INDIA Law and Practice Contributed by: Divyanshu Pandey, Utsav Johri, Sucheta Bhattacharya and Nishal Makharia, JSA Advocates & Solicitors
due to the failure of some large NBFCs, pri - vate credit funds have become major players in financing acquisitions in the last 12 months. 1.4 Challenges The private credit market in India is currently in its evolutionary stage. The market has witnessed significant growth in recent years, with invest - ments reaching an all-time high in the first half of 2024. In recent times, with the influx of local wealth funds, increased retail investor participation in the equity market and the Securities Exchange Board of India (SEBI) allowing for small and medium enterprises listings, a substantial num - ber 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 the investment ability of the AIFs. 1.5 Junior and Hybrid Capital The Indian debt market is focused predomi - nantly on senior or pari passu debt instruments. Typically, senior debt is funded by the lenders, and subordinated debt and equity infusion is provided by the sponsor/promoter. However, junior and hybrid investments are made by pri - vate credit funds where required. Private credit funds have also deployed funds in convertible instruments, quasi-equity instru - ments and warrants alongside debt instruments issued by the borrowers.
Investments by foreign investors or foreign sponsored AIFs in quasi-equity instruments like warrants and equity instruments are regulated by the Indian foreign exchange laws, which are prescriptive. 1.6 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 restrict 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. Pri - vate credit deals are more prevalent for funding growth capital, acquisitions, high-risk sectors, special situations and start-ups. Therefore, in India, private credit providers do not focus pri - marily on companies with private equity spon - sors and their portfolio companies. International and domestic private credit funds have also participated in the acquisition of com - panies undergoing insolvency resolution pro - cesses, where the actual returns are dependent on the turnaround of the asset. However, itis less common for companies requiring long-term debt to avail funding from private credit funds. 1.7 Recurring Revenue Deals and Late- Stage Lending Recurring revenue financing, which is based on the borrower’s recurring revenue rather than earnings before interest, taxes, depreciation and amortisation (EBITDA), has not been predomi - nant. Recurring revenue financing in the form of dis - counting transactions and loans against sched - uled revenues has been used by companies with stable revenues. There are certain private credit funds that provide funding to these companies.
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