Since the Insolvency and the Bankruptcy Code was promulgated in 2016, there has been an enormous push from the legislature, government, the judiciary and the Reserve Bank of India to resolve stressed assets in a time-bound fashion.
Making long-term and cost-effective capital available to prospective bidders or resolution applicants (RAs) is fundamental for the success of the corporate insolvency resolution process (CIRP). Recognising this need, the RBI amended the regime on external commercial borrowings (ECBs) on February 7, 2019, and allowed RAs to borrow ECBs from recognised lenders (other than the branches or overseas subsidiaries of Indian banks) for repayment of rupee term loans of a corporate debtor under CIRP.
Such ECBs can be raised with the prior approval of the RBI. This relaxation follows the liberalisation made in January when the RBI significantly expanded the pool of recognised lenders and eligible borrowers under its new ECB framework . This amendment is opportune as there are over 900 companies undergoing CIRP under India’s toddler insolvency law.
The amendment, however, does throw up some ambiguities, which need to be quickly addressed to ensure that it can be efficacious. Since an ECB can be raised for this purpose only with prior RBI approval, it will help to iron out the ambiguities set out below to offer greater clarity on the RBI’s scrutiny process.
Firstly, we need to examine the end-use in the context of the new ECB framework where ECBs cannot be used for equity investments, repayment of rupee loans or on-lending for any of these purposes. The only exception is repayment of rupee loans (or on-lending for such purpose) from an ECB taken from a foreign equity holder.
Repayment of debt
Given that the RBI has permitted RAs to tap ECBs to repay debt at the target level, it would be a reasonable assumption that any debt raised by the RA or any special purpose vehicle (SPV) of the RA can be infused as equity or debt into the corporate debtor to repay its rupee term loans. But a clarification on this would be helpful.
The new framework permits corporate debtors under CIRP to raise ECBs if they are specifically permitted under the resolution plan. However, it does not exempt such corporate debtor from the end-use restriction of using the ECB to repay rupee loans (unless the ECB is from a foreign equity holder). With the February 7 relaxation, we hope that RBI will permit corporate debtors to raise ECBs as part of the resolution plan for repayment of rupee loans.
Another structure that is often used by RAs is to acquire the existing rupee debt through a SPV rather than writing off some of the debt by the corporate debtor to avoid negative tax consequences. Further, this structure is also utilised where existing lenders wish to retain the right to proceed against guarantors and third-party security providers.
Acquisition of loans
The RBI’s circular currently deals with “repayment” but does not envisage an “acquisition” of the loans. Since its intention is to enable existing lenders being repaid in order to relieve their stress, pursuant to the new circular the RBI should also permit acquisition of existing debts by the RA which achieves the intended purpose.
Further, the type of debt that can be repaid also needs to be clarified. Since the circular uses the phrase rupee “term loans”, a question that needs to be answered is whether the ECB raised can be used to repay rupee denominated non-convertible debentures, working capital facilities and non-fund based facilities which have devolved. The circular needs to be construed widely by the RBI to provide the maximum benefit to all existing creditors.
While the current relaxation is a welcome move, the RBI could have also considered further revisions given the practical realities. It could have extended the policy for using ECBs to repay debt pursuant to a restructuring scheme under the RBI guidelines. It could also have permitted any person submitting a plan/scheme pursuant to Section 12A of the IBC to use an ECB for repayment of existing debts. ECBs could also have been allowed to repay operational debts as well as any prior debt availed of by the RA to repay debts under the CIRP.
Insolvency resolution is a time-bound process and creditors require evidence of genuine funding sources before any resolution plans are approved. The RBI’s approvals are discretionary, and the time that the regulator takes to revert with its decision will not stop the clock on the CIRP.
Therefore, the RBI ought to consider establishing an enabling framework permitting such ECBs under the automatic route so that there is greater deal certainty and, consequently, speedier resolution of stressed assets.
The authors are finance and restructuring partners at J Sagar Associates. Their views are personal.