Private Equity Through Debt: Opportunities for Private Equity in India


There appears to be a recent trend in Indian PE circles with increasing number of PE players raising (or planning to raise) offshore funds which are able to invest in rupee denominated non-convertible debt in India (“NCDs”) along with equity. What is this reason for this? With Indian equity markets looking up, is this a value proposition of the past or does PE investment through NCDs still hold some sheen?
This note highlights some of the reasons why PE investment through NCDs has caught the fancy in recent quarters and opportunities that this route presents going forward.


The Indian central bank (the “Reserve Bank of India” or the “RBI”) along with India’s securities regulator (“SEBI”) liberalized Indian law in 2012 to allow PE (set up as Foreign Institutional Investors registered with SEBI) to invest in private placements of NCDs so long as these NCDs are listed on a recognized stock exchange in India within 15 days. Since 2012, there has been a significant increase in NCD issuances by Indian corporates. Highlighted below are some of the benefits of NCDs that perhaps explain the opportunities in this space.

No Regulatory Cap on Returns

Unlike Indian regulations on foreign currency loans (“ECB”), straight NCDs being rupee denominated do not attract the provisions applicable to ECBs, e.g. the restriction on returns. Some recent NCD transactions have seen IRRs north of 20%. 

Down-Side Protection with Access to Up-Side

Given that an NCD is a debt instrument, it can be protected by security over assets of the issuer. This is particularly helpful if one is investing in low-investment credit issuers. In addition, the Indian market has seen structured NCD products where the returns are linked to the underlying performance of the issuer (e.g. EBITDA or PAT). Therefore, NCDs can provide access to up-side returns while protecting downside credit risk by way of security. Furthermore, SEBI regulations in 2011 recognized the issuance of NCDs where the returns are linked to market returns on other underlying securities/indices. For example, the returns may be linked to the price of stock of a listed subsidiary of the issuer or the trading price of an index. The benefits may be similar to “tracking stock” only with the linkage being to a listed subsidiary rather than a division of the issuer. 

Assured Return and Redemption Based Exits

Indian regulatory concerns with “assured returns” on equity investments are well documented. NCDs being debt instruments do not suffer from these concerns. In addition, the return on NCDs being by way of redemption of the instrument, some of the restrictions that apply to return of capital in the equity context (e.g. adequacy of profits etc.) do not apply to NCDs.


Unlike other instruments, there are limited restrictions on which companies can issue NCDs and into which sectors can a PE invest using NCDs. The Indian regulatory sectoral caps under the Foreign Direct Investment Policy for equity do not apply to issuance of non-convertible debt. Furthermore, the market has seen proceeds of NCDs being used as mezzanine finance, for promoter finance and for acquisition finance; thereby opening these avenues for PE. 

Equity like Features

NCDs can be issued with investors having the benefit of corporate governance rights similar to equity such as limited veto rights and board seats.


Structured NCDs do need to be carefully crafted to avoid being categorized as equity. In addition, some of the other benefits typically provided in a PE investment, such as shareholder participation and tag & drag rights, are not available with NCDs. Keeping in mind these investment  objectives, a hybrid of NCDs and equity may also be considered. In addition, the new (Indian) Companies Act
2013 also presents certain challenges in issuance of NCDs. For example, an unlisted Indian company with privately placed NCDs which are listed is treated as a listed company for certain purposes of the act. While this presents corporate governance benefits to PE, it does place an administrative compliance burden on the Indian issuer. As the market continues to absorb the new act, other challenges under the act have found solutions.


Given the benefits outlined here, we do feel that there is significant potential for NCDs to be used as an investment tool not only in a bear market but in a bull market as well, particularly where coupled with equity investments. Furthermore, for some time now the Indian government has tried to expand the avenues of capital available to Indian corporates. The NCD route is the result of this attempt. The new Indian government has also started to walk the path to increasing the ease of investing and doing business in India. The two policies augur well for Indian corporates and PE looking to raise/invest capital in India using the NCD route. 


About the Authors

Ashwin Bishnoi is an Associate Partner at Khaitan & Co

Arjun Rajgopal is a Senior Associate at Khaitan & Co


1 (The views expressed herein are as of 5 December 2014)