Liberalization of external commercial borrowings

By Shardul Thacker, Mulla & Mulla & Craigie Blunt & Caroe
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External commercial borrowing (ECB) can take several forms: bank loans; buyers’ credit; suppliers’ credit; securitized instruments; credit from official export credit agencies and international capital markets; and commercial borrowings from multilateral financial institutions, such as the International Finance Corporation and ADB.

Shardul Thacker Partner Mulla & Mulla & Craigie Blunt & Caroe
Shardul Thacker
Partner
Mulla & Mulla & Craigie Blunt & Caroe

The government’s ECB policy envisages and outlines the ways in which Indian companies are entitled to borrow funds from prescribed overseas entities as a source of financial assistance for enhancing their existing capacity and also for fresh investment.

The regulation of debt raised from ECB funding has been governed by standards of economic external debt management, with the aim of providing increased flexibility and access to borrowings by Indian commercial houses by maintaining low service costs and long maturity periods.

Slowdown calls for open doors

The international economic crisis, recessionary pressures in the developed world and a slowdown in domestic and international demand have adversely affected funding via the ECB route, due to reduced mobilization of funds from overseas lenders. India has witnessed a sharp downturn in the quantum of ECBs raised, from US$21.45 billion in 2007 to US$13.78 billion in 2008.

The ECB policy is periodically reviewed by the government of India and the Reserve Bank of India (RBI), in line with the developing macroeconomic conditions, sectoral requirements and changing global market conditions.

The adverse impact of the sluggish domestic and external economies and the continued reticence of lenders to make adequate financial resources available has prompted calls for the relaxation of corporate borrowing norms, in order to stimulate economic growth. In response, the RBI has recently introduced significant liberalizations to the ECB policy.

Specific areas of reform

Previously, the ECB policy did not permit the proceeds of ECBs to be used for the development of integrated townships. Integrated townships include housing, commercial premises, hotels, resorts, city and regional level urban infrastructure facilities built in an area of at least 100 acres.

To facilitate access to funds for the housing sector, the ECB policy now permits corporations engaged in the development of integrated townships to access ECB under the approval route, until 31 December.

Non-banking financial institutions

Previously, non-banking financial companies (NBFCs) that are exclusively involved in financing the infrastructure sector could access ECBs from multilateral or regional financial institutions and government-owned development financial institutions, for lending to borrowers in the infrastructure sector under the approval route of the RBI, provided that the direct lending portfolio of the eligible lenders in relation to their total ECB lending to NBFCs was not less than 3:1.

The RBI has now decided to do away with this restriction in order to facilitate increased lending to NBFCs in the infrastructure sector.

Special economic zones

Pursuant to the ECB policy, units in a Special Economic Zone (SEZ) were permitted to access ECBs for their own requirements. However, ECBs could not be used for the development of an SEZ.

The RBI has now modified the ECB policy to allow SEZ developers to avail ECBs, under the approval route, for the creation of infrastructure such as industrial parks, ports and power facilities within the SEZ.

However, SEZ developers are restricted from raising ECBs for building integrated townships and commercial real estate within the SEZ. This move offers an additional avenue for SEZ developers to meet their funding requirements at a lower cost and is aimed at enhancing credit availability for small and medium enterprises.

Service sector

Presently, entities in the service sector, such as hotels, hospitals and software companies, are allowed to access ECBs of up to US$100 million per financial year for importing capital goods under the approval route.

The ECB norms have now been relaxed for the services sector: entities can raise the US$100 million under the automatic route, for both foreign currency and rupee capital expenditure, other than for land acquisition.

Liberalization of the ECB regime provides greater access to global markets, stringent credit rating of borrowers and facilitates commercial borrowings for augmentation of the Indian economy.

Shardul Thacker is a partner with Mulla & Mulla & Craigie Blunt & Caroe in Mumbai.

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