RBI Circular on Partial Credit Enhancement to Corporate Bonds by Banks
Infrastructure companies often face fundraising challenges because of poor credit ratings. This is largely because such companies are heavily indebted in the initial years and take several years to generate profits and repay those debts. Nevertheless, adequate funding of infrastructure companies is crucial for India’s development.
In September, 2015, the Reserve Bank of India issued a circular that allowed infrastructure companies to issue bonds (debt instruments) supported by credit enhancement through an irrevocable contingent line of credit provided by commercial banks up to a limit of 20% of the bond issue size. Such credit enhancement was intended to enable higher credit ratings for such bonds. Higher ratings are crucial for attracting investments from provident and pension funds, which are otherwise unable to invest in bonds issued by infrastructure companies because of the low credit ratings.
The circular was intended to provide an alternative source of finance for infrastructure companies, which are heavily dependent on banks for their financing requirements. Vidhi advised the RBI on certain key aspects of this circular.
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About the Contributors
Debanshu is one of Vidhi’s Co-Founders. He has over a decade of experience in commercial laws and the financial sector and has advised the Government of India on several legislative projects in this space. He was instrumental in advising the Government on the design and drafting of the Insolvency and Bankruptcy Code and its subsequent implementation. He has developed and curated Vidhi’s work on insolvency law, corporate law, financial regulation, and competition law and conceptualized its Bankruptcy Research Program. He has served as a member of a Government-appointed committee for operationalizing the National Company Law Tribunal and deposed before two Parliamentary committees examining financial sector legislation. He has also worked as a teaching fellow at Harvard Law School. He is an alumnus of the Harvard Law School, the University of Oxford, and Hidayatullah National Law University. He attended Harvard as a Fulbright Scholar and was awarded the Irving Oberman Memorial Prize in Bankruptcy and the Dean’s scholar prize in Corporations. He was also awarded a Distinction for his graduate studies at Oxford. In 2017, he was selected for NYU School of Law’s Hauser Global Scholarship, which he waived. His academic work has been published in peer-reviewed journals and an edited book published by Cambridge University Press, New York. He has been consulted by and mentioned in global business publications, such as IFR Asia and The Economist. Earlier, Debanshu practiced as an M&A and regulatory lawyer with AZB & Partners at its Mumbai and New Delhi offices.
