During the last week of September, the Reserve Bank of India (RBI) issued several notifications liberalizing its external commercial borrowing (ECB) policy, in particular for the infrastructure sector.
ECB limits under the automatic route have been enhanced for the real sector (industrial and infrastructure sectors) from US$500 million to US$750 million per financial year and for the hotel, hospital and software sectors from US$100 million to US$200 million per financial year.
Refinancing of rupee loans: Companies in the infrastructure sector can now, under the approval route, use 25% of a fresh ECB to refinance existing rupee loans for capital expenditure of completed infrastructure projects. The remaining 75% must go towards capital expenditure in infrastructure projects.
One significant limitation of this provision is that each infrastructure project is typically housed in a standalone special purpose vehicle (SPV). Such SPVs cannot apply loan proceeds in this split fashion across two projects.
Bridge finance: Companies in the infrastructure sector are now permitted to import capital goods using short-term credit (including buyers’/suppliers’ credit) as bridge financing subject to this being replaced with a long-term ECB. Such bridge financing may be obtained under the approval route. The replacement of the bridge financing with a long-term ECB also requires the RBI’s approval.
Interest during construction: “Interest during construction” has been included as a permissible end-use of ECBs, subject to the condition that such interest is capitalized and is a part of the project cost. This is extremely useful as many companies were seeking to fund such interest through ECBs instead of through up-front equity.
Structured obligations: Foreign equity holders can now provide credit enhancement to companies engaged in the development of infrastructure and to infrastructure finance companies for domestic debt raised through capital market instruments. Minimum equity holding thresholds are imposed as qualifying criteria to provide such credit enhancement – 25% and 51% for direct and indirect equity holders, respectively.
Renminbi funding: Infrastructure sector companies can now obtain ECBs in renminbi under the approval route, with an annual cap of US$1 billion. It will be interesting to see the demand for renminbi given the involvement of some infrastructure sectors with Chinese suppliers.
Previously, ECBs from foreign equity holders exceeding US$5 million attracted a maximum debt-equity ratio. This has been clarified and rephrased as “ECB liability-equity ratio”. The objective: other debt should not be included while computing the ratio and only total ECBs (outstanding and proposed) from the foreign equity holder are counted.
Separately, free reserves (including share premium received in foreign currency from foreign equity holders) will also be counted as equity while determining the ratio.
Access to shareholder funding has also been relaxed through the introduction of the following changes:
- Earlier, a foreign equity holder to be eligible as a lender was required to directly hold at least 25% of the paid-up capital of the borrower. ECBs may now also be taken from indirect equity holders (subject to a minimum 51% equity holding) and group companies (provided the borrower and the lender are subsidiaries of the same parent). Prior RBI approval is however required for these ECBs.
- All service-sector units have now been recognized as eligible borrowers under the approval route for ECBs from foreign equity holders. Previously, eligible service-sector borrowers were
limited to hotels, hospitals and software.
- ECB liability-equity ratio in the above cases should not exceed 7:1. Where funding is from a group company, the ratio is tested against the equity of the common parent.
- ECBs from foreign equity holders can now be designated in rupees.
Does it work?
While the relief in some cases will be felt immediately, the big question is: will all of this work on the ground? Some of the current and previous changes still need refinement or further clarity. Take-out financing is a classic example of a previous relaxation that has not been fully tapped on account of regulatory ambiguity despite deep interest in the market. The same could hold true for some of the changes introduced through these notifications.
While the RBI clearly intends to relax policy in response to the global and local economic scenario, for the full benefit of these changes to be felt, the RBI must actively engage with market participants to provide clarification or practical changes wherever these are warranted.
Ameya Khandge (Ameya.Khandge@trilegal.com) is a partner at Trilegal in Mumbai where Siddharth Saxena (Siddharth.Saxena@trilegal.com) is an associate. Trilegal is a full-service law firm with offices in Delhi, Mumbai, Bangalore and Hyderabad and has over 140 lawyers.
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