India – Revised Framework For External Commercial Borrowings

8 February, 2016

 

 

The Reserve Bank of India (‘RBI’) has introduced a revised framework for external commercial borrowings (‘ECB’) by its circular dated November 30, 2015 (‘New ECB Framework’). The New ECB Framework appears to be based on the following overarching principles:

 

1. Overall, the RBI has adopted a rationalised approach towards Indian companies accessing the foreign debt market. This has resulted in more relaxed and liberal conditions for companies in the manufacturing and infrastructure sectors, as well as a more permissive overall regime (with higher cost ceilings and fewer end-use restrictions) for longer term ECBs as well as ECBs denominated in Indian Rupees (‘INR’) (i.e. in cases where the risk of INR depreciation is borne by the lender).
2. Certain key end-use restrictions continue to apply to all forms of ECBs. For in- stance, ECBs still cannot be used for real estate activities, investments in capital markets and domestic equity investment or for on-lending for these activities or for purchase of land.
3. The RBI has also clarified positions in relation to certain long-standing ambiguities under the New ECB Framework. For instance, it has now been clarified that ECBs may be backed by credit enhancement, guarantees and insurance provided by offshore parties provided that such offshore parties are eligible lenders under the ECB regulations. Similar clarifications have been provided in the context of changes to various parameters of an ECB, with significant delegation of powers of approval to authorised dealers (‘AD’).

 

The New ECB Framework introduces three tracks under which Indian entities will now be permitted to raise borrowings from overseas entities under the automatic and approval routes as summarised below:

 

Track I : Medium term foreign currency denominated ECB

 

• Minimum Average Maturity: Three years for ECB up to US$50 million or equivalent and five years for ECB beyond US$ 50 million or equivalent.
• Eligible Borrowers: Companies in the manufacturing and software development sectors, shipping and airline companies, Small Industries Development Bank of India (‘SIDBI’), units in special economic zones (‘SEZs’), Export Import Bank of India (‘Exim Bank’) (which is permit- ted to raise ECB only under the approval route).
• Eligible Lenders: International banks, international capital markets, multilateral financial institutions, regional financial institutions and government owned (either wholly or partially) financial institutions, export credit agencies, suppliers of equipment, foreign equity holders, overseas long term investors (which include prudentially regulated financial entities, pension funds, insurance companies, sovereign wealth funds, financial institutions located in interna- tional financial services centres in India) and overseas branches/subsidiaries of Indian banks.
• Permitted End-use: ECB proceeds under Track I can be utilised for the following purposes:

 

1. Capital expenditure in the form of import of capital goods including payment towards import of services, technical know-how and license fees, provided the same are a part of these capital goods, local sourcing of capital goods, new projects, modernisation/expansion of existing units, overseas direct investment in joint ventures and wholly owned subsidiaries, acquisition of shares of public sector undertakings at any stage of disinvestment under the disinvestment programme of the government of India, refinancing of existing trade credit raised for import of capital goods, payment of capital goods already shipped/imported but unpaid, re- financing of existing ECB provided the residual maturity is not reduced;
2. SIDBI can raise ECB only for the purpose of on-lending to borrowers in the micro, small and medium enterprises sector;
3. Units of SEZs can raise ECB only for their own requirements;
4. Shipping and airlines companies can raise ECB only for import of vessels and aircrafts respectively;
5. ECB proceeds can also be used for general corporate purpose (including working capital) provided the ECB is raised from the direct/indirect equity holder or from a group company for a minimum average maturity of five years;
6. Further, ECBs for the following purposes will be considered under the approval route:

• Import of second hand goods as per the guidelines issued by the Director General of Foreign Trade; and
• On-lending by EximBank. 

 

All-in Cost Ceiling:

 

300 basis points per annum over six month London Inter Bank Offered Rate (‘LIBOR’) or applicable bench mark for the respective currency, for ECB with minimum average maturity period of three to five years; and 450 basis points per annum over six month LIBOR or applicable bench mark for the respective currency, for ECB with average maturity period of more than five

years.

 

Further, penal interest, if any, for default or breach of covenants should not be more than two per cent over and above the contracted rate of interest.

 

Track II : Long term foreign currency denominated ECB

 

• Minimum Average Maturity: 10 years irrespective of the amount.
• Eligible Borrowers: All entities listed as eligible borrowers under Track I, companies in the infrastructure sector, holding companies, core investment companies, real estate investment trusts and infrastructure investment trusts coming under the regulatory framework of the Se- curities and Exchange Board of India.
• Eligible Lenders: All entities listed as eligible lenders under Track I except overseas branch- es/subsidiaries of Indian banks.
• Permitted End-use: The ECB proceeds can be used for all purposes except real estate activities, investing in capital markets and domestic equity investment, on-lending to other entities with any of the aforesaid objectives and purchase of land. Additionally, holding companies can also use ECB proceeds for providing loans to their infrastructure special purpose vehicles.
• All-in Cost Ceiling: The maximum spread over the bench mark will be 500 basis points per annum.All other conditions prescribed under Track I in this regard will apply.

 

Track III : Indian Rupee denominated ECB

 

• Minimum Average Maturity: This will be the same as prescribed under Track I.
• Eligible Borrowers: All entities listed as eligible borrowers under Track II, all non-banking financial companies (‘NBFCs’), NBFCs-micro finance institutions (‘NBFCs-MFIs’), not for profit companies (registered under the Companies Act, 1956 or the Companies Act, 2013), societies, trusts and cooperatives (registered under the relevant state or central legislations), non-gov- ernment organisations (‘NGOs’) which are engaged in micro-finance activities (provided that entities engaged in micro-finance activities shall be eligible to raise ECB if they have a satisfac- tory borrowing relationship for at least three years with an AD category I bank in India, and have a certificate of due diligence on ‘fit and proper’ status from the AD category I bank), com- panies engaged in miscellaneous services such as research and development, training (other than educational institutes), companies supporting infrastructure, companies providing logis- tics services, developers of SEZs and national manufacturing and investment zones (‘NMIZs’).
• Eligible Lenders: All entities listed as eligible lenders under Track I except overseas branch- es/subsidiaries of Indian banks. Further, in case of NBFCs-MFIs, other eligible micro-finance institutions (‘MFIs’), not for profit companies and NGOs, ECB can also be availed from overseas organisations and individuals who fulfil the conditions prescribed in the circular on the New ECB Framework.
• Permitted End-use: The following end-use restrictions are applicable under Track III:
• NBFCs can use ECB proceeds for on-lending to the infrastructure sector, providing hypothecated loans to domestic entities for acquisition of capital goods/equip- ment and providing capital goods/equipment to domestic entities by way of lease and hire-purchases;
• Developers of SEZs/NMIZs can raise ECB only for providing infrastructure facili- ties within the SEZ/NMIZ;
• NBFCs-MFI, other eligible MFIs, NGOs and not for profit companies can raise ECB only for on-lending to self-help groups or for micro-credit or for bona fide micro- finance activities including capacity building;
• For other eligible entities under Track III, the ECB proceeds can be used for all purposes except for real estate activities, investing in capital markets and domes- tic equity investments, on-lending to other entities with any of the aforesaid ob- jectives and purchase of land.
• All-in Cost Ceiling: The all-in-cost of the borrowing should be in line with the market conditions. 

For further information, please contact:

 

Zia Mody, Partner, AZB & Partners

zia.mody@azbpartners.com