As the country becomes a top investment destination and a global economic powerhouse, it is high time that the government and RBI start treating foreign lenders, not registered in India, in a fair manner so that their money is safe and they feel encouraged to pump in more dollars.
Having already become the third-largest economy in purchasing power parity terms much ahead of projections and slated to be the No. 3 in real GDP by 2030, India is the cynosure of global investors and corporations. Foreign banks, PE funds and financial institutions are making a beeline here to fuel their growth plans. India is becoming one of the primary centres of attraction for trade and commerce as well as international investments. Ever-growing domestic consumption and growth opportunities are encouraging more and more banks, FIs, PE funds and investors to look at India to meet their growth plans and IRR targets.
This has increased lending by foreign banks and institutions through their offshore branches or correspondent banks under the trade credits routes popularly known as foreign currency loans, external commercial borrowings and buyer and supplier credits. The participation by way of various options available through structured finance to foreign subsidiaries of Indian parties has been on the increase. This calls for a faster and stronger judiciary so that unlike our civil cases, matters concerning finances don’t get dragged on for decades.
It is natural that issues crop up between investors and investees, be it between offshore and onshore ones or between two onshore parties. The problem arises when a foreign lender/investor is required to initiate any legal action to protect its interests. What is noteworthy is that despite our negative perception about our justice delivery system, foreign investors consider our regulatory and judicial frameworks are far stronger and more dependable than most other emerging markets.
Foreign banks, as per existing provisions, have some legal recourse if the borrower becomes delinquent. One of the options available is to file a recovery suit. But it is time-consuming. Foreign lenders/investors generally insert arbitration clauses in their contract and they prefer a neutral place like Singapore, instead of India, for such legal process. Though the arbitration award is obtained comparatively faster outside than in our country, the difficulty arises in executing the arbitration award as the borrower has his assets here. Foreign lenders can also go in for winding-up process if the borrower is a company incorporated under the Companies Act of 1956 or Companies Act of 2013.
Though foreign lender can obtain an executable decree/award from the foreign jurisdiction, when execution is applied in Indian courts the same foreign lender faces difficulty in execution, as there are only a few countries which are recognised as a “reciprocating territory” under the Indian laws (Section 44 A of the Civil Procedure Code, 1908) whereby any decree or award passed by certain courts in such reciprocating countries can be directly enforced here.
Special rights available to domestic lenders
Domestic banks and licensed foreign lenders have special rights to recover their dues. As our courts are clogged with commercial/civil disputes, both the government and RBI have been enacting some laws and recovery mechanisms like the Recovery of Debts Due to Banks and Financial Institutions Act of 1993 (DRT Act), the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act of 2002 (SARFESI), and the Corporate Debt Restructuring (CDR) Cell in March 2002, among others.
The government established the Debt Recovery Tribunals (DRTs) to fast-track recovery process. Since the nature of proceedings at DRTs is summary, there is an appeal process at the Debt Recovery Appellate Tribunals (DRATs).
Faster economic growth has also triggered a rise in bad loans and the government brought in the SARFESI Act in 2002 to empower lenders to recover their non-performing secured loans through attachment or sale of security etc., without the intervention of the court. The Supreme Court in the Mardia Chemicals Vs. Union of India (2004) 4 SCC 311) upheld the constitutional validity of the SARFESI Act; also in the Transcore Vs. Union of India (2006 (12) scale 585) the apex court upheld the concept of greater or complete autonomy of lenders for asset classification and recovery of dues.
RBI issued the CDR guidelines on August 23, 2001 and the CDR Cell became operational from March 2002. The CDR forum allows both borrowers and lenders to restructure the troubled debt by consensus.
Concerns for foreign lenders
However, for unregistered foreign lenders, debt recovery is not an easy process, as they can neither take the recourse of the SARFESI Act nor move the DRT. This has become an anomaly, as they don’t enjoy the rights on par with domestic lenders or their overseas counterparts which are licensed by the RBI. To better understand the logic behind this anomaly, one has to look at the Foreign Exchange Management Act, 1999 and other forex regulations where various curbs have been prescribed for getting guarantees by way of immoveable assets, shares and other guarantees by the Indian party. Accordingly, the RBI issued guidelines for external commercial borrowings (ECBs). Until July 11, 2008, RBI permission was needed for any security of immoveable property or shares. The RBI in July 2008 sub-delegated the power to issue NOCs to authorised dealers, and also simplified the procedures to improve security cover for funds of lenders, including foreign banks.
Though the government has relaxed security creation norms for ECBs, concurrent amendments in the laws are still pending. As a result, the provisions of the DRT and SARFESI laws are available only to RBI-licensed banks and financial institutions.
It needs no special mention that the financial system can be viable only when interests of the lenders are adequately protected. Where domestic companies avail of foreign currency loans and/or structured finance by offering guarantees of moveable and immoveable assets or mortgaging personal assets as per the July 2008 RBI circular, logic demands that foreign lenders should also be allowed to enforce their rights on par with any other domestic lender. Today any delinquent borrower is worried and scared of any action under SARFESI Act as it compels him/her to honor the commitment to the lender.
The way ahead
It is desirable that interests of foreign lenders are also duly protected so as to encourage them to participate in the Indian growth story by offering them fair and equitable treatment on par with their domestic peers. In our view, this unequal treatment being meted out to foreign lenders must be reviewed by extending the provisions of the DRT and SARFESI laws. But while doing so, we would suggest the following cautionary steps:
(1) Only those foreign lenders which have a presence in the country could be eligible for this so as to prevent them from arbitraging on the Indian parties and their assets;
(2) Only RBI licensed lenders and not any other ‘recognised lenders’ could avail the protection of these laws; and
(3) Only foreign lenders from a ‘reciprocating territory’ could be eligible so that lenders and borrowers inter-se from such countries are treated at par and no disparity of rights and obligations subsists amongst them.
(Rajesh Narain Gupta is managing partner at SNG & Partners. The views are his.)
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