India: ECB Policy Overhauled - Two Steps Forward, One Step Back

The much anticipated revisions to the External Commercial Borrowings (ECB) regime was announced by the Reserve Bank of India (RBI) on 30 November 2015 and became effective from 2 December 2015 upon relevant regulatory notifications being made in the official gazette of the Government of India as the revised framework of the ECB policy (the Revised ECB Framework). The Revised ECB framework was preceded, earlier this year, by a liberalised framework for the issuance of rupee denominated bonds overseas ('Masala Bonds', as they are popularly called), which was introduced by the RBI on 29 September 2015.

The Revised ECB Framework is, inter alia, intended to:

  1. liberalise the ECB regime, with fewer restrictions on end uses, higher all-in-cost ceiling, etc. for long term foreign currency borrowings;
  2. incentivise INR denominated ECBs so as to transfer the currency risk to the lender;
  3. expand the list of overseas lenders to include long-term lenders such as, insurance companies, pension funds and sovereign wealth funds;
  4. align the list of infrastructure entities eligible for availing ECBs with the 'Harmonised List' of the Government of India.

The key highlights of the Revised ECB Framework are as follows:

Classification of ECBs based on tenor – introduction of a 3-Track approach

The bifurcation of ECBs into approval and automatic routes (with parameters such as eligible borrowers, recognised lenders, permitted end-uses and other restrictions) under the extant ECB guidelines has been largely modified and linked to three identified 'Tracks' under the Revised ECB Framework, on the basis of Minimum Average Maturity (MAM) and currency denomination, as follows:

Track 1

Medium term foreign currency denominated ECBs can be availed with a MAM of 3/5 years

Track 2

Long term foreign currency denominated ECBs can be availed with a MAM of 10 years

Track 3

Indian rupee denominated ECBs can be availed with a MAM of 3/5 years

While ECBs availed under any of the above Tracks are under the automatic route (provided such ECBs are in compliance with the specified limits and parameters applicable for such Track), the RBI approval route continues to be applicable in comparatively limited cases such as: (i) ECBs beyond the borrowing limits specified under each Track, (ii) Foreign Currency Exchangeable Bonds, (iii) borrowings and on-lending by the Export Import Bank of India, and (iv) ECBs for the purposes of importing second-hand goods. The intent behind this revision appears to be to discourage applications under approval route beyond the limited categories as set out above.

Larger pool of Recognized Lenders/Investors

One of the key positive changes to the Revised ECB Framework is the introduction of a new category of 'overseas long term investors' as recognised lenders, which includes prudentially regulated financial entities, pension funds, insurance companies, sovereign wealth funds and financial institutions located in 'Institutional Financial Services Centres' in India. However, the term 'prudentially regulated financial entities' is not defined and requires further clarity.

In addition, the RBI has also included group companies of eligible borrowers (which have a common overseas parent) within the realm of a 'foreign equity holder'. The expansion in the list of recognized lenders is a welcome move and is expected to increase the flow of funds from these sources, keeping in mind the increasing interest recently shown by these long term investors to participate in the Indian debt market.

However, overseas branches / subsidiaries of Indian banks cannot provide ECBs under Track II and Track III, which may end up restricting this source of funding, particularly to the Infrastructure sector.

Liberalisation of Borrowing Limits for certain sectors

Under the Revised ECB Framework, companies in the infrastructure sector (which includes hotels and hospitals) and the manufacturing sector are now permitted to avail ECBs up to USD 750 million in a financial year, under the automatic route, as opposed to the earlier limit of USD 200 million applicable to companies in the hotels and hospitals sector under the erstwhile regime.

However, the borrowing limits for companies in the software sector have been retained at USD 200 million per financial year. Further, entities engaged in micro-finance activities can now avail up to USD 100 million while all other entities have to comply with a ceiling of USD 500 million in each financial year.

Although the limits have been significantly relaxed for certain sectors which fall within the definition of 'infrastructure sector' under the Harmonised Master List of Infrastructure sub-sectors dated 27 March 2012 (the Harmonised Master List), overall, the borrowing limits available to companies in all other sectors have been reduced from USD 750 million to USD 500 million in a financial year.

Importantly, the RBI has clarified that the limits under the Revised ECB Framework are separate from and in addition to the USD 750 million limit specified under the Masala Bonds regime.

