INTRODUCTION
Investment into companies is generally in the form of equity investment or debt investment.
Equity instruments provide the investor direct upside from the operations of the investee
company, along with substantial control rights. On the other hand, debt investments provide
investors downside protection, guaranteed returns and security against the sums advanced. In the
last couple of decades alternative means to bank lending also emerged to cover for the debt needs
of Indian companies. Another major change was that an investment into Indian companies that
was noticed was the use of hybrid instruments, merging the benefits of debt instruments as well
as of equity instruments1.
The Indian central bank, the Reserve Bank of India has undertaken stern measures in the last 2
years to clean up the non-performing assets in India. In the backdrop of these measures, banking
institutions in India have been more cautious in lending to companies. Further, a few banks have
been put under RBI’s Prompt Corrective Action (PCA) plan, thereby restricting the ability of
these banks to lend.
With banks facing constraints on lending, Indian companies have been looking at alternative
modes of funding Private debt funds have seen a substantial rise in the Indian debt scenario due
to increasing opportunities. The emergence of these debt platforms can also be attributed to the
enactment of the Insolvency and Bankruptcy Code, 2016 in India, which provided creditors with
substantial powers enabling them to ensure that the promoters of the Indian companies do not go
rogue. The changing dynamics of the Indian regulatory framework has also resulted in debt
funds / investors being compelled to look at various structures for debt investments into India.
Some of these regulatory requirements include minimum residual maturity for corporate bonds
issued to foreign portfolio investors, concentration norms for foreign portfolio investors
investing into Indian corporate bonds, thin capitalization norms for Indian corporate,
applicability of the International Financial Reporting Standards (IFRS) for Indian companies and
enactment of the General Anti-Avoidance Rules under the Indian tax regime.
DEBT FUNDING OPTIONS:
1 Payal Ghose and Aparna Raja,
Changing Dynamics of Debt Funding in India, Economic Research and Surveillance Department, CCIL
[Link]
The Indian regulatory framework provides options for both onshore and offshore debt funding
for Indian companies. The offshore funding routes are generally highly regulated and need to
comply with a number of conditions provided under Foreign Exchange Management Act, 1999
(“FEMA”). Onshore lending generally does not require compliance with FEMA, and is generally
less regulated.
INVESTMENT INSTRUMENTS
Debt Investment in India can be made by way of various instruments, such as:
⮚ Non-Convertible Debentures (“NCDs”) are debt instruments which cannot be converted
into equity shares of a company. Return on NCDs is by way of interest that is payable on
them and upside on sale or extinguishment. They are regarded as corporate debt and will
accordingly be subjected to the overall corporate debt auction limits of India. Investment
in NCDs can be made under the FPI Route or by an FVCI.
⮚ Compulsorily Convertible Debentures (“CCDs”) or Compulsorily Convertible
Preference Shares (“CCPS”) are instruments which mandatorily convert into equity
shares of the issuing company on the conditions decided mutually at the time of issuance
of the instruments. CCDs generally have a lower rate of interest than NCDs. CCDs are
considered as capital instruments and investment in CCDs may be made under the FDI
route.
⮚ Optionally Convertible Debentures (“OCDs”) are instruments that may be converted to
equity shares of a company but such conversion is not mandatory. Investment in OCDs
may be made under the FVCI route.
⮚ Rupee Denominated Bonds (“RDBs”) are bonds issued by corporate outside India but
are denominated in Indian Rupees. These bonds are generally priced at 450 basis points
over the prevailing government security rate. These bonds are governed by the directions
issued by Reserve Bank of India (“RBI”) from time to time.
⮚ Security Receipts (“SRs”) are instruments issued by ARCs in exchange for non-
performing assets acquired by them2.
INVESTMENT ROUTES
⮚ Foreign Direct Investment (“FDI”) is investment through capital instruments such as
equity, CCD and CCPS.
2 Debt Funding in India, Nishith Desai Associates, available at, [Link] last visited on 8 April,
2019
⮚ Foreign Portfolio Investment is investment by a person registered with the Securities and
Exchange Board of India (“SEBI”) as a Foreign Portfolio Investor (“FPI”) and is
investing in instruments such as NCDs of an Indian company, units of domestic mutual
funds, SRs issued by asset reconstruction companies etc.; or (ii) investment by a person
resident outside India through less than 10% of capital instruments of listed Indian
company.
