Reserve Bank of India (RBI) is allowing foreign investors to buy corporate bonds that are either totally or partly in default, it said on Thursday, a potential boost to the country's nascent distressed debt market.
"This will provide an exit to existing investors and also help in reducing the level of stress in the banking sector," said a policymaker.
India is struggling to clean up corporate balance sheets after years of expansion were followed by a sharp slowdown in growth. Companies are wrestling with more than $640 billion of debt, or more than 40 percent of India's gross domestic product, and a sluggish recovery means they struggle to repay.
The result has been a bad debt pile of more than $50 billion in the country's banks and a rise in bond defaults. That number is not publicly disclosed.
Indian companies typically rely on bank loans for financing, but rupee bond issuance has jumped in 2015.
While foreigners had not previously explicitly been banned from buying defaulted bonds, officials said investors had sought clarity from the Reserve Bank of India after a unit of JP Morgan in India suffered significant mark-to-market losses in late August.
It was hit by a steep downgrade to auto-parts maker Amtek Auto Ltd's debt. At the time, foreign distressed debt buyers had eyed Amtek bonds - unusual in a country where trading in corporate bonds is mostly confined to top rated issuers.
"There were lots of queries from foreign investors on buying defaulted bonds," the policymaker said.
India is trying to foster a distressed debt market, and is currently pushing through its first ever unified bankruptcy code, a change which should clear up and speed up both liquidation and restructuring.
In its circular issued on Thursday, the RBI said the maturity of the bonds should be three years or more.
The issuer will need to restructure the bond to comply with the minimum maturity tenure, as foreigners are not allowed to buy corporate bonds of below three years, the RBI said.
