Indian firms can borrow in rupees from foreign lenders
Rupee-denominated bonds will bear an interest rate commensurate with prevailing market conditions
Is it true that Indian companies are now permitted to borrow in rupees as part of their external commercial borrowing exercise? Has it already been permitted, and, if so, what are the conditions imposed by the government?
- P.K. Ramachandran, Dubai
Last month, the Reserve Bank of India had announced a set of guidelines to liberalise the external commercial borrowing norms which will be effective from April 1, 2016. Under these guidelines, Indian companies can raise rupee resources from overseas lenders. The rupee-denominated bonds will bear a rate of interest commensurate with prevailing market conditions.
It is expected that such rupee resources can be raised from sovereign wealth funds, pension funds and insurance companies. This will insulate Indian companies from foreign exchange volatility. As more such bonds are issued by reputed Indian companies, the rupee as a currency will become more international in character. Japanese retail investors have been found to be hugely interested in subscribing to these bonds.
Currently, Indian companies can raise loans in foreign exchange to the extent of $50 million with a minimum average maturity of three years. Where the external commercial borrowing is of more than $50 million, the minimum maturity period is five years.
Both my sons are currently in India preparing for their entrance exams, one for engineering and the other for management. They have both expressed the need to enroll in private coaching institutes. I do not know how reliable these institutes are and whether any steps are being taken to regulate these private entities.
- S.K. Mishra, Sharjah
At present, there is no regulatory authority to oversee the activities of private coaching institutions. However, they are flourishing in India as most students enroll in these institutes for scoring high marks, especially in entrance exams for technical and management institutions. A small city like Kota is well known in this regard as being a centre for many coaching institutes.
Recently, the Human Resource Development Ministry appointed a committee which has recommended that a regulatory body should be set up by the government to supervise and regulate private coaching institutions. According to a survey undertaken by a chamber of commerce, the size of the private coaching sector is estimated at around $24 billion which is likely to grow to $40 billion in the coming years.
Therefore, the committee has recommended that an all-India council be established to regulate coaching institutes to ensure best practices in education and regulation of fees. This recommendation is yet to be accepted and implemented by the government.
There are several companies in India which have issued bonds. Defaults have been made in repaying loans and meeting liabilities on maturity of the bonds. All over the world, there is a market in what are called distressed bonds or junk bonds. Some foreign companies may be interested in buying these bonds as well. Does the Indian government permit this?
- K.B. Menon, Doha
Foreign portfolio investors are now permitted to invest in bonds of companies which are in default, provided the residual maturity is of at least three years.
Therefore, foreign funds which are looking for distressed assets would be able to buy these bonds at a steep discount and hope that the companies would turn around or the sale of assets would give adequate returns.
Banks which are having non-performing assets are securitising them by issue of bonds which are picked up by asset reconstruction companies or by portfolio investors who specialise in distressed assets. Therefore, a ready market would now be available as the Reserve Bank has permitted foreign portfolio investors to invest in these bonds. However, the foreign portfolio investors can invest in these bonds subject to the overall corporate bond investment limit.
Can depository firms in India make a public offering of their shares? Is similar power given to stock exchanges? There is some confusion in this regard and, therefore, I need your clarification.
- D.C. Gupta, Abu Dhabi
The Securities & Exchange Board of India has now permitted depository firms as well as stock exchanges to make initial public offerings. However, more details are awaited in this regard. The listing of stock exchanges is expected to bring additional transparency to their working.
In case of stock exchanges, the combined shareholding of trading members, associates and brokers cannot exceed 49 per cent. Every shareholder will be required to declare his 'fit and proper' status at the time of the IPO. Investment limits will be monitored for single entities by the depositories. It is expected that more guidelines will be issued in due course to remove any anomalies.
The writer is a practising lawyer specialising in tax and exchange management laws of India.
Q: Does the Indian government permit foreign firms to buy junk bonds?
A: Foreign portfolio investors are now permitted to invest in bonds of companies which are in default, provided the residual maturity is of at least three years