Rule changes on external commercial borrowing

In the past, India has been cautious about regulations governing foreign currency borrowing. Given the infrastructure and investment deficit, the new government has taken bold steps to encourage external commercial borrowings (ECBs), i.e. foreign currency borrowing by companies in India.

Some of the key changes in the Master Circular on External Commercial Borrowings and Trade Credits, issued by the Reserve Bank of India (RBI) on 1 July, are analysed below.

General corporate purposes

The funding of Indian subsidiaries has been one of the primary issues faced by foreign companies. Due to the earlier restrictions on the end use of ECB funds, foreign equity shareholders mostly opted for the route of injecting funds in the form of expensive equity, which did not provide any clarity over immediate returns.

On 4 September 2013, the RBI gave an initial respite by suggesting that a foreign shareholder holding at least 25% of the Indian subsidiary directly would be able to provide a loan (ECB) under the approval route, which allows the funds to be used for general corporate purposes.

Subsequently, through a circular dated 16 May 2014, the RBI has allowed direct foreign equity shareholders of Indian companies in the manufacturing, infrastructure, hotels, hospitals and software sectors to provide loans (ECBs) for general corporate purposes, which includes for working capital purposes. This would be available with the approval of the authorized dealer bank, subject to: (a) the direct foreign equity shareholder being a 25% shareholder; (b) the ECB not being used for prohibited purposes; and (c) the principal repayments to start after seven years from the date of disbursement. The same is available to all eligible borrowers for all other sectors with approval from the RBI.

Jeet Sen Gupta is a partner, Deep Roy is an associate partner and Megha Agarwal is an associate at Economic Laws Practice. This article is intended for informational purposes and does not constitute a legal opinion or advice.