Charting The Course: India's Debt Finance Trends And Budget Expectations Shaping 2025

The debt finance landscape in India in 2024–25 saw varying trends and updates from both market and regulatory perspectives, presenting new opportunities and challenges for investors and businesses. Understanding these trends is crucial as innovative financing mechanisms reshape capital flows in the economy. .Revised regulations, rules and directions introduced by the Reserve Bank of India and the Securities and Exchange Board of India have significantly impacted the financing trends in India: .SEBI has made it mandatory for any entity, which has outstanding listed non-convertible debentures, to compulsorily list any additional NCDs it issues. The only exception to this requirement is where the NCDs are issued to multilateral institutions, such as the International Finance Corp., Asian Development Bank and African Development Bank Group.However, the caveat to such issuances to multilateral institutions is that the terms of the issue including embedded options, security offered, interest rates, charges, commissions, premium and period of maturity is required to be disclosed to the stock exchange, from time to time. Thereby, while there has been an increase in financing by such multilateral financial institutions to Indian entities, these entities have also been little reluctant, given their terms and pricing, which gives such entities a competitive edge, is available in public domain. .The RBI has introduced regulations and penal charges in loan accounts requiring banks and non-banking financial companies to specify the exact default amount instead of setting out a blanket default rate. Given that the RBI has not prescribed a uniform methodology for charging such penal charges, it has led to varied interpretations by different institutions, influencing borrowers' choices when seeking debt financing. .Financing through IFSCs, particularly GIFT City in Gujarat, has gained momentum due to regulatory exemptions and relaxations. Key benefits include: Exemption from Indian withholding taxes on interest payments to IFSC banks. A 10-year tax holiday for GIFT IFSC banks lowers borrowing costs, attracting more businesses. Significant tax benefits for aircraft leasing transactions, including a 100% income-tax holiday for 10 years..Budget 2025: Customs Duty Cut On High-End US Goods Likely Amid Trump's Tariff Calls — Profit Exclusive.Following the Union Budget 2024–25, this act has implemented key reforms to enhance India's financial sector, particularly debt capital markets. A major highlight is the rationalisation of capital gains taxation on unlisted debt securities, incentivising a shift toward listed instruments despite increased compliance costs.Listed debt securities now face a uniform tax rate of 12.5%, up from 10%, while listed REITs and InvITs benefit from reduced holding periods for long-term gains. These changes aim to promote liquidity and long-term investment in listed securities, aligning with the government's push for a more efficient, investor-friendly market.While the reforms may challenge the unlisted debt market, they are expected to stimulate overall growth and parity between debt and equity markets, requiring stakeholders to adapt to this evolving financial landscape. .Budget 2025: From AI, Upskilling, Subsidies To Renewables, Tech Sector Leaders Reveal Expectations.From a market perspective, a plethora of factors resulted in the upswing and downswing of various types of financing, including certain traditional financing structures and a few newer structures. Public Sector Borrowing: Public sector units in infrastructure, energy and financial sectors borrowed heavily this year and were able to secure competitive pricing, given the surge in their respective industries and the fact that the majority of these public sector units are AAA rated. Government Security Yields: A decline in the government security yields by over 100 basis points has been one of the major factors, which resulted in increased borrowings due to better pricing being available to the borrowers. Infrastructure Push: The government of India's push for infrastructural scaling has enabled infrastructure companies and, in-turn infrastructure finance companies to increase their borrowing and lending capacities respectively. Global Events Impact: Ongoing conflicts in Israel, Palestine, and Iran have affected financing trends. In September 2024, foreign institutional investors pulled out approximately Rs 4,500 crore from the Indian market owing to the volatility in the Middle East, which affected the feasibility of such FIIs to remain invested in India from an overall cost perspective. However, a reduction in foreign investment in India was countered by an increase in domestic financing. It is estimated that in September 2024 itself, the domestic institutional investor funding in India scaled up to Rs 5,000 crore. .Budget 2025 Expectations: Focus On Defence, Aerospace Sector; Tax Incentives For Power Sector.As Finance Minister Nirmala Sitharaman prepares to present the budget on Feb. 1, the Union Budget 2025 is expected to significantly impact India's debt finance sector by focusing on fiscal responsibility, debt management, and growth-oriented reforms.Enhanced capital expenditure, particularly in infrastructure, is anticipated to drive private investment and boost domestic demand, fostering long-term economic growth. Stakeholders are advocating for targeted incentives to encourage private sector investments and reforms in tax policies, such as restoring long-term indexation benefits for debt funds, to rejuvenate investor interest and liquidity in debt markets.Amid global uncertainties, the projected GDP growth of 6.4% for FY25 underscores the need for a balanced approach between fiscal discipline and growth stimulation. By addressing these priorities, the budget is expected to set the stage for a robust and investor-friendly debt finance ecosystem, critical for India’s sustained economic progress..Manisha Shroff is a partner, Siddhant Shetty is senior associate and Aparna Arya is an associate at Khaitan & Co.Disclaimer: The views expressed here are those of the authors and do not necessarily represent the views of NDTV Profit or its editorial team..Budget 1991 Rewind: How Manmohan Singh Revived The Indian Economy

Charting The Course: India's Debt Finance Trends And Budget Expectations Shaping 2025

The Union Budget 2025 is expected to significantly impact India's debt finance sector by focusing on fiscal responsibility, debt management and growth-oriented reforms.

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