Indian Overseas Fundraising gets a "Made in China" Makeover

October 13, 2011


Overview of amendments to the Indian overseas borrowing regulations to permit RMB-denominated debt

On September 27, 2011, the Indian government amended its overseas borrowing regulations to specifically allow Indian companies in the "infrastructure" sector (as defined in the Indian regulations) to raise foreign currency debt in Chinese Yuan (or “RMB”). Press reports suggest that certain Indian companies such as Reliance Power Limited already are taking advantage of these amendments and have obtained the necessary approvals to raise RMB-denominated bank loans.

The new amendments are seen as a significant step and one that will potentially allow Indian companies to raise lower cost offshore debt. The primary conditions are that companies need to receive the prior permission of the Reserve Bank of India ( “RBI”), the principal Indian banking regulator, to raise funds in RMB and that the total amount of RMB funds raised by each company may not exceed US$1 billion per year. In addition, such fundraising must comply with certain general restrictions that apply to all foreign currency fundraising by Indian companies such as, among other things, restrictions on interest rate, debt maturity, use of proceeds and classes of investors that are permitted to invest.

The amendments are widely regarded as being representative of an extremely significant policy shift by the Indian government as part of a wider set of amendments to the "External Commercial Borrowing" guidelines. The amendments generally liberalise the regime governing foreign currency debt raised by Indian companies to address the perceived difficulty faced by them as a result of the high cost of funds in the Indian Rupee-denominated market. One other significant amendment introduced by the Indian government on September 23, 2011 specifically permitted the use of offshore debt to refinance Indian Rupee-denominated debt, subject to certain conditions.  

Strategic importance of the amendments for India and China

India’s permission to allow RMB-denominated debt is indicative of the rapid development of the offshore RMB market and the significance of the Chinese currency in the international market. Given current market conditions, the new amendments assume additional strategic importance as they may open a new and attractive fundraising route for Indian companies given the current weakness in many offshore credit markets. As we addressed in another recent Client Alert, the offshore RMB bond market continues to grow notwithstanding that other global equity and debt markets across the world appear to be nearly frozen. For more information on this, please refer to our client alert here.

Ability of Indian companies to access the offshore RMB bond market

The offshore RMB bond market has developed quickly and has proved to be attractive to a variety of issuers and credits. This market first opened in Hong Kong in 2007 with issuances mainly by PRC commercial banks and quasi-government policy banks. However, since the RMB200 million bond offering by McDonald’s in August 2010 (the market’s first foreign MNC issuer) the market has grown significantly. During the past year, issuers of RMB bonds have included sovereigns (the PRC government), supra-nationals (Asia Development Bank), foreign investment grade MNCs (Caterpillar, Volkswagen, CJ Corp, Orix, Tesco), Chinese majority state-owned enterprises (China Eastern Airlines) and high yield issuers with significant PRC operations and assets (Powerlong Real Estate, Guangzhou R&F Properties, China Shanshui Cement). To date, US, Korean, Japanese, UK, German, Russian and French companies are among the foreign issuers of RMB-denominated bonds.

While Indian companies (either directly or through their offshore subsidiaries) have not yet accessed the offshore RMB bond market, they have been very active issuers in other offshore foreign currency markets, raising a total of about US$16 billion according to a recent IFR Asia report. Press reports suggest that the Indian lender Infrastructure Leasing & Financial Services Limited is in an advanced stage of preparing for an RMB bond transaction through an offshore entity.

The new amendments could potentially enable Indian-incorporated companies to access a new class of investors who prefer exposure to RMB and are interested in gaining direct exposure to issuers in India, recognised by a Standard Chartered Bank research report as likely to become the world's third largest economy by 2030. However, it is important to note that Indian issuers (or their offshore subsidiaries) are required to either structure the terms of their bonds to comply with the general commercial restrictions applicable to overseas borrowings under the Indian regulations that are noted above or seek prior RBI approval for any deviation.

The foreign issuers that have accessed the offshore RMB bond market to date generally either have operations in China or otherwise use RMB as a transaction currency in their business. It remains to be seen which Indian companies will be able and willing to access this market either directly or through their offshore subsidiaries.  

O’Melveny & Myers is not licensed to practice Indian law, and nothing in this Client Alert should be deemed to be an opinion on or advice concerning Indian law. The above is summarized from publicly available sources and is prepared as a convenience to our clients and friends outside of India.