RBI permits IBC bidders to raise funds via ECBs to repay existing lenders

The Reserve Bank of India on Thursday permitted bidders for insolvent companies to raise funds through external commercial borrowings (ECBs) to repay existing lenders. The access to relatively cheap foreign capital would aid early resolutions and also make the process cost efficient, bankers and legal experts said. According to existing norms, the proceeds of ECBs, in either foreign currency or Indian rupee denominations, are not permitted to be utilised for repayment or for on-lending for repayment of domestic rupee loans.

The resolution applicants under Corporate Insolvency Resolution Process (CIRP), under the Insolvency and Bankruptcy Code (IBC), may find it attractive to borrow abroad to repay lenders.

"It is proposed to relax the end-use restrictions under the approval route of the ECB framework for resolution applicants under CIRP and allow them to utilise the ECB proceeds for repayment of rupee term loans of the target company," the RBI said.

SBI Chairman Rajnish Kumar said opening up the ECB route for applicants under the IBC could facilitate a faster turnaround.

According to rating agency ICRA, the timely conclusion of CIRPs of pending entities could have brought in additional Rs 65,000-67,000 crore to the financial creditors, which is equivalent to about 6.5 per cent of the gross non-performing assets in the banking sector. “This is a sizeable figure when we consider that the 79 corporate resolutions that have yielded a resolution plan so far have helped the financial creditors realise an aggregate amount close to Rs 65,000 crore, to be received either upfront or in a staggered manner,” ICRA said.

Internationally, there is a big mature market for funding distressed assets. Many global banks with huge fund base have appetite for such opportunities. ECBs are cheap funds for bidders even when they have to hedge for foreign exchange risks.Banks within the country are barred from providing acquisition finance. Foreign branches and overseas subsidiaries of Indian banks are prohibited to extend ECB money for bidders for insolvency activity in India.

There are few domestic resources (from finance companies) available to fund big and medium size (by outstanding debt) buys. And, what is available is costly.  

RBI Governor Shaktikanta Das, while addressing the media on Thursday, said resolutions under IBC is done by the National Company Law Tribunal (NCLT). "Our decision gives no room to fly-by-night operators to bring in money just for the sake of bringing in money. There are other openings of bringing in money, we have the ECB route, we have the FPI (foreign portfolio investor) route," Das said.

It's a well-regulated process and only those companies that have been identified under the resolution process would be able to tap this route, he said.

The RBI said guidelines in this regard would be issued by the end of February.