RBI allows foreign investors to buy bonds in distress

The Reserve Bank of India (RBI) has allowed foreign portfolio investors to buy corporate bonds that are in default, either fully or partly, in the repayment of principal on maturity or principal installment in the case of amortising bond.

The issuer will have to restructure the bond to comply with the minimum maturity tenure, as foreigners are not allowed to buy corporate bonds of below three years, the RBI said. Reuters

The revised maturity period of such NCDs/bonds, restructured based on negotiations with the issuing Indian company, should be three years or more, RBI said in a notification issued today.

The FPI which propose to acquire such NCDs/bonds under default should disclose to the debenture trustees the terms of their offer to the existing debenture holders / beneficial owners from whom they are acquiring. Such investment should be within the overall limit prescribed for corporate debt from time to time (currently Rs244,323 crore). All other existing conditions for investment by FPIs in the debt market remain unchanged, RBI said.

The RBI move is a potential boost to the country's nascent distressed debt market.

India is struggling to clean up corporate balance sheets after years of expansion were followed by a sharp slowdown in growth. Companies are wrestling with more than $640 billion of debt, or more than 40 per cent of India's gross domestic product, and a sluggish recovery means they struggle to repay.

The result has been a bad debt pile of more than $50 billion in the country's banks and a rise in bond defaults.

Indian companies typically rely on bank loans for financing, but rupee bond issuance has jumped in 2015.

India is trying to foster a distressed debt market, and is currently pushing through its first ever unified bankruptcy code, a change which should clear up and speed up both liquidation and restructuring.