Indian firms with overseas debt afraid of losing the plot

Mumbai: Invocation of offshore guarantees given by Indian companies, pressure from overseas lenders, and takeover attempts by deep pocketed foreigners amid plummeting stock and asset prices are among the concerns creeping in as Covid-19 continues to impact business and life.

Indian companies offer guarantees to secure contracts and lower borrowing cost of overseas subsidiaries and group companies. Many of them are beginning to fear that liquidity crunch and dip in earnings could make the situation difficult for them. There is also a question mark on whether companies would be able to service their external commercial borrowings (ECBs) — often unhedged against foreign currency fluctuation — due to fall in sales and exports.

“Some of these concerns have been shared with us… Companies want Covid-19 to be covered as a force majeure event so that they can defer their obligation. Companies with ECBs are also under pressure,” said Gopal Krishna Agarwal, BJP’s national spokesperson on economic affairs.

Takeover Safety Nets

Unlike the three-month moratorium given by local lenders on interest and loan repayment, no such relief is offered by offshore banks.

According to Agarwal, even though there are certain concerns among companies, they should not fear hostile acquisitions as there are enough laws in India relating to securities market and competition that discourage such takeover bids.

The recent open market purchase of over 1% shares of HDFC by People’s Bank of China may have stoked a simmering fear. But, a senior fund manager told ET that such concerns are overplayed as China has been buying through various vehicles and exchange traded fund.

The development, however, comes at a point when countries like Germany and Australia—the second largest recipient of Chinese investment since 2007—have tightened rules on foreign investment.

Recently, the European Union’s competition chief told the Financial Times newspaper that EU member countries should buy into companies to counter the threat of Chinese takeovers. However, market circles believe that new restrictions on foreign investments—either on portfolio or strategic investments — would not go down well among investors.

The more immediate worries are encashment of offshore guarantees and pressure to fulfil ECB obligations. “Entities are exploring various options, including restructuring their overseas borrowings amongst group companies which have a better financial position. In certain cases these steps also involve a specific approval from the Reserve Bank of India,” said Moin Ladha, partner at Khaitan & Co.