India opens up to foreign debt

The Indian government has taken steps to rationalize and simplify foreign investment into debt instruments in India, providing opportunities for alternative asset managers to access more credit-related investments in the country, according to local law firm Nishith Desai.

The ministry of finance, as of 1 April 2013, has allowed all qualified foreign investors, including private equity firms, to invest up to an overall limit of $51 billion in the form of corporate debt in India – a number that was increased from just $1 billion. Previously, only foreign institutional investors could make substantial investments in debt instruments in India, restricting GPs from overseas. 

Private equity firms are increasingly considering debt-related strategies in India as exit routes are clogged and many companies face debt payments they are unable to make. ICICI Venture and Apollo Global Management have raised $350 million of a $500 million special situations fund in India targeting such opportunities, while SSG Capital closed a $400 million fund oversubscribed for distressed businesses late last year. 

“Private equity investors have felt a need for a more reliable instrument because they are not [always] able to see an exit, but [the debt] instrument will offer them a way out,” said Ruchir Sinha, head of private debt and private equity in real estate. 

Sinha explains that investing via debt instruments in India allows private equity firms to exit their investments legally, without facing the risk of a dispute with the promoter. “It gives a little bit of [security] to an otherwise vulnerable private equity community,” he said. 

“In India where promoter-investor disputes are now being seen and the litigation system takes so long to resolve, I think a small amount of security needs to be created.”

Foreign private equity investors are increasingly appearing in India’s debt market. In April, Netherlands-based development bank FMO and UK development finance institution the CDC Group invested directly in Au Financiers, an Indian non-bank finance company that provides loans to SMEs. 

However, debt is becoming popular across other parts of Asia Pacific, particularly in China. According to Robert Appleby, director of Hong Kong-based ADM Capital, the need for non-bank lending in Asia is expected to increase as companies grow domestically and expand offshore and traditional credit sources remain tight.

“Lending to good companies that can’t get loans elsewhere is now the bulk of our business,” remarked Appleby during a recent interview, adding that since 2004, ADM has done 100 such private transactions in Asia.

He sees China and Southeast Asia as key markets, but firms are clearly interested in India’s offering, too. In March, Olympus Capital launched a structured credit business to serve companies that don’t have access to capital, opening an office in Singapore; Kohlberg Kravis Roberts reportedly intends to raise a debt fund for India and Adamas Asset Management is raising a $200 million debt and structured loan fund targeting China’s SMEs.