Debt Capital Market

The webinar, ‘Investing in India – Debt Capital Markets’, hosted by Khaitan & Co, provided foreign investors and their advisors a practical and strategic overview of India’s debt capital markets from a foreign investor’s perspective, covering investment routes, regulatory frameworks, tax considerations and recent reforms.

The session was moderated by Sudhir Bassi, Executive Director, Capital Markets practice group and led by Manisha Shroff, Partner, Debt Capital Markets practice group.

Please see below a summary of the key points discussed in the webinar. Views expressed in the webinar are those of individual panel members and not those of Khaitan & Co and are subject to the disclaimer set out in the webinar recording.

The recording can be viewed here: Debt Capital Markets | Investing in India

India’s debt capital markets represent a significant and increasingly attractive investment opportunity for foreign investors. In FY 2024–25, corporate bond issuances reached approximately USD 99 billion, with total outstanding corporate bonds of USD 595 billion as of 31 March 2025. The webinar was designed to enhance understanding of the key structural, regulatory and commercial issues facing foreign investors seeking to deploy capital in Indian debt instruments. The programme also sought to explain recent liberalisations—particularly in the External Commercial Borrowing (ECB) regime—and the emerging role of the Gujarat International Financial Services Centre (GIFT City) as India’s offshore gateway.

KEY POINTS

Why India’s Debt Capital Markets?

India’s debt markets offer compelling advantages:

• Attractive yields: 7–9% compared to US market yields of 3–4%, despite geopolitical volatility.
• Calibrated market opening: Government has steadily liberalised debt investment rules over the past 15 years.
• Sovereign credit quality: India holds an Investment Grade (IG) rating; Indian government bonds are included in the JPMorgan Government Bond Index for emerging markets.
• Diversified financing options: Government securities (GSecs), corporate bonds, treasury bills, commercial papers, convertible and hybrid instruments.
• Sophisticated regulation: Modelled on international best practices (ICMA standards); extensive disclosure requirements; high transparency and liquidity
• Robust insolvency framework: Foreign investors have equal standing with domestic banks in recovery proceedings; the Insolvency and Bankruptcy Code, 2016 (IBC) is creditor-driven.

Market Size, Composition & Participants

As of March 2025:

• Total market size: USD 2.78 trillion.
• GSEC dominance: G-Secs dominate the market, accounting for more than 50% of market value.
• Corporate bonds: Market size reached approximately USD 646 billion2 accounting for 22-23% of market as of FY-25.
• Key issuers: Government of India; public sector enterprises; banks and non-banking finance companies (NBFCs); large corporates (increasingly for capital expenditure (CAPEX) and working capital financing).
• Primary v. secondary: Primary market is dominated by private placement of debt securities with over 99% of corporate bond issuances in FY25; Secondary market concentrated in high-rated securities.

Regulatory Architecture

India’s debt markets are regulated by several authorities with clearly defined roles:

For corporate bonds: SEBI is the primary regulator. For sovereign debt: RBI and SEBI work jointly.

Debt Instruments Available

Foreign investors can access a comprehensive suite of instruments:

• Government securities and treasury bills;
• Corporate bonds (including ESG-linked, sustainability-linked, green, infrastructure and municipal bonds);
• Short-term instruments (commercial papers, certificates of deposit);
• Convertible and hybrid instruments;
• Regulatory capital instruments (issued by banks, NBFCs and insurers);
• Masala bonds and foreign currency notes;
• Securitised debt (Pass-Through Certificates, security receipts, InvIT and REIT debt, infrastructure debt funds);
• Non-convertible redeemable preference shares;

Different types of Financing:

1. Regulatory Capital;
2. Bridge Financing;
3. Capex / Working Capital Financing;
4. Real Estate Financing;
5. Infrastructure/Project Financing; and
6. Acquisition Financing.

Public v. private issuance: Public issues carry the highest disclosure requirements and are restricted to institutional and sophisticated investors (Non-Resident Indians and Foreign Portfolio Investors excluded). Listed and unlisted private placements permit foreign investor participation with fewer restrictions.

Foreign Investment Routes: Comparative Analysis

The primary routes exist for foreign debt investment are as follows:

Foreign Direct Investment (FDI):

• Investment by a non-resident entity in India with objective of lasting interest.
• Sectoral restrictions apply; no licensing required.
• Covers ordinary equity, CCDs, CCPS, warrants.

Foreign Portfolio Investment (FPI)

• Investment by Securities and Exchange Board of India (SEBI)‑registered non‑resident investors in Indian debt securities through regulated market routes, without the intent of securing control or long-term influence.
• SEBI license required (3–5 weeks processing time). The applicant is required to make an application to the depository participant / prime broker who will follow Know Your Customer and other diligence requirements before granting an FPI registration.
• Two sub-routes:
• Voluntary Retention Route (VRR): No minimum maturity; 3-year minimum retention period; no concentration limits; single investor permitted.
• General Investment Route (GIR): 1-year minimum maturity; investment limits prescribed; 50% of the Non-Convertible Debentures per FPI
• Foreign Access Route (FAR): Route for Government securities only.