No substantive alterations to the list of Eligible Borrowers

Except a few additions, the list of 'eligible borrowers' has not been significantly altered but has been spread out under the three Tracks. These additions include Real Estate Investment Trusts (REITs) /Infrastructure Investment Trusts (INVITs) (under Track II and Track III) and companies providing logistic services (under Track III).

Similar relaxations have been extended to developers of Special Economic Zones (SEZs) and National Manufacturing Investment Zones (NMIZs) (who could earlier avail ECBs under the approval route), as they have now been listed as eligible borrowers under Track III.

Further, under the erstwhile regime, airline companies were permitted to avail ECBs only for working capital purposes under the Approval Route. Under the Revised ECB Framework, airline and shipping companies have been identified as 'eligible borrowers' (for import of aircrafts or vessels only) under all three Tracks. Limited liability partnerships continue to remain ineligible for availing ECBs.

Another key change is in respect of non-banking financial companies (NBFCs), which can now avail ECBs only under Track III, which entirely eliminates access to foreign currency denominated ECBs for NBFCs.

Significant implications for the Infrastructure sector

Under the new regime, companies in the 'infrastructure sector' can avail ECBs under Track II and Track III. As a result, infrastructure companies would no longer have access to shorter term foreign currency denominated ECBs under Track I but only long term ECBs under Track II and INR denominated ECBs, under Track III.

Moreover, the definition of 'infrastructure sector' has now been linked with the Harmonised Master List. It may be worthy to note that, although the definition of 'infrastructure sector' under the erstwhile ECB regulations remains largely similar to the definition set out under the Harmonised Master List, certain additional infrastructure sub-sectors which appear in the Harmonised Master List are slurry pipelines and parks with industrial activity such as food parks, textile parks, agricultural markets and terminal markets. On the other hand, certain important sectors such as mining, exploration, refining and fertilizers have been removed from the ambit of 'infrastructure sector' according to the Harmonised Master List, which means that only the Masala Bonds route would now be available to companies engaged in mining, oil and gas exploration and refining and fertilizers, who are seeking to avail financing from non-resident lenders.

Similarly, developers of low-cost affordable housing projects (who could earlier avail ECBs under the approval route), have now been removed as 'eligible borrowers' under the present ECB regime and would therefore have access to debt financing from non-resident lenders only in the form of Masala Bonds, after 31 March 2016.

All-in-Cost Ceilings tightened further

Under the Revised ECB Framework, guarantee fees (payable in INR or foreign currency), and all other fees, charges, expenses payable in INR are now included within the calculation of the all-in-cost ceiling.

Further, the Revised ECB Framework mandates a reduction of 50 basis points for ECBs under Track I as compared to the erstwhile ECB regulations. However, for ECBs availed under Track III, the all-in-cost shall be in conformity with the prevailing market conditions.

In addition, whilst the erstwhile ECB regulations stated that penal interest should not be more than 2% of the all-in-cost (which would include rate of interest, fees and expenses in foreign currency), the Revised ECB Framework states that the penal interest should not be more than 2% over and above the 'contracted rate of interest'.

No Major Relaxations in the Permitted End-uses

The Revised ECB Framework has segregated the permitted end-uses under the different Tracks and has included fewer restrictions on end-uses. For example, direct / indirect foreign equity holders and group companies are now permitted to provide ECBs for general corporate purposes with a lower MAM period of 5 years (as opposed to 7 years under the erstwhile regime).

Further, the Revised ECB Framework has extended the benefit of borrowing for 'general corporate purposes' as a permissible end-use to all eligible borrowers under Track I and Track II, and Track III other than for NBFCs, developers of SEZs / NMIZs, other eligible MFIs, NGOs and non-profit companies.

Separately, the Revised ECB Framework has also provided for certain additional end-uses which are now permitted under the automatic route. For example, payment of capital goods already shipped/imported but unpaid has been added as a permitted end-use under the Revised ECB Framework. Shipping and airlines companies can now raise ECB only for import of vessels and aircraft respectively and refinancing of existing trade credits raised for import of capital goods are now permitted under Track I.

Tightening the regime for overseas guarantees for securing ECBs

Broadly, the regime for securing ECBs remains consistent with the erstwhile ECB Regulations. However, ECBs can now be credit enhanced or guaranteed by an overseas party only if the guarantor qualifies as a recognized lender under the Revised ECB Framework. The restrictions on issuance of guarantees, SBLCs, letters of undertaking or letters of comfort by Indian banks, all India financial institutions and NBFCs relating to ECB continue to prevail. Further, financial intermediaries have been specifically restricted from investing in FCCBs.

Extension of time for parking ECB Proceeds

While the conditions in relation to parking of ECB proceeds are similar to erstwhile guidelines, the Revised ECB Framework permits eligible borrowers to park ECB proceeds (meant for Rupee expenditure) in unencumbered term deposits with AD banks up to 12 months (previously 6 months).

Additional 'no-objection' required for prepayment

Under the Revised ECB Framework, any pre-payment of ECBs availed under the new regime, subject to compliance with the stipulated MAM, will now require a prior No-Objection Certificate (NOC) from the AD Bank. Under the erstwhile regime, so long as the MAM of the original ECB was maintained, no approvals/NOCs were required.

Sunset provisions

ECBs can be raised under the erstwhile ECB regime up to 31 March 2016, provided the loan agreement is signed before 2 December 2015. Additionally, ECBs can be raised under the erstwhile regulations by:

  1. airline companies for meeting their working capital requirements;
  2. consistent foreign exchange earners under USD 10 billion Scheme; and
  3. low cost affordable housing projects, provided the loan agreement is signed and the Loan Registration Number is obtained prior to 31 March 2016.

Comment

The Revised ECB Framework has been drafted with a view to provide a simplified and more liberalized regime for ECBs. While the new regime attempts to streamline the applicable regulatory framework and has opened up opportunities for a wider category of lenders to participate in lending to Indian borrowers, further clarity is required on some aspects (as set out below), in order to properly achieve the policy objectives:

  • The Revised ECB Framework is silent on the provisions in the erstwhile ECB regulations on structured obligations, trade credits and bridge financing. Consequently, it is unclear whether these provisions continue to remain applicable and may require clarifications from RBI in due course;
  • It is unclear whether or not the Masala Bonds regime is to be read in conjunction with the new ECB framework (under Track III). If the former view is adopted, it would open up a 'IVth Track' whereby companies such as software companies that have limits under the Revised ECB Framework would be able to borrow an additional USD 750 million through the Masala Bond route;
  • The revised definition of "infrastructure sector" seems to have unintentionally left out certain key sectors like mining and oil & gas exploration, which largely relied on ECBs for their capital expenditure requirements. The revised definition will potentially have implications for other RBI or SEBI Regulations which refer to the ECB Guidelines for the definition of 'infrastructure'. For example, per SEBI's previous notifications, foreign portfolio investors (FPIs) would be permitted to invest in unlisted NCDs issued by corporates in the 'infrastructure sector' (as defined in the ECB guidelines);
  • Financing for low cost housing schemes and working capital facilities for airline companies would be phased out by 31 March 2016 and this may dry up sources of financings for such cash-strapped sectors;
  • Permissions set out under the erstwhile ECB regime for spectrum allocation have been omitted under the Revised ECB Framework, which may be interpreted as the intention of RBI to disallow such end-uses, despite the telecom sector being a recognized 'infrastructure sector' borrower. RBI may, on a case-to-case basis, consider ECBs to be availed for spectrum allocation, under the approval route, such that Telecom companies have access to ECBs as and when a fresh round of spectrum auction is contemplated by the Government of India;
  • The all-in-cost requirements under Track III have been left to 'prevailing market conditions' and are dependent on the interest of foreign lenders to take exposure in Rupees to Indian borrowers. RBI may, in the future, consider re-assessing whether the all-in-cost requirements under Track II should be subject to a ceiling or should be left to market conditions;
  • NBFCs and NBFC-MFIs have been clubbed under Track III only for certain specific end-uses. Considering that such financial market players may be more sophisticated in terms of determining the foreign currency risks and have been raising foreign currency borrowings, RBI may consider providing such NBFCs access to foreign currency denominated ECBs under Track I and Track II.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at legalalerts@khaitanco.com

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Singhania & Partners LLP, Solicitors and Advocates
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Singhania & Partners LLP, Solicitors and Advocates
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions