In order to address the issue of possible volatility that may emerge by allowing foreign players, a scheme similar to that of the Voluntary Retention Route (VRR) for FPI investments in debt markets may be envisaged, the task force suggested.
Foreign portfolio investors (FPIs) should be allowed to directly buy stressed loans from Indian banks within certain annual prudential limits, a task force on the development of a secondary market for corporate loans has recommended to the Reserve Bank of India (RBI).
FE had reported in December 2018 that Bank of America, while putting in a successful bid for debt-ridden Jayaswal Neco through Assets Care & Reconstruction Enterprise (Acre), had also reached out to the central bank seeking easier norms for takeover of stressed assets by foreign banks.
“The extant regulations permit acquisition of standard loans by securitisation trusts which, in turn, issue PTCs (pass through certificates) to FPIs. Such express permission is currently not provided for FPIs to acquire NPAs through securitisation trusts. These FPIs have to come through the ARCs (asset reconstruction companies) to participate in the distressed loan market,” the report said, adding: “The securitisation trusts route may also be permitted for acquisition of NPAs (non-performing assets) by FPIs.”
In order to address the issue of possible volatility that may emerge by allowing foreign players, a scheme similar to that of the Voluntary Retention Route (VRR) for FPI investments in debt markets may be envisaged, the task force suggested. Broadly, investments through VRR are free of the macro-prudential and other regulatory norms applicable to FPI investments in debt markets, provided FPIs voluntarily commit to retain a minimum 75% of their investments in India for a period of three years. “It is understood from market participants that the VRR has created a much positive impact in the market and hence can be adopted in the case of secondary market for corporate loans,” the report said.
Other recommendations include the setting up of an online sales portal for secondary sale of corporate loans as well as permitting single-loan securitisation and participation by mutual funds (MFs), pension funds (PFs), alternative investment funds (AIFs), FPIs and insurers in these securities.
The “Approved Investments” category under IRDAI (Investment) Regulations, 2016 and investment regulations of PFRDA (Pension Fund Regulatory and Development Authority) may be amended to permit insurance companies and pension funds respectively to participate in the secondary market for corporate loans, the report said. MFs may be permitted to launch special loan assets schemes; a separate category of AIFs may be devised to allow investment in secondary loan market for standard as well as distressed loans.
Similarly, AIFs and FPIs may be permitted to participate in the secondary market for corporate loans by the government through their respective regulators. The task force was chaired by TN Manoharan, chairman, Canara Bank.