Alternative Investment Fund (AIF)

• Primarily for debt investment (private credit, stressed / special situations).
• SEBI license required (16–20 weeks); single-window clearance.
• No redemption / tenor restrictions; robust for listed instruments

Venture Capital Investor (FVCI)

• SEBI‑registered foreign investors to invest in eligible Indian companies, through pure debt or hybrid instruments, outside the standard FPI framework.
• Limited to 10 specific sectors (such as biotechnology, information technology, infrastructure, agriculture and hospitality).
• SEBI license required (12–16 weeks), single window for FVCI registration.

External Commercial Borrowing (ECB)

• Most liberal route – no licensing required.
• Recognised lenders from any jurisdiction.
• Permitted end-use framework (limited restrictions).
• No all-in-cost ceilings (recently liberalised).
• Minimum average maturity (MAMP) requirements apply.
• Bonds by Indian issuers (INR / FCY denominated) which can be listed on offshore exchanges (London, Singapore) or GIFT City.
• Standalone issuance / global / medium term note programme to facilitate multiple drawdowns.

Overseas Indian Subsidiary (OI) Route

• Indian parent establishes foreign subsidiary.
• Subsidiary raises financing with parent guarantee.
• Funding limit – 400% of parent’s net worth.
• Popular for foreign bond issuances with parental support.
• Types of Financial Commitment (FC) from India – debt, equity, guarantee, pledge and charge.

GIFT City: India’s Offshore Gateway

GIFT City represents a paradigm shift in Indian debt issuance. Operating as a foreign jurisdiction under the International Financial Services Centre (IFSC) authority, it offers the following benefits:

Structural advantages:

• No regulatory approval required for listing.
• No physical presence required in GIFT City.
• Simplified disclosure requirements (modelled on international frameworks).
• Fast-paced documentation (2–3 weeks to listing).
• No listing fees and minimal other charges.
• Unified supervision (single regulator; no RBI–SEBI overlap).

Tax benefits:

• Interest on long term bonds or Rupee Denominated Bonds (RDB) listed on a GIFT city exchange: 9%
• Tax Treaty jurisdiction rates: Mauritius 7.5%; UAE 12.5%; Netherlands 10%; UK / US 15%; Australia / Singapore 15%.
• Capital gains on bond transfer: exempt.
• Interest on loans to GIFT City units: nil.

Governing law & enforcement:

• No requirement to use Indian law; English law is market standard.
• Full choice of arbitration seat (London, Singapore, India) and dispute resolution mechanism.
• GIFT City currently has no enforcement mechanism; investors typically elect English law arbitration or court proceedings for cross-border disputes.

Direct listing structure:

• Offshore-incorporated issuer (no presence requirement in IFSC).
• All intermediaries available locally (depository participant, bond trustee, rating agency, listing agent, stock exchange).
• Bank and demat accounts available for principal / interest payouts and securities transfer.
• Entire ecosystem within GIFT City.

Global Treasury Centre (GRCTC) route:

• Indian corporates establish treasury arms in GIFT City.
• Hub for debt raising, refinancing, hedging across group.
• No presence requirement; optional establishment.

Credit Quality, Recovery & Enforcement

Foreign investors have robust protections:

• Rating oversight: SEBI rigorously oversees all rating agencies and intermediaries; ratings backed by disclosures and periodic surveillance.
• Insolvency framework: Highly creditor-friendly. Debt holders qualify as financial creditors; can initiate corporate insolvency resolution process; participate in committee of creditors
• Equal standing: Foreign investors are treated identical to Indian banks and domestic investors under IBC.
• Instrument-agnostic: IBC rights are not dependent on instrument type (bond, loan, etc).
• Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002: Specialised debt recovery statute (previously banks-only) now available to FPIs and AIFs holding listed instruments; secured creditors have robust enforcement mechanisms.
• Demonstrated recovery: Foreign investors have achieved full or near-full recoveries in multiple default cases; ongoing Byju’slitigation demonstrates equal treatment of foreign bondholders in Indian courts.

ESG, Green & Sustainability-Linked Bonds

India has established comprehensive regulatory framework:

• SEBI regulations specifically govern green, social and sustainability-linked bonds
• Framework modelled on International Capital Markets Association (ICMA) Green Bond Principles and international standards.
• Disclosure requirements: Robust National Designated Use standards (NDDs) for each bond type.
• Third-party certification: Mandatory external certification at issuance.
• Post-issuance monitoring: External audits and certifications required throughout bond life (not just at issuance).
• Sustainability-linked bonds: Must-have specific KPI targets with interest step-downs for non-achievement; global investors actively enforce covenants.
• Market growth: Substantial volume of green, social and ESG issuances from Indian corporates (Renew, Piramal, Saman, KPI and JSW Steel).

Market Liquidity & Exit Realities

• Counterparty risk: Minimal; strict SEBI control of intermediaries.
• Secondary market turnover: Average monthly turnover in 2025 was 3.8% of total outstanding bonds, demonstrating healthy market liquidity.
• High regulatory standards for clearing and settlement.
• Note: Secondary market concentrated in high-rated securities; lower-rated bonds have limited exit liquidity.

