RCom defaults a test case for new India law

Indian mobile phone operator controlled by Anil Ambani failed to pay a coupon on its 2020 dollar notes

The first default on US dollar bonds by an Indian company in 15 months may become a closely-watched test case for how international creditors will fare under the country’s new bankruptcy laws.

Reliance Communications Ltd, the Indian mobile phone operator controlled by billionaire Anil Ambani, failed to pay a coupon on its 2020 dollar notes before the expiry of a grace period on Monday, according to a person familiar with the matter. It’s India’s most high-profile default on international debt since the nation’s insolvency and bankruptcy code was passed in May 2016. The company’s shares and bonds fell to record low.

The new rules, part of Prime Minister Narendra Modi’s push to make India more investor-friendly, are designed to speed up debt restructurings in a country whose banking system is plagued by the highest stressed-asset ratio in 17 years. An improved resolution process would not only encourage foreign money managers to increase holdings of Indian distressed debt, it could also help reduce borrowing costs for companies across the credit spectrum.

“If the restructuring is done properly and fairly, this could set a good precedent and global creditors will take comfort that debt restructuring can have a satisfactory outcome in India,” said Dhiraj Bajaj, Singaporebased portfolio manager at Lombard Odier.

While it’s unclear whether offshore creditors will utilise the new rules, Ernst & Young LLP says bondholders can prompt companies to come up with a debt resolution plan or face liquidation if they fail to do so after 270 days. There hasn’t yet been a case in India where this process was initiated by offshore bondholders, according to Ernst & Young. The last Indian dollar bond default was Rolta India Ltd, which failed to honour an obligation in August 2016.

Old rules

Under the old rules, “the only option available to bondholders was liquidation,” said Abizer Diwanji, partner and national leader for financial services at Ernst & Young. “And that took forever.”

The defaulted 2020 notes issued by Reliance Communications, once India’s second-largest wireless operator, were trading at a record low of about 35.6 cents on the dollar as of 4.03pm in Hong Kong. The company’s shares slid 3.3 per cent to an all-time low of Rs11.8. The firm also missed interest payments due on November 2 and November 7 on two rupee-denominated bonds.