To improve the ease of doing business, the Reserve Bank of India (RBI), in consultation with Government of India, notified a new framework for external commercial borrowings (ECB) on 16 January 2019. The new ECB framework has made significant changes and has liberalized the manner in which Indian entities can raise ECBs.
The changes were brought about to consolidate RBI’s regulations governing all types of borrowing and lending transactions between a person resident in India and a non-resident in both foreign currency and Indian rupees.
The new framework has merged the existing tracks under which ECBs can be raised. Track I and track II, which dealt with medium-term and long-term foreign currency ECBs, have been merged into a single track, foreign currency-denominated ECBs. Track III, which dealt with Indian rupee denominated ECB’s and the framework in respect of rupee denominated bonds issued overseas (masala bonds), have been merged into rupee-denominated ECBs. With the merging of tracks and bringing masala bonds within the ECB framework, the RBI has simplified the process of raising funds.
Under the new framework, ECBs cannot be used for repayment of domestic rupee loans. However, the RBI, in its circular dated 7 February 2019, has permitted resolution applicants participating in the corporate insolvency resolution process to raise fund through ECBs. This will enable resolution applicants to explore additional avenues for restructuring.
The new framework has also expanded the list of eligible borrowers and recognized lenders. All entities permitted to receive foreign direct investment are now eligible borrowers, thus widening the scope of entities such as limited liability partnerships and non-banking finance companies (NBFC) to raise funds through the ECB route.
Existing borrowers under the old framework continue to remain eligible under the new framework. Further, all eligible borrowers under the new framework are allowed to raise ECBs up to US$750 million or equivalent per financial year under the automatic route.
The list of eligible lenders has been expanded to include all entities that are residents of Financial Action Task Force (FATF) or International Organization of Securities Commission (IOSCO) compliant countries. Multilateral and regional financial institutions of which India is a member country are also eligible to lend. Individuals, who are equity holders or are subscribing to bonds listed abroad, foreign branches or subsidiaries of Indian banks can now lend foreign currency-denominated ECB (except foreign currency convertible bonds and foreign currency exchangeable bonds). These changes are likely to make India a more attractive destination to foreign lenders and boost foreign capital inflow.
Further, the minimum average maturity period has been reduced to three years, irrespective of the instrument of borrowing, instead of three, five and 10 years earlier. The increase of eligible lenders coupled with a shorter minimum average maturity period will enable Indian companies to raise short term finance.
Under the old framework, borrowers under track I, raising loans with durations of three to five years were required to hedge 100% of their ECB exposure. However, this has now been reduced to 70% for infrastructure companies. In all other cases, companies are required to comply with the hedging guidelines, if any, issued by the concerned sectoral or prudential regulator. The lower hedging costs will enable Indian companies to raise ECB’s on competitive terms, but exposes them to currency risks.
With the relaxation in norms for individual lenders, companies under financial distress have now been afforded some relief as they can raise funds from their foreign shareholders. Further, in the case of ECBs raised from foreign equity holders, the minimum average maturity period is five years and the proceeds can be utilized for working capital and general corporate purposes, and also for repayment of rupee loans.
The major beneficiaries of these new guidelines would be the NBFC, who will now to able to raise funds via the ECB route, allowing them to provide capital to domestic companies and comes as a relief from the liquidity crunch. The new framework is a welcome move in terms of making India a favourable destination for foreign capital inflows, which in turn will stabilize the Indian rupee. Although we may note that, in light of the relaxation of hedging requirement and reduction of the minimum average maturity period, the long-term impact of the revised framework remains to be seen.
SNG & Partners has offices in New Delhi, Mumbai and Singapore. Devashree Limaye is an associate and Medha Unadkat is a legal consultant.
SNG & Partners
One Bazaar Lane, Bengali Market
New Delhi – 110001