The RBI has revised the ECB framework to allow
companies in the infrastructure sector to raise shorter term
foreign currency denominated ECBs with a minimum average maturity
of 5 years.
The Reserve Bank of India (RBI) has, through
its circular dated 30 March 2016 (Circular), relaxed the existing
External Commercial Borrowings (ECBs) policy to
allow, companies and financial institutions raising funds for the
infrastructure sector to raise shorter term ECBs, albeit subject to
a 100% hedging requirement.
The RBI had on 30 November 2015, released a revised framework on
ECBs (Revised Framework), under which the RBI had
laid out three tracks through which Indian borrowers could borrow
funds from overseas. Track I allowed shorter term ECBs with a
minimum average maturity (MAM) of 3/5 years. Track
II covered long term ECBs with a MAM of 10 years while Track III
allowed ECBs denominated in Indian Rupees with a MAM of 3/5 years.
The Revised Framework also provided for a specific list of eligible
borrowers under each Track.
Although the RBI had generally expanded the list of eligible
borrowers under the Revised Framework, companies and financial
institutions raising funds for the infrastructure sector were only
allowed to raise ECBs under Track II and Track III. The RBI seemed
to have made this change to encourage long term borrowing in this
sector, however, this proved to be counter-productive as it greatly
reduced the availability of funds for infrastructure projects and
impaired the Indian borrower's flexibility in securing short
term ECBs. The current Circular therefore seeks to address this
Key changes introduced by the Circular
(a) Eligible borrowers and MAM
Companies in the infrastructure sector, Non-Banking Financial
Companies-Infrastructure Finance Companies
(NBFC-IFCs), Non-Banking Financial Companies-Asset
Finance Companies (NBFC-AFCs), holding companies and core
investment companies (CICs) are now eligible to
avail ECBs under Track I. While the MAM for all borrowers under
Track I is 3/5 years (depending on the amount borrowed), the MAM
for the entities listed above is at least 5 years irrespective of
the amount of borrowing.
(b) Hedging requirement
The RBI has allowed companies in the infrastructure sector,
NBFC-IFCs, NBFC-AFCs, holding companies and CICs to avail foreign
currency ECBs under Track I, subject to 100% hedging of the
exposure. The cost of hedging is a significant expense that
borrowers will need to account for when availing ECBs which could
impact the utilising of ECBs under this track. This 100% hedging
requirement is to be verified by Authorised Dealer Category-I banks
and filings under ECB-2 returns are required to be made to the RBI.
Further, these borrowers are required to have a board approved risk
management policy in place.
(c) Inclusion of sub-sectors under the infrastructure
Under the Revised Framework, companies operating in sectors set
out in the Government's Harmonised Master List of
Infrastructure sub-sectors were permitted to raise ECBs. The
exploration, mining and refinery sectors are not included in this
list and therefore, though under the previous ECB regime they were
allowed to raise ECBs, they seemed to have been excluded from the
To address this lacuna, the Circular, specifically provides that
for the purposes of raising ECBs, the exploration, mining and
refinery sectors will be deemed to be included in the
infrastructure sector and therefore companies in these sectors may
avail ECBs under Track I.
The Circular requires companies in the infrastructure sector to
utilise the proceeds raised under Track I for the specific end-uses
permitted under this Track, which include capital expenditure in
the form of import of capital goods services, expansion of
projects, modernisation, refinancing of existing ECBs etc. However,
NBFC-IFCs and NBFC-AFCs are permitted to raise ECBs only for
(e) Individual limit for borrowing
Under the Revised Framework, companies in the infrastructure and
manufacturing sectors are permitted to avail ECBs up to USD 750
million in a financial year under the automatic route, in all three
tracks. Now, NBFC-IFCs, NBFC-AFCs, holding companies and CICs may
also avail ECBs under all three tracks without government approval
up to USD 750 million in a financial year.
The RBI's current decision to open up Track I ECBs for the
infrastructure sector is a positive development and a much needed
change to address the critical needs of this sector. Though having
said that, a 100% hedging requirement could still make ECBs under
this route inefficient and uneconomical for many borrowers.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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.
The committee set up to draft a Code on Resolution of Financial Firms, by the Ministry of Finance, Government of India, on September 28, 2016, released a draft bill – The Financial Resolution and Deposit Insurance Bill, 2016...
In a race to adopt technology innovations, Banks have increased their exposure to cyber incidents/ attacks thereby underlining the urgent need to put in place a robust cyber security and resilience framework.
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).