Recent Reforms & Regulatory Trends

ECB regime (February 2025 onwards):

• All-in-cost ceilings removed; pricing left to market dynamics.
• Restrictions on recognised lenders eliminated.
• End-use restrictions significantly eased (minority acquisition and land purchase still restricted).
• Effect: ECBs now competitive with FPI–NCD route for CAPEX and working capital financing.

FPI regime:

• Targeted relaxations for G6 investment.
• Enhanced flexibility in investment types through portfolio structure.
• Transition from gross settlement to net settlement for outright cash market transactions, to be implemented by 31 December 2026.

Corporate bond disclosure (SEBI):

• Unified disclosure requirements for public and private issuances.
• Enhanced stock exchange intimation requirements.
• Granular periodic reporting mandates (not just at primary issuance).
• Rating downgrade triggers immediate reporting obligation to stock exchange and trustees.
• Continuous disclosure ensures transparency and timely creditor notification.

Key Takeaways

For Foreign Investors:

1. India offers a mature, globally investable debt ecosystem combining attractive yields (7–9%), stability, high liquidity and strong regulatory credibility. The market has opened up significantly over the past 15 years; nearly all debt instruments are now accessible.
2. Route selection is strategically critical. The choice between FPI, ECB, and GIFT City listing depends on factors such as licensing appetite, tax jurisdiction, exit timeline, end-use requirements and deal structure. Each route has distinct advantages; a generic analysis is insufficient.
3. GIFT City has become the preferred listing destination for Indian corporate bonds due to tax arbitrage (9% withholding tax vs 20% in India) and simplified disclosure requirements. Major Indian banks and corporates have already shifted; the trend is accelerating.
4. ECB liberalisation (February 2025) has fundamentally changed the competitive dynamics. The removal of all-in-cost ceilings and expansion of permitted lenders makes ECB competitive with FPI routes for CAPEX and working capital financing, though end-use restrictions remain more limited than FPI.
5. Foreign investors enjoy equal standing with domestic creditors in recovery proceedings under the IBC. Demonstrated track record of full recoveries supports confidence in Indian debt instruments.
6. Regulatory risk in licensed sectors (NBFCs, banks, insurance, telecom, pharma) is material and should be carefully evaluated through sector-specific due diligence and (where applicable) regulatory MAC drafting.

For Indian Corporates & Issuers:

1. GIFT City is now the default listing venue for offshore bond issuances seeking to compete with London and Singapore exchanges. The tax and regulatory efficiencies justify the shift; established ecosystem of intermediaries is robust.
2. ESG and sustainability-linked instruments command investor demand and align with global capital allocation trends. Robust SEBI framework ensures credibility; third-party certification and mandatory post-issuance monitoring.
3. Disclosure transparency is the market standard. Continuous periodic reporting, rating downgrade triggers and event-based stock exchange intimation requirements mean that credit events are immediately visible to investors. Board-level discipline and proactive communication are essential.
4. Short-tenor instruments (CP) remain valuable for rapid-execution financing needs( e.g., acquisition bridge financing) but should be embedded in a longer-term refinancing strategy given maturity constraints.

For Transaction Advisors & Counsel

1. Sector-specific regulatory risk mapping is essential. Material Adverse Change (MAC) definitions in regulated-sector M&A must enumerate sector-specific triggers (licence suspension, show-cause notices, Prompt Corrective Action (PCA) actions for NBFCs, Central Drugs Standard Control Organisation (CDSCO) warnings for pharma, etc.) rather than relying on generic economic MAC language.
2. Quantitative threshold design is critical to enforceability. Vague MAC language invites litigation; defined financial metrics (e.g., 20% EBITDA decline) with reference periods and sustainability requirements reduce interpretive risk.
3. Governing law selection has material consequences. Indian law and the contract frustration doctrine (Section 56 of the Indian Contract Act, 1872) set a narrower standard than contractual MAC definitions. English or Singapore law may better protect parties' commercial intent; arbitration seat selection should reflect enforcement preferences.

Conclusion

India’s debt capital markets have undergone a transformative opening over the past 15 years. Foreign investors now have five distinct routes to deploy capital, with yields materially superior to developed markets, and a regulatory framework that has demonstrably protected creditor rights.

The emergence of GIFT City as a competitive listing venue—driven by tax arbitrage and regulatory efficiency—represents a structural shift in the geography of Indian corporate financing. The recent ECB liberalisation further expands investor optionality, particularly for development-stage financing and working capital needs.

For foreign investors, success requires: (i) clear-eyed route selection aligned to deal structure and exit strategy; (ii) sector-specific due diligence in regulated industries; (iii) awareness of tax treaty implications; and (iv) confidence in India’s demonstrated commitment to creditor recovery and regulatory transparency.

For Indian issuers, the market rewards operational discipline, continuous disclosure and strategic positioning in GIFT City where cost arbitrage and international governance standards attract global capital.

The regulatory landscape continues to evolve in favour of greater openness. The practical and legal framework for foreign investment in Indian debt is now mature, transparent, and globally competitive.

The content of this document does not necessarily reflect the views / position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up, please contact Khaitan & Co at editors@khaitanco.com.