Indian companies looking to raise debt overseas have typically had to do so through external commercial borrowings (ECB). ECB can take the form of loans, foreign currency convertible or exchangeable bonds, fixed or floating rate bonds and non-convertible, optionally or partially convertible preference shares. Until recently, the ECB regulations imposed restrictions regarding eligible borrowers, recognized lenders and end-uses that made it a challenge for borrowers and lenders alike. In 2016, changes were introduced to relax some of these conditions. However, these relaxations were of limited help as they applied only to recognized startups and were subject to ambiguities in language.
In January 2019, the Reserve Bank of India (RBI) issued a revised ECB framework that significantly simplified and liberalized the ECB regime. The revised ECB framework could have implications for private equity and venture capital investors looking to extend debt financing to Indian corporates.
The Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 (B&L regulations) issued in December 2018, sought to integrate all regulations governing borrowing and lending, both in Indian rupees and foreign exchange and between persons resident within and outside India under a single umbrella. The B&L Regulations also included an enabling clause that allowed eligible borrowers to raise ECB in both rupees and freely convertible foreign exchange. The revised ECB framework that the RBI issued subsequently in January 2019 provides further clarity on the changes that began with the B&L regulations.
Under the earlier regulations, there were three different tracks for raising ECB depending on the currency and tenor of the loan. ECB under each of these tracks had minor variations with respect to eligible borrowers and recognized lenders, end-use restrictions and all-in costs. The revised framework has merged the three tracks into two, with the only distinguishing factor being whether they are foreign currency or rupee denominated. Both tracks are now broadly subject to the same regulatory restrictions regarding the minimum average maturity period of the loan, minimum amount and end-use restrictions. This merger of tracks is indeed a welcome change that would, along with the changes described below, simplify what used to be an unnecessarily complex framework.
The most significant changes to the ECB framework relate to the categories of borrowers and lenders that are eligible to receive or advance ECB. The scope of eligible borrowers has been significantly expanded to include any entity that is eligible to receive foreign direct investment, rather than entities engaged in specific sectors, as was the case previously. This change is likely to remove the first hurdle faced by companies that were prima facie deemed to be ineligible borrowers based on the sector they operate in.
The revised framework also provides more flexibility on who can be a recognized lender. Under the prior regime, each track had a specific list of recognized lenders such as international banks, multilateral financial institutions, export credit agencies and foreign equity holders (defined as persons that held at least a direct equity interest of 25% or an indirect equity interest of 50% in the borrower). Under the revised framework, the only requirement for a lender (other than individual lenders, who are still required to be “foreign equity holders” of the borrower to qualify) is that it should be a resident of a Financial Action Task Force or International Organization of Securities Commissions compliant country.
Previously, private equity and venture capital funds could not advance ECB to Indian companies unless they were also foreign equity holders in such entities, which posed a significant deterrent to overseas investors wishing to advance loans through the ECB route. In fact, various private equity and venture capital funds had been forced to look at other options for lending to their portfolio companies such as by establishing a presence in India through a non-banking financial company (NBFC). The changes now mean funds are now be able to extend ECB to borrowers directly regardless of their equity ownership in the borrower.
Further, the revised regulations would also be an opportunity for individual non-resident shareholders, such as angel investors, to advance funds to borrowers through ECB. The ECB regime continues to be subject to certain restrictions, such as prescribing the forms of ECBs, a minimum average maturity period (three years) and limitations on end-use. On the whole, it is far more flexible, which is likely to lead investors to use the ECB framework creatively for lending to Indian companies.
Aparna Ravi is a partner and Samyuktha Damojipurapu is a senior associate at the Bengaluru office of Samvad Partners
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