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Conventus Law

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29 January, 2019

 

INTRODUCTION

 

  • External Commercial Borrowings Policy, 2019 (Regulations 2019) aims to consolidate and rationalize the regulatory provisions dealing with External Commercial Borrowings (ECB) and rupee denominated bonds
  • Regulations 2019 have superseded the Master Direction – External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorized Dealers and Persons other than Authorized Dealers
  • The new policy has two tracks : Foreign Currency Denominated (FCY) ECB and Rupee Denominated (INR) ECB
  • It has been clarified that the ECB framework is not applicable in respect of the investment in Non-Convertible Debentures in India made by Registered Foreign Portfolio Investors 

 

KEY DEFINITIONS IN REGULATIONS 2019

 

All-in-Cost: Rate of interest, other fees, expenses, charges, guarantee fees, Export Credit Agency (ECA) charges but does not include commitment fees and withholding tax payable in INR

 

Financial Action Task Force (FATF) Compliant Country: Member of Financial Action Task Force (FATF); or
Member of a FATF – Style Regional Body

 

Foreign Equity Holder:

 

Direct foreign equity holder with minimum 25% direct equity holding by the lender in the borrowing entity; Indirect equity holder with minimum indirect equity holding of 51%; or
Group company with common overseas parent

 

International Organization of Securities Commission (IOSCO) Compliant Country: Country whose securities market regulator is a signatory to the IOSCO’s Multilateral MoU or to bilateral MoU with SEBI for information sharing arrangements

 

Real Estate Activities: Any activity involving own or leased property for buying, selling and renting of commercial and residential properties or land and also includes activities either on a fee or contract basis assigning real estate agents for intermediating in buying, selling, letting or managing real estate 

 

KEY PROVISIONS IN REGULATIONS 2019

 

Merging of Tracks

 

Tracks I and II under the earlier framework are merged as “Foreign Currency denominated ECB” and Track III and Rupee Denominated Bonds framework are merged as “Rupee Denominated ECB”

 

Minimum Average Maturity Period (MMAP)

 

Regulations 2019 has revised the Minimum Average Maturity Period to 3 years irrespective of the amount raised through ECB. However, for ECB raised from foreign equity holder and utilized for specific purposes, the MAMP would be 5 years. Similarly, for ECB up to USD 50 million per Financial Year (FY) raised by manufacturing sector, the MAMP could be 1 year

 

Eligible Borrowers

 

The definition of ‘Eligible Borrowers” has now been expanded to include all entities that are eligible to receive foreign direct investments and other specified entities like port trust, units in an SEZ, startups, etc. This would imply that even LLP, trading entities, service entities, etc. eligible for FDI would now also be allowed to avail the ECB facility

 

Recognized Lenders

 

The ‘Recognized Lender’ definition has been expanded to include any entity that is a member of the Financial Action Task Force and International Organization of Securities Commissions 

 

KEY PROVISIONS IN REGULATIONS 2019

 

Annual Borrowing Limit

 

General limit for ECB under automatic route is revised to USD 750 million in a FY for all Eligible Borrowers. Startups can raise up to USD 3 million, in the new list of Eligible Borrowers

 

All-in-Cost

 

All-in-Cost ceiling (the interest rate) on ECBs will be benchmark rate plus 450 basis points. The benchmark rate is the 6-month London Interbank Offered Rate (LIBOR) or any other 6-month interbank interest rate applicable to the currency of borrowing

 

End-use Restrictions

 

ECB proceeds cannot be availed for the following: Real estate activities; investment in capital market; equity investment; working capital purposes except from foreign equity holder; general corporate purposes except from foreign equity holder; repayment of rupee loans except from foreign equity holder; or on-lending to entities for the above activities

 

Late Submission Fee

 

Late submission fee has been introduced for delay in reporting could be in the range of INR 5,000-INR 50,000 per year or INR 100,000 depending on the delay. It provides an opportunity to borrowers who are otherwise in compliance of ECB guidelines, except for delay in reporting drawdown of ECB proceeds before obtaining Loan Registration Number (LRN) or Form ECB 2 returns to regularize the delay by payment of LSF as per the laid down procedure 

 

COMPARATIVE ANALYSIS : NOTABLE CHANGES WITH RESPECT TO ECB POLICY 2016

Sr. No.

Parameters

ECB Policy 2016

ECB Policy 2019

Comments

1.

Merging of Tracks

Under the previous policy, the framework for raising loans through ECBs comprised of three tracks namely Track I, II and Track III

Track I and II are merged and termed as “Foreign Currency denominated ECB” whereas Track III is merged with Rupee Denominated Bonds and termed as “Rupee Denominated ECB”

Under the previous policy different limits for raising loans through ECBs were provided for eligible borrowers mentioned under Track I, II & III but after the merger of the track the ECB framework is rationalized and a common limit is provided

COMPARATIVE ANALYSIS : NOTABLE CHANGES WITH RESPECT TO ECB POLICY 2016

Sr. No.

Parameters

ECB Policy 2016

ECB Policy 2019

Comments

2.

