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The rising number of non-performing loans in India has grabbed the attention of both local and foreign GPs. As the economy slows, banks dial down their lending and companies struggle to repay their debts, private equity looks well-placed to provide refinancing options. In turn, they would receive more exit security in a market where realisations have been tough. 

It all sounds good – and some firms have already thrown their hat into the ring. For instance, Apollo Global Management and ICICI Ventures launched a joint venture called AION to address these distressed debt opportunities.  

“Because [growth] hasn’t kept pace with [many companies’] ambitions and the debt they’ve borrowed, clearly we find [a] gap between earnings and debt repayments,” says ICICI chief executive and managing director Vishakha Mulye. 

AION declined to comment on fundraising, but industry sources expect the vehicle to make a splash, exceeding its $500 million target when it closes early next year.  

Lending seems like a perfect match of demand and supply. Indeed, some believe that a shift is gradually occurring, with India-focused funds moving from equity to debt investing.  

I do agree with the premise that debt investing in India will be interesting – lending via an institutional loan environment versus the bank environment, [which] they’ve been used to,” Juan Delgado-Moreira, managing director at Hamilton Lane in Asia, says.  

The trouble is that in practice, regulations get in the way.  

In late October, Kohlberg Kravis Roberts provided a $90 million convertible loan to India’s Apollo Hospitals – both to build more hospitals, but also to address the company’s debt burden. 

KKR will subscribe to convertible debentures issued by Apollo’s parent company PCR Investments. The firm then has the option to convert the debentures into equity shares in Apollo Hospitals at the end of five years, with the founders holding the right to buy back these instruments after two years.  

An important point is the source of this capital. A source close to KKR said it wasn’t from the $6 billion Asia fund. And last August, the firm registered a rupee-denominated credit vehicle with the Securities and Exchanges Board of India, which would have allowed them to provide capital via local currency.  

Rupee investors have an advantage: they can freely address debt opportunities, according to Ruchir Sinha, partner at local law firm Nishith Desai. But foreign investment restrictions hinder overseas managers from lending through some structures.  

Structures that allow debt to be converted into equity (such as in the KKR deal) are permissible, as are non-convertible debentures – although the latter poses a number of problems for GPs, such as hard-to-enforce contracts and the difficulty in selling non-convertible bonds in India’s shallow bond market. 

Moreover, few entrepreneurs agree to convertible loans as they generally prefer not to dilute their equity, sources say.  

As such, firms are better off investing through rupees until the regulatory barriers are broken down. 

“It is the offshore guys who are facing the challenge, because the Indian rupee funds can always lend or give rupee loans,” Sinha explains. 

However, the supply side is also imposing limits. Hamilton Lane’s Delgado-Moreira believes that a crop of debt fund managers haven’t appeared, due to the widespread dissatisfaction with the returns that have emerged from India.  

“Why aren’t investors clamouring for it? Fundraising. The issue is not debt funds; [it’s that] fundraising in India in general is in a tough spot.”