India: Changing Landscape Of The External Commercial Borrowings

Last Updated: 30 July 2019
Article by Vaish Associates Advocates

The corporates by and large procure funding through equity, debt or a combination of both. The External Commercial Borrowing ("ECB") deals with the debt branch of the funding wherein the corporates obtain funding from foreign body corporates. The primary reason attributable for undertaking ECB funding is associated to factors such as lower rate of interest on returns, less regulatory compliances etc.

The Reserve Bank of India ("RBI") vide its notification dated December 12, 20181 , liberalized the norms pertaining to external commercial borrowing and notified Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 (" Amended ECB Regulations"). Since these Amended ECB Regulations did not provide complete procedure for undertaking the ECB transaction therefore most of the provisions contained in the Amended ECB Regulations referred for framework which the RBI is required to frame in consultation with and Indian Government and accordingly, RBI vide master circular dated January 16, 20192 ("Master Circular") revamped, the procedure for undertaking ECB transaction and, compliance requirements concerning ECB transactions.

Significant Changes in ECB Regime introduced through the Master Circular

  1. Eligible borrowers: All entities which are eligible to raise foreign direct investment are eligible borrowers.
  2. Recognized lenders: The eligible lender shall be a resident of FATF or IOSCO compliant, however following category of lenders can also be considered as recognized lenders;

    1. multilateral or Financial Institution where India is a member country;
    2. individuals, as foreign equity holders (holding 25% direct stake or 51% indirect stake in the borrower), or as subscribers of bonds listed outside India, further following can also be recognized as eligible lenders;
    3. foreign branches/subsidiaries of Indian banks :

      1. can raise foreign currency denominated ("FCY") ECBs;
      2. can participate as underwriters, arrangers, market-makers, traders for Indian rupee ("INR") ECB subject to prudential norms compliance, however underwriting is not allowed by branches or subsidiaries of Indian banks in case the issuance is done by the Indian banks.
    OBSERVATION: The new ECB framework liberalized the category of lenders to include anyone as recognized lender as long as the lender is the resident is FATF or IOSCO compliant with some exceptions.
  3. Forms of ECBs: The new ECB regime has done away with the complex requirement of track system and categorized ECB into two forms i.e. Foreign currency denominated ("FCY") ECB and Indian Rupee denominated ("INR") ECB.
  4. Minimum average maturity period ("MAMP") : The changes brought into MAMP via new ECB regime are as follows:

    1. Uniform MAMP of 3 years across the board;
    2. Retention of the earlier MAMP of 1 year for the manufacturing sector;
    3. Specific class: for general corporate purposes or repayment of rupee loan, MAMP will be 5 years.
    The ECB framework casