Mumbai/New Delhi: An interim order by the Delhi high court restraining coercive action against Indiabulls Housing Finance Ltd for its inability to repay bondholders has raised fears among mutual funds that more debtors could take the same course.
The Indiabulls counsel cited the Reserve Bank of India’s (RBI) 27 March circular on loan moratorium and the ongoing lockdown to claim that the company is unable to recover debts owed to it. The Securities and Exchange Board of India (Sebi) counsel countered that the circular does not cover the liabilities arising from non-convertible debentures (NCDs), but the court passed its order citing the peculiar facts of the case and the ongoing lockdown. The case will be heard next on 19 May.
Fund houses worry more non-bank lenders could follow the same route.
“This order does add to the confusion, but in the absence of any clear regulatory go-ahead, (on providing moratorium for repayment for bonds) we will have to decide on case-to-case basis and see if they have similar allowance from courts,” the CEO of a mid-sized fund house said on condition of anonymity.
“We are in capital markets and will go with the regulator’s guidelines and prescribed norms. If any other NCD issuer or CP (commercial paper) issuer gets similar relief from courts, then we would structure our funds accordingly, perhaps through a side-pocket,” the CEO of another fund house added.
A regulatory official said debentures are private contracts and if the majority of debenture trustees agree, the terms of bonds can be changed.
Raj Bhalla, partner, M.V. Kini & Co., termed the court order “a ray of hope” to issuers facing repayment concerns due to the prolonged lockdown. “Capital markets regulator Sebi has been reluctant to offer a moratorium to obligations of the issuers of debt securities on the pretext that the same would cause hardships to already struggling issuers in wake of covid-19, he said.
On 12 April, Mint reported that Sebi is reluctant to offer a moratorium to nearly ₹1 trillion of commercial paper and bonds coming up for repayment.
“The court should keep away from all this. Already, the regulator has created a fundamental problem by not allowing banks to give moratorium to NBFCs (non-banking financial companies). Regulators should give a clear direction. As of now, NBFCs have not started defaulting on payments. With this judgement, it could create a lot of chaos in the market,” a senior executive with a private bank said.
Banks are split over giving moratorium to NBFCs. State Bank of India maintains that it is not too keen on a moratorium for NBFCs, and would rather have them borrow under the targeted loan term repo operations window. Other banks, however, feel that the NBFC sector will be hit hard if a moratorium is not given.
Prathma Sharma contributed to this story.
(Above content has been sourced from a news feed)