INDIA Law and Practice Contributed by: Utsav Johri, Sucheta Bhattacharya and Nishal Makharia, JSA Advocates & Solicitors
debentures (NCDs) in the debt market. The investors in such NCDs can be foreign portfolio investors (FPIs), mutual funds or alternative investment funds (AIFs). The RBI has recently permitted Indian banks to finance the acquisition of equity shares, subject to the fulfilment of the RBI’s regulatory requirements. Upon the latest guidelines coming into effect, acquisition finance from banks will only be available to a limited set of borrowers having a minimum net worth of INR5 billion and profits after tax for the last three consecu - tive financial years. In the case of unlisted compa - nies, the borrowers will also be required to have a minimum investment-grade credit rating of BBB- (or above) from a recognised credit rating agency. It is anticipated that acquisition financings will also see increased participation from Indian banks. Domestic acquisition finance was previously domi - nated significantly by NBFCs. However, the arbitrage enjoyed by NBFCs has reduced drastically and, due to the failure of some large NBFCs, private credit funds have become major players in financing acquisitions. 1.4 Challenges The private credit market in India is currently in its evolutionary stage. As mentioned in 1.1 Private Credit Market , the market has witnessed significant growth in recent years, with investments reaching an all-time high in the first half of 2025. In recent times, with the influx of local wealth funds and increased retail investor participation in the equi - ty market, a substantial number of companies have raised money by going public rather than availing debt. Furthermore, private credit players that are organised as AIFs in India have to comply with exposure and concentration norms. Some funds are also restricted by their fund documents and investment strategies to invest in certain sectors. Such restrictions limit AIFs’ investment ability. In accordance with the recent liberalisation by the RBI, Indian banks will be permitted to finance up to 75% of the acquisition value, with the balance required to be funded by the acquirer through equity contributions or
internal accruals, thereby ensuring adequate promoter commitment. The acquiring entity is also required to maintain a maximum consolidated debt-to-equity ratio of 3:1 on an ongoing basis, such that total borrowings do not exceed three times the equity base. In addi - tion, these facilities typically require corporate guar - antees from the acquirer group and security over the shares of the acquired target. Related party acquisi - tions remain excluded from bank financing, reflecting a continued emphasis on prudential safeguards. Any financing by banks will be subject to such limitations. For the private credit market to remain resilient, it is essential for private credit providers to undertake proper risk assessment for their investments. Along - side commercial considerations such as portfolio diversification and ongoing evaluation of the bor - rower’s credit profile and cash flows, equal emphasis must be placed on identifying and managing legal and regulatory risks, which require careful and proactive attention. 1.5 Sponsored/Non-Sponsored Debt Private credit solutions gained traction in the Indian market due to financial difficulties faced by NBFCs and situations where the end use of funds restricts bank funding. They also gained momentum as new age companies – which did not want to dilute equity – were able to access private credit funds, albeit at a higher cost. Private credit deals are more prevalent for funding growth capital, acquisitions, high-risk sectors, special situations, minority acquisitions and start- ups. Therefore, in India, private credit providers do not focus primarily on companies with private equity sponsors and their portfolio companies. International and domestic private credit funds have also participated in the acquisition of companies undergoing insolvency resolution processes, where the actual returns are dependent on the turnaround of the asset. However, it is less common for companies requiring long-term debt to avail funding from private credit funds. 1.6 Recurring Revenue Deals and Late-Stage Lending Recurring revenue financing, which is based on the borrower’s recurring revenue rather than earnings
103 CHAMBERS.COM
Powered by FlippingBook