Revised ECB regulations: Old wine in new bottle

By Sawant Singh and Aditya Bhargava, Phoenix Legal
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The Reserve Bank of India’s (RBI) statement on developmental and regulatory policies for December proposed “rationalizing” the external commercial borrowing (ECB) framework “with a view to improving the ease of doing business”. While the statement served as a forewarning, no draft regulations were placed on the RBI’s website for public comments.

On 17 December, the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018, were notified, superseding the previous regulations.

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Sawant Singh
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The RBI issued further directions on 16 January. The revised framework comprising these directions and the 2018 regulations simplifies the “tracks” for raising ECBs. Tracks I and II (for foreign currency-denominated ECBs) of the previous ECB framework are now merged into a single “foreign currency-denominated ECB” track. Track III (for rupee-denominated ECBs) and rupee-denominated bonds are now merged into a “rupee-denominated ECB” track.

Eligibility conditions for borrowers have been simplified by allowing all entities eligible to receive foreign direct investment to raise ECBs. The range of eligible borrowers has also been expanded to allow registered not-for-profit companies, registered societies, trusts and cooperatives, and non-government organisations engaged in micro-finance to raise rupee-denominated ECBs.

Eligibility for lenders has also been simplified as the residents of Financial Action Task Force (FATF) and International Organisation of Securities Commissions (IOSCO) compliant countries are now considered recognized lenders. Further, multilateral financial institutions and regional financial institutions of which India is a member will also be considered recognized lenders. Individuals can be recognized lenders only if they are foreign equity holders or hold debentures that are listed outside India.

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Aditya Bhargava
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The minimum average maturity for all ECBs is now three years, with exceptions for: (a) loans of up to US$50 million by borrowers in the manufacturing sector, which must have a minimum average maturity of one year, and (b) ECBs raised from foreign equity holders and utilized for working capital or general corporate purposes, or repayment of rupee loans, which must have a minimum average maturity of five years. Under the automatic route, a single borrower can now raise up to US$750 million by way of ECBs in a financial year.

The revised ECB framework retains the cap on all-in-cost prescribed by the previous framework. The term all-in-cost includes rate of interest, other fees, expenses, charges, guarantee fees, and export credit agency charges (whether paid in foreign currency or rupees), and must not exceed 450 basis points above the applicable benchmark rate.

For ECBs denominated in foreign currencies, the benchmark is the six-month interbank interest rate applicable to the currency (for instance, London Inter-bank Offered Rate and Euro Inter-bank Offered Rate). For rupee-denominated ECBs, the benchmark rate is the prevailing yield of the government of India securities of corresponding maturity.

The revised ECB framework also retains the previous framework’s prescriptions on end uses. An ECB cannot be raised for real estate activities, investment in capital markets, or equity investment. ECBs for working capital purposes, general corporate purposes, and repayment of rupee loans can only be raised from a foreign equity holder. ECBs for on-lending for any of the above activities is also not permitted. As in the previous ECB framework, any drawdown can only take place after obtaining a loan registration number from the RBI.

Borrowers are also required to follow hedging guidelines issued by their sectoral regulator. Where an ECB has a maturity of less than five years, 70% of the ECB exposure is required to be hedged. A financial hedge should have a minimum tenor of one year with a periodic rollover, and should cover principal as well as coupon amounts. A natural hedge (in lieu of a financial hedge) will only be considered to the extent of projected cashflows and revenues in similar currencies (in the same accounting year), which are net of all other projected outflows.

While the revised ECB framework simplifies certain aspects of raising ECBs, for the most part, the changes overlap with the previous framework. While this provides continuity, it also gives a sense of regulatory inertia. Although the revised ECB framework does not include sweeping changes, it would have been useful if drafts of the 2018 regulations and the RBI’s directions were placed on its website for public comments to assess stakeholder expectations.

Sawant Singh and Aditya Bhargava are partners at the Mumbai office of Phoenix Legal.

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