INDIA Law and Practice Contributed by: Anish Mashruwala, Utsav Johri, Megha Upadhyaya and Sahil Unadkat, JSA
can be used for equity investments. However, the proceeds of unlisted NCDs cannot be used for capital market investments. Further, the pro- ceeds of a public issuance of listed NCDs can- not be used for the acquisition of shares of any person who is part of the same group or under the same management. Generally, NCDs must have a minimum maturity or duration of one year at the time of investment by the FPI. Any investment by an FPI in NCDs will need to comply with the concentration lim- its and single or group investor-wise limit pre- scribed by the RBI. It should be noted that: • investment by any FPI, including investments by related FPIs, shall not exceed 50% of any issuance of NCDs; • if an FPI, including related FPIs, has invested in more than 50% of any single issue, it can- not make further investments in that issue until this requirement is met; and • FPIs cannot invest in partly paid NCDs. The RBI has also provided a separate channel, called the Voluntary Retention Route (VRR), to enable FPIs to invest in NCDs. The investments through the VRR are free of the macro-pruden- tial and other regulatory norms applicable to FPI investments in debt markets, provided that FPIs voluntarily commit to retaining a required mini- mum percentage of their investments in India for a specified period. If the FPI invests in the NCDs under the VRR, the minimum average maturity, single-borrower limits and concentration norms do not apply to those NCD investments. Further, NCDs are required to have a minimum maturity of 90 days. However, if NCDs are issued with a maturity of less than one year, they are regulated by guidelines issued by the RBI in this regard (the “RBI NCD Guidelines” ). The RBI
NCD Guidelines prescribe stringent guidelines for such issuances, including a minimum rating requirement of “A3” as per the rating symbol and definition prescribed by the SEBI and specific eligibility requirements for the issuer. The NCD route offers greater flexibility on pay- ment of interest to NCD holders, as there are no interest rate caps for privately placed NCDs. However, no call or put option can be exercised in relation to privately placed, listed NCDs prior to the expiry of 12 months from the date of their issuance. Further, under the ECB Guidelines, eligible bor- rowers who are participating in the corporate insolvency resolution process (CIRP) under the IBC as resolution applicants can raise ECB from all recognised lenders, except foreign branches or subsidiaries of Indian banks, for repayment of rupee term loans of the target company, with the prior approval of the RBI. 3.2 Mezzanine/Payment-in-Kind (PIK) Loans While payment-in-kind (PIK) loans are not very popular in India, where the borrower is an Indian acquirer, PIK loans are generally structured by way of NCDs. Loans from NBFCs can also be in the form of PIK loans. Since the RBI requires banks to charge interest monthly, Indian banks cannot extend PIK loans. However, there have been PIK structures where the borrower was an entity incorporated outside India. Mezzanine finance is generally raised in the form of: • compulsorily convertible preference shares; • optionally or partially convertible preference shares; • compulsorily convertible debentures; or
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