FPIs set to seek clarity from RBI, Sebi on debt default resolution

Foreign portfolio investors (FPIs) are likely to seek clarity from the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (Sebi) on the recourse available to them in case of defaults in their corporate debt portfolio.
 
This comes after the central bank hiked the short-term investment limit for FPIs in both corporate and government debt, last week, to 30 per cent from 20 per cent.
 
FPIs do not come under the RBI’s June 7 circular on stressed asset resolution, which covers banks, term-financial institutions, small finance banks, and non-banking financial companies (be they deposit taking entities or otherwise). Thus, FPIs can’t be a part of the inter-creditor agreement (ICA), which is the first step towards finding a resolution under the June 7 circular before a company is referred to the National Company Law Tribunal (NCLT).
 
“We may now have a situation where, in the case of a default, FPIs and other secured lenders pull in different directions. We saw this happening after the default on Dewan Housing Finance (DHFL) debentures with mutual funds (MFs) and banks taking opposing views,” said an investment banker.
 
“It is one thing to say that FPIs had never sought clarity on the resolution route available to them earlier, another that you are now not to have recourse under the June 7 circular, which was not part of the equation. And that leaves only the NCLT as an option,” said a top corporate lawyer.
 
ICA did not initially offer a seat to MFs, even as some indicated that they may back a resolution proposal put forward by banks for DHFL. Later, Sebi said MFs could be part of an ICA after they had carved out the stressed portion. This also takes care of Sebi’s stance that MFs are not to enter into “standstill” agreement with promoters of stressed groups, giving them extended timelines to repay their debt.
 
A way out for FPIs is to be part of the ICA through the debenture trustee. This was first seen in the DHFL case, where Catalyst Trusteeship – the debenture trustee – sought the nod of retail investors to take a stand on the ICA.
 
FPIs are set to follow in the footsteps of offshore lenders, who as a class are also not part of the ICA at present. “This can become an issue if a company wants to source external borrowings, and this risk will get priced into the loan,” said a banker, hinting, in effect, that FPIs may seek a higher coupon rate on debentures, or alternatively even see special covenants be written in to protect their interests. 
 
The development comes even as regulatory circles are abuzz with speculation that RBI, Sebi, Insurance Regulatory and Development Authority of India, and Pension Fund Regulatory and Development Authority may work together to fine-tune ICA so that all financiers are on the same page.