Banking and Finance

The last quarter saw the introduction of certain new regulations by the RBI geared towards development of the securitisation market in India and by the SEBI to boost corporate debt markets. There was also traction in the insolvency resolution space with some notable judicial pronouncements.

Ameya KhadgePartner

Okram SinghaCounsel

Coming straight out of the second wave of the Covid-19 pandemic, debt markets saw a much-needed increase in activity, triggered mostly by an urgent necessity to boost businesses. While banks and financial institutions got the shorter end of the stick as far as relief measures by the Reserve Bank of India (RBI) during the pandemic were concerned, it was a big relief for most borrowers who have been dealing with ebbing cashflows and stalled projects. The regulators on their part have been quite active, with the RBI overhauling the framework for sale of loan exposures and securitisation of standard assets. The Securities Exchange Board of India (SEBI) also revamped the regulations governing the issuance of listed debt securities to provide greater flexibility to the issuers. On the insolvency front, the introduction of pre-packaged insolvency resolution process (PPIRP) under the Insolvency and Bankruptcy Code, 2016 (IBC) to deal with distressed micro, small or medium enterprises (MSMEs) underscores the government’s attempt to make the resolution process of businesses quicker and more efficient. On the judicial front, we saw several notable judgments under the IBC.

Key Developments

  • Pre-packaged insolvency

    To add to the existing regime of corporate insolvency resolution under the IBC, PPIRP was introduced to deal with distressed businesses in the MSME sector. It appears that law makers are looking to test the waters by introducing this regime for MSMEs initially. Under the PPIRP, debtors have the onus and responsibility to prepare the plan and negotiate with the creditors and agree on a resolution plan prior to approaching the National Company Law Tribunal (NCLT) for their consent to initiate the process. While the PPIRP has not gained significant traction as yet, we expect it to become a relevant tool and, if successful in the case of MSMEs, it could set the path for a similar regime for insolvency resolution of bigger corporate entities.

  • The SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021

    SEBI introduced the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 (NCS Regulations), which came into effect from 16 August 2021, with an intent to encourage greater participation in the listed corporate debt markets. Some of the key highlights of the NCS Regulations are:

    • Indian companies which have been in existence for less than 3 years are now permitted to raise debt through listing of debt securities on a private placement basis.
    • The period for exercise of call and put options has been reduced to 12 months from 24 months for public issue of debt securities. This is now applicable to listed debt securities issued on a private placement basis as well. Previously, in case of private placement of listed debt securities, the call and put options were entirely guided by the terms of the issuance.
    • Companies intending to list their debt securities must provide financial statements that are not less than 6 months old. Further, recent amendments to the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 mandate companies with listed debt securities to disclose their financial statements on a quarterly basis to the stock exchange.
    • Electronic debt bidding platform is mandatory for issuance of eligible listed securities amounting to INR 1 billion or above in a financial year.
    • Issuers are permitted to file shelf prospectus post curing a payment default of interest/dividend/redemption amount, which should act as an incentive for more issuers to access the debt market for raising of funds.

    Some of these changes have increased the level of compliance and disclosures in relation to issuance of listed debt securities and have brought them on a similar footing as listed equity shares, which may act as a hindrance to companies that are considering issuances of listed debt securities.

  • Master Direction – Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021

    The RBI notified the Master Direction on Transfer of Loan Exposures, 2021 (Master Directions on Loan Transfer) on 24 September 2021, which is a unified framework for the sale of loan exposures by banks and other financial institutions. The Master Directions on Loan Transfer specify that lenders can now undertake loan transfers only in the manner permitted and prescribed under the Master Directions on Loan Transfer and the provisions of RBI (Securitisation of Standard Assets) Directions, 2021 (discussed below), thus prohibiting any loan transfers outside the purview of the directions issued by the RBI. Further, in the past, syndication of loans between banks/NBFCs have been typically excluded from regulations relating to transfer of loan exposures. However, under the Master Directions on Loan Transfer, specific provisions regulating the assignment, novation and loan participation activities have been included. Banks and financial institutions are observing this space closely and we are yet to see how this plays out.

  • Master Direction – Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021

    The RBI notified the Master Direction – Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021 (Master Directions on Securitisation) on 24 September 2021. This follows the draft guidelines that were issued in June 2020. The rebooting of the regulations governing securitisation in India was much needed as the erstwhile regulations had become outdated. Some of the key highlights of the Master Directions on Securitisation are:

    • The restriction on securitisation of purchased loans has been removed, subject to a minimum holding period requirement (which is the period for which an originator must have the loan on its books before transferring it) of 6 months.
    • For other cases, the minimum holding period has been reduced to 6 months for loans with tenor of more than 2 years and 3 months for loans with tenor of up to 2 years.
    • The minimum risk retention requirement (which is the minimum percentage of interest which the originator of securitisation transaction is required to retain in the securitised assets to ensure its skin in the game) for residential mortgage-backed transactions has been reduced to 5% of the book value of the loans being securitised.
    • A minimum ticket size of INR 10 million has been stipulated for issuance of securitisation notes.
    • If securitisation notes are offered to 50 or more persons, it will be mandatory to list the securitisation notes.
    • While overcollateralisation continues to be counted towards the minimum retention requirement, it will no longer be an accepted form of first loss facility (which is the first level of financial support provided by the originator against the risk associated with the assets in the securitisation pool), even though strictly speaking it is a financial support being provided by the originator.
  • Housing Finance Companies to have recourse under the SARFAESI Act

    To provide more teeth to housing finance companies dealing with rising defaults in the real estate sector, the RBI on 25 August 2021 notified that all housing finance companies having assets worth INR 1 billion or above are financial institutions as recognised under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. This provides such housing finance companies access to a more robust and effective legal regime for enforcement of security.

  • Some relevant developments under IBC

    This quarter saw some important developments in the jurisprudence of insolvency framework in India. In the case of Ebix Singapore Private Limited, the Supreme Court held that once a resolution plan has been submitted, it cannot be withdrawn or modified except in the manner as permitted under the IBBI (Insolvency Process for Corporate Persons) Regulations, 2016. This judgement should bring in a greater sense of discipline among the lenders and resolution applicants alike in formulating resolution plans.

    Further in the case of Lalit Kumar Jain, the Supreme Court confirmed that approval of a resolution plan does not discharge a personal guarantor (of a corporate debtor) of their liabilities under the contract of guarantee. Similarly, in the case of Insta Capital Private Limited, the NCLT stated that a financial creditor cannot initiate insolvency resolution proceedings against a personal guarantor under the IBC in the absence of any corporate insolvency resolution process or liquidation process against the corporate debtor. Given the substantial number of corporate debts that are backed by personal guarantees from promoters, these judgments could have a significant impact on the recovery efforts by the financial institutions and insolvency proceedings in future.

The ensuing quarter will be an interesting period from a banking perspective as businesses relook at cashflows. With the rollback of some pandemic related operational and financial flexibilities, businesses could potentially be faced with a challenging period and we may see increased restructuring activity, especially in sectors which have been the most affected by the pandemic – such as real estate, hospitality, and automobiles. The pandemic has also deepened the cracks in an already ailing aviation sector and it is yet to be seen how airline companies restructure themselves to recover. The recent news of acquisition of Air India by the Tata group may be seen as a silver lining and could be a sign of better times to come for the industry. With the NCLT having admitted the insolvency applications of the RBI against SREI Infrastructure Finance Limited and SREI Equipment Finance Limited, it will be interesting to see how insolvency proceedings of another major financial entity plays out and whether it follows the same path as the insolvency of DHFL.

More in this issue