Eligible Borrowers

  • List of “Eligible Borrowers” were categorized under three tracks namely Track I, II & III

  • Companies in shipping and airlines sector, infrastructure sector, Housing Finance Companies, Small Industrial Development Bank of India (SIDBI), Export Import Bank of India (EXIM Bank) were listed under Track I

  • Real Estate Investment Trusts, Infrastructure Investment Trusts in addition to borrower under Track I were listed under Track II

  • All the borrowers mentioned under Track II, Non-Banking Finance Companies, not for profit companies, Societies, Trusts and Registered Societies, NGOs, Companies in research and development, companies providing logistics services, developers of Special Economic Zones (SEZ) and National Manufacturing and Investment Zones were mentioned

As all the three tracks are merged, the list of “Eligible Borrowers” has been expanded to include all entities eligible to receive FDI and:

  • Port Trusts

  • Units in SEZ

  • SIDBI

  • EXIM Bank

  • registered entities engaged in

    micro-finance activities, viz.,

    registered not for profit companies

  • registered societies / trusts /

    cooperatives

  • NGO’s

The erstwhile regulations restricted eligible borrowers and therefore service companies and trading entities were not eligible for ECB but under the new policy all entities that are eligible to receive FDI and other specified entities like Port Trust, units in a SEZ are allowed to raise loans through ECBs

COMPARATIVE ANALYSIS : NOTABLE CHANGES WITH RESPECT TO ECB POLICY 2016

Sr. No.

Parameters

ECB Policy 2016

ECB Policy 2019

Comments

3.

Eligible Lenders

  • List of eligible lenders was categorized into three tracks namely Track I, II and III

  • International banks, international capital markets, Multilateral Finance Institutions (MFIs), Regional Finance Institutions (RFIs), ECA, foreign equity holders, overseas investors and overseas subsidiaries of Indian banks were mentioned under Track I

  • Under Track II, all entities listed under Track I but for overseas, branches / subsidiaries of Indian banks were mentioned

  • Under Track III, in addition to lenders mentioned under Track II, overseas organizations and individuals were also mentioned as recognized lenders but only in the case of NBFCs-MFIs, not for profit companies and NGOs availing ECBs

  • Lender should be the resident of FATF and IOSCO compliant country

  • MFIs and RFIs where India is a member country will also be considered as recognized lenders.

  • Individuals as lenders were also permitted provided that they should be foreign equity holders

  • Foreign branches / subsidiaries of Indian banks are permitted as recognized lender only for foreign currency ECB except Foreign Currency Exchange Bonds (FCEB) and Foreign Currency Convertible Bonds (FCCB)

The earlier regulations restricted eligible lenders to international banks, multilateral financial institutions, direct and indirect equity holders, etc. The ‘Recognized Lender’ definition has been expanded to include any entity that is a member of the FATF and IOSCO

COMPARATIVE ANALYSIS : NOTABLE CHANGES WITH RESPECT TO ECB POLICY 2016

Sr. No.

Parameters

ECB Policy 2016

ECB Policy 2019

Comments

4.

Limit

• Limit for raising loans through ECBs under automatic route was different for each category of borrower i.e. USD 750 million for companies in infrastructure and manufacturing sectors, NBFCs, holding and investment companies

  • USD 200 million for companies in software development sector, USD 100 million for entities engaged in micro finance activities

  • USD 500 million for remaining entities

  • Since the tracks were merged, the limit for raising loans through ECB under automatic route is revised to USD 750 million in a financial year for all eligible borrowers

  • Oil marketing companies shall now be eligible to raise USD 10 billion or equivalent, on obtaining board approval

  • Startups can raise USD 3 million or equivalent

Individual annual borrowing limit has been expanded to USD 750 million for raising loans through ECBs instead of track wise individual limits for entities provided in the erstwhile regulations

COMPARATIVE ANALYSIS : NOTABLE CHANGES WITH RESPECT TO ECB POLICY 2016

Sr. No.

Parameters

ECB Policy 2016

ECB Policy 2019

Comments

5.

Minimum Average Maturity Period (MAMP)

  • MMAP for rupee denominated bonds up to USD 50 million in a financial year was 3 years

  • MMAP for bonds raised above USD 50 million in a financial year was 5 years

  • MMAP for Long term foreign currency denominated ECB was 10 years

MAMP has been set to 3 years irrespective of the amount raised through ECB

However, for ECB raised from foreign equity holder and utilized for specific purposes, the MAMP would be 5 years.

Similarly, for ECB up to USD 50 million per financial year raised by manufacturing sector, which has been given a special dispensation, the MAMP would be 1 year

The earlier minimum maturity period was 3 / 5 / 10 years based on the quantum and purpose of ECB raised. The revised ECB framework reduces the overall minimum maturity period to 3 years

 

OTHER ASPECTS OF REGULATIONS 2019

 

There is no change with respect to all-in-cost as compared to the erstwhile regulations. The permissible cap is the same

Existing Carve Outs have been removed under the new policy

 

  • ECB facility for working capital by airlines companies
  • ECB facility for consistent foreign exchange earners under the USD 10 billion Scheme
  • ECB facility for low cost affordable housing projects

 

With the introduction of new ECB policy, certain changes in the procedure as well as in the Forms are also included ECB policy 2019 also does not provide any special benefits to Real Estate or Infrastructure sector except hedging

 

The new policy has introduced a late submission fee for delay in reporting which could be in the range of INR 5000-50000 per year or INR 100,000 depending on the delay.

 

 

 

For further information, please contact:  

Souvik Ganguly, Partner, Acuity Law

al@acuitylaw.co.in

 

 

 

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