“Imposition of three-year residual maturity requirement would not only impact shorter term loans, it would also restrict various contractual arrangements like call / put option vis-à-vis the issuing company, part redemptions, etc., to be exercised prior to the expiry of three years,” said a note by Nishith Desai. According to legal experts, the restriction is likely to prove a deterrent for companies, as it will disallow early redemptions or structures where the repayment is linked to business accruals. Nishith Desai said structures where principal is paid in the beginning, while there interest is back-ended might no longer be feasible.
To be sure, new restrictions will be applicable on fresh investments made by FPIs and existing investments or agreements will be unaffected. Currently, FPIs have investments worth nearly Rs 1.7 lakh crore (over $27 billion) worth of investments in the Indian corporate debt. India allows investments up to Rs 2.44 lakh crore ($51 billion) in the corporate debt market. FPIs have exhausted less than 70 per cent of the limits available. This is contrary to their investments in government debt where the entire $30 billion limit is entirely exhausted.
Attractive yields and easy availability of liquidity has increased FPI demand for corporate papers in recent months.
However, the latest restrictions on FPI investments, which come after substantial easing and simplifications of norms over the years, could also hurt demand going ahead.
“The introduction of minimum three years residual maturity requirement is a major dampener for FPIs and corporates,” Nishith Desai Associates said.
According to the law firm, the domestic corporate bond market at $242 billion is much smaller than China’s $1.65 trillion, South Korea’ $1 trillion and Japan’s $786 billion.
Nishith Desai said the new norms “don’t augur well with the intention of the government to encourage debt.”