India is implementing regulatory changes to tackle the credit crunch. How will the moves help cash-strapped corporations restructure their debt portfolios and access new sources of funding? Karan Singh and Ameya Khandge report

India escaped the worst of the Asian financial crisis in 1997. It was insulated from the fallout by its limited foreign currency exposure. The reverberations of the current financial crisis have hit the country much harder.

In 2007, India saw robust foreign capital inflows, both in foreign direct investment (FDI) and foreign currency borrowings. These inflows raised liquidity levels and caused the rupee to appreciate. The Reserve Bank of India (RBI) responded with measures to cool the economy and fight inflation, including a range of restrictions on the use of participatory notes. Measures were also taken to tighten inward investment through foreign currency borrowings: Ceilings on interest were introduced, rupee capital expenditure was removed from the automatic route for foreign investment and a US$20 million ceiling on such expenditure use was imposed. The use of proceeds for the development of integrated townships was also withdrawn around this time.

Normally, such measures would have had only a short-term impact, but the global financial meltdown changed that. One of the immediate consequences was a significant outflow of foreign investment from the Indian stock market.

By the middle of 2008 the government was reversing exchange control measures in a bid to boost FDI and tackle the liquidity crunch. Controls on external commercial borrowings (ECBs), for instance, were progressively lifted, as were regulations concerning security creation. Restrictions on the use of funds for rupee expenditure were relaxed and all-in-cost ceilings were substantially widened. More recently, the RBI went even further, relaxing borrowing norms and, for the first time, removing all-in-cost ceilings altogether under the approval route with the policy on this account subject to review in June 2009. Another temporary measure, permitted under the approval route and subject to review in June 2009, is the re-introduction of integrated township development as a permissible end use. In addition, non-banking financial companies (NBFCs) that are exclusively involved in financing the infrastructure sector are now permitted to tap ECBs from regional financial institutions and government-owned development financial institutions for on-lending to borrowers.

Restructuring foreign debt

The financial crisis has had a severe impact on companies seeking to raise foreign currency loans offshore. Indian companies had relatively easy access to cheap funds abroad before the curbs on ECBs were introduced in 2007. With the onset of the global financial crisis, foreign lenders became anxious about lending to companies in emerging markets. Indian companies suddenly faced a shortage of foreign currency liquidity and increasing costs on their offshore loans as well as on the refinancing of maturing debt.

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Karan Singh is a partner and Ameya Khandge is a counsel at Trilegal in Mumbai. Trilegal is a full-service law firm that advises on corporate and commercial law in India and provides commercially oriented legal advice in relation to all sectors of the economy.