In the July/August edition of India Business Law Journal, we outlined the series of recent relaxations introduced by the Reserve Bank of India (RBI) to the exchange control policy governing external commercial borrowings (ECBs) raised by Indian entities.
Close on the heels of these changes, and as a further measure against the global credit crisis, the RBI has introduced a slew of further relaxations to ECB policy, pursuant to its circular issued on 22 October. The changes are, perhaps, the most sweeping reforms to the ECB guidelines in the last seven months and seek to mitigate the overall impact of the credit crunch on the Indian economy.
According to the circular, ECBs of up to US$500 million per borrower per financial year are now permitted for rupee expenditure and/or foreign currency expenditure for permissible end-uses under the automatic route. The change marks a reversal to the position prevailing prior to August 2007, when ECBs for rupee expenditure up to this limit were obtainable under the automatic route.
Moving rupee expenditure under the approval route in the interim led to a sharp decline in ECB funds being utilized for such expenditure. As an adjunct to this change, the requirement of a minimum average maturity period of seven years for ECBs valued at more than US$100 million for rupee capital expenditure by borrowers in the infrastructure sector, has also been dispensed with.
In a bid to develop the telecom sector, the permissible use of ECB proceeds has also been widened to include payments by telecom companies to obtain licences and permits for 3G spectrum services.
Historically, ECB proceeds had to be parked overseas until actual requirement in India. Such proceeds could be invested in the following liquid assets a) deposits or a certificate of deposit offered by banks rated not less than AA(-) by Standard and Poor’s, Fitch IBCA or Aa3 by Moody’s; b) deposits with an overseas branch of an authorized dealer in India; c) treasury bills and monetary instruments of one-year maturity, with a minimum rating as indicated above.
The circular provides borrowers with the flexibility to either keep the ECB proceeds offshore as above, or with overseas branches or subsidiaries of Indian banks abroad; or remit these funds to India for credit into their rupee accounts with their authorized dealer category I banks in India, where utilization for permitted end-uses is pending. However, the circular clarifies that the funds should not be used for capital markets, real estate or inter-corporate lending.
All-in-cost ceilings have been further rationalized. For ECBs with an average maturity between three to five years, the ceiling has risen from 200 to 300 basis points (bps) over six month London interbank offered rate (Libor). For ECBs with an average maturity of more than five years and up to seven years, the ceiling has increased from 350 to 500 bps, and from 450 to 500 bps over six months Libor for ECBs with an average maturity of more than seven years.
These revisions are subject to ongoing review, depending on international financial markets conditions, and do not alter any other aspects of foreign currency lending into India.
In order to reduce the negative repercussions on the Indian economy and domestic banks, Indian regulators have taken steps to respond to the global financial market meltdown. In an attempt to improve liquidity, cash reserve ratio and statutory liquid ratio rates have already been slashed and special repo rates were introduced, in addition to several other measures.
The changes are yet another central bank attempt to bolster credit inflows into India and enable corporates to raise funds, given the global credit squeeze. India’s infrastructure projects requiring financial closure, in particular, require access to capital.
Easier access to long-term foreign debt capital would be welcome at this juncture. Measures permitting the parking of funds with Indian banks, may, however, be aimed at providing liquidity to Indian banks rather than granting specific advantages to Indian borrowers.
Market sentiments suggest that the measures are too little too late, with several industry watchers questioning the squeeze on ECBs initiated late last year.
In a credit environment where institutions are struggling to borrow at Libor in the international markets and market disruption clauses are being invoked under existing facilities, the level of resources that would be available at the 500 bps spread is questionable.
International institutions are exiting their positions in similar investments in Asia, at levels that far exceed the Libor + 500 bps range, often selling their positions at deep discounts to raise immediate liquidity. The Indian revisions are certainly welcome, although, whether the measures are enough to provide immediate benefits to Indian corporates, remains to be seen.
Karan Singh is a partner and Ameya Khandge is a counsel at Trilegal in Mumbai. Trilegal is a full-service law firm that advises on corporate and commercial law in India and provides commercially oriented legal advice in relation to all sectors of the economy. The firm has offices in Delhi, Mumbai, Bangalore and Hyderabad and has over 100 lawyers, some with experience at law firms in the US, the UK and Japan.
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