INDIA Trends and Developments Contributed by: Tirthankar Datta, JSA Advocates & Solicitors
equity capital markets have also seen frothy peaks, resulting in one of the strongest IPO mar - kets in decades. Motivated by examples of mul - ti-bagger exits, India continues to attract global private equity fund houses, which have made sizeable investments in information technology, healthcare and infrastructure companies. A few such prominent international alternative asset managers are the largest commercial office space owners in India by square footage. In the last few years, the balance sheets of India’s banks have been plagued by non-per - forming assets. In fact, 12 of the largest bad loan accounts – termed as the “dirty dozen” – were mandated into insolvency to showcase the credit-in-possession regime under India’s re- imagined new Insolvency and Bankruptcy Code, 2016 (IBC). While the banks were busy cleaning up their balance sheets, a structural opportunity presented itself for private credit in India. Banks have recently cleaned up their balance sheets by selling loans to asset reconstruction companies and the National Asset Reconstruc - tion Company Limited (NARCL), an Indian gov - ernment-formed “bad bank” -set up to clean up large stressed accounts in the Indian banking system, and also resolved through IBC. Since then, India’s banking sector has seen a robust credit growth of 16.1% year-on-year according to RBI’s Financial Stability Report. The health of the credit sector is evidenced by stable asset quality and high capital buffers, especially in retail lending. The gross NPA ratio of banks has also dropped to 2.8%. AIFs Many existing NBFC lenders were refinancing their stressed exposure through NCDs sub - scribed by newly formed AIFs, whose junior
tranche of units were subscribed to the NBFC and a senior lender investing in a senior tranche of AIF units. When the regulators became aware of this structure, it was seen as a means of ever - greening stressed assets and a sidestep to regu - lations on provisioning for bad assets. Accord - ingly, in 2023 RBI issued a circular restricting regulated entities from investing in units of AIFs that have direct or indirect investments in a debtor company of the entity. However, due to industry representations on the ramifications for the genuine investments of many regulated enti - ties in funds being called into question, in 2024 the RBI clarified certain aspects to mitigate the effects. It is also pertinent to note that AIFs are not permitted to leverage under the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 (SEBI AIF Regula - tions). Such a restriction on leverage has been interpreted in a recent order against a fund house permitting share pledges. Since industry repre - sentations were made to the regulator that the credit for project financings is largely predicated on share pledge security, the SEBI AIF Regula - tions were amended in 2024 to permit encum - brance on equity investments in infrastructure companies for the purpose of borrowing by the investee company, subject to certain conditions. AIFs set up at the International Financial Servic - es Centre (IFSC) at GIFT City, Gujarat, have per - mitted AIFs set up under a special IFSC regime to leverage. There is significant traction in GIFT City funds raising foreign currency leverage. Challenges in enforcement The high number of pending cases in Indian courts and tribunals makes recovery actions and the enforcement of security interest challenging. The Securitisation and Reconstruction of Finan - cial Assets and Enforcement of Security Act,
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