turnaround rapidly. Furthermore, the RBI has brought in this notification when several cases like Essar Steel, Bhushan Power and Steel are at various stages of a resolution under the IBC.
The RBI report on trends and progress of banking in India for 2017-18 clearly shows that the lenders recover 49.6 percent of their claims under IBC. The haircuts provided under the insolvency regime of other foreign countries are very less as compared to India. The new notification will help and reduce the haircuts given to the banks, as the ECB route for raising funds will put the bidders in a position to bid aggressively for stressed assets so that they can bring back the capital and other resources.
Conclusion
Overall, the decision of the RBI to ease the end use limitations of ECB receipts in order to allow the companies to raise overseas endowments via the approval route from all eligible lenders except the subsidiaries and branches of Indian banks is a welcome move in the field of corporate debt restructuring and insolvency regime. This will serve a twofold purpose. First, this will result in a spurt of interest especially from the foreign distressed assets investors who typically finance high yield debts and hence India would be a lucrative option for them to venture in. Second, the resolution applicants in India will gain access to cost effective ECB funds with a comparatively low rate of interest, to refinance their outstanding domestic debts.
However, the effects of the aforementioned relaxations are still subject to the guidelines which are yet to be released by the RBI. Pertinent questions like whether the current pricing cap on ECB loans is also relaxed for the distressed companies and if relaxation up to a certain amount can be made through the automatic route as the existing mandatory approval route is more time consuming and lacks certainty and finality are yet to be addressed. Therefore, the proposed RBI guidelines which are to be released soon may shape the future of debt financing and restructuring model in India.
– Utkarsh Jhingan & Rakshit Raj Singh