The recent increase in liquidity and availability of capital in the economy has prompted the Reserve Bank of India (RBI) to change its policy on external commercial borrowings (ECBs), reverting to the pre-credit crunch regulatory framework. In its recent circular of 9 December the RBI has removed the relaxations on the ceilings of all-in-costs, which had earlier been extended to companies seeking loans from foreign lenders. The change was to effect on 1 January 2010. However, the RBI also announced that certain concessions to the telecommunication and infrastructure sector will be extended.
Earlier this year the RBI announced that, until June 2009, it would dispense with the ceilings on the all-in-costs for ECBs procured under the approval route. Thereafter, after considering the continuing pressure on credit in the international markets, the RBI decided to extend the relaxation until 31 December. Having possibly decided that the prevailing macroeconomic conditions are no longer inhibiting the ability of companies to access credit, the RBI has now reintroduced the ceilings on interest rates that can be charged by foreign lenders to Indian companies.
Hence the prescribed all-in-cost ceilings for ECBs under the approval route are 300 basis points over the six-month LIBOR for loans with an average maturity of three to five years, and 500 basis points over the six-month LIBOR for loans with an average maturity of more than five years. The circular however provides eligible borrowers an opportunity to enjoy the benefits of the previous regime, provided the loan agreement is signed on or before 31 December 2009. The RBI has affirmed that such proposals will continue to be considered under the approval route.
In 2008, due to several factors including the sharp rise in interest rates, the depreciating value of the rupee, a decrease in demand and a considerable decline in stock prices, the RBI changed its policy to permit the use of ECB funds for buying back foreign currency convertible bonds (FCCBs). The move was welcomed by market participants because of the FCCB redemption pressure being faced by Indian corporate entities. However, with the capital markets witnessing increased liquidity in the last few months, the RBI has withdrawn this permission.
As a part of its stimulus package, the RBI changed the ECB norms to allow companies engaged in the development of integrated townships to tap resources in the international market. This move helped the housing sector weather the credit crunch and have continued access to funds for expansion and development plans. The RBI has now stipulated that companies in this sector can continue to borrow funds through the ECB route until 31 December 2010.
Recognizing the specific needs of the infrastructure sector, in January 2009, the RBI had changed its policy to permit non-banking financial companies (NBFCs) that invest exclusively in infrastructure projects to use ECBs from multilateral or regional financial institutions, and government-owned development financial institutions, under the approval route. This relaxation was subject to the condition that the ratio of aggregate commitment of such external lending institutions to India’s infrastructure projects, in relation to their total ECB lending to NBFCs, should not be less than 3:1. Though helpful, the move failed to achieve the desired effect, since the eligibility criterion it required of prospective lending institutions was prohibitive. The RBI, in response, tweaked its ECB policy in June to dispense with such eligibility requirements. This change has been further extended by the RBI in its December circular.
Interestingly, the RBI has liberalized the ECB end-use policy for the telecom sector as well, even though this sector witnessed spectacular growth last year despite the credit crunch; the revenues of the industry increased by 20.7% last year. The rationale is perhaps that the RBI seeks to introduce to introduce policies that provide adequate support to telecom companies, especially since these companies face constant pressure to meet rising demands and to continue to create and invest in new markets and products, such as the 3G spectrum.
Previously the RBI had supported telecom market participants by allowing them to use ECBs for making payments to obtain 3G spectrum licences. Maintaining the consistency of all other aspects of the ECB policy that were introduced in October 2008, the RBI has now permitted telecom companies to use ECBs for the purpose of making payments for acquiring spectrum. However, it still remains unclear whether the proceeds of ECBs can be used for acquiring broadband wireless access spectrum.
The RBI has clarified that the ECB policy changes should not be viewed as outright capital control measures and instead should be viewed as price and quality based controls on debt inflow in the country. While the impact of these changes remains to be seen, it will be particularly interesting to see if these changes will lead to the revival of the domestic credit market.
Parneeta Singh is a senior associate at Trilegal in Mumbai where Vardaan Ahluwalia is an associate. 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.
23 Madhuli, 2nd Floor
Dr. Annie Besant Road
Mumbai 400 018
Tel: +91 22 2481 9999
Fax: +91 22 2481 9998
149 Richmond Rd
Bangalore, 560 025
Tel: +91 80 4151 5252
Fax: +91 80 4151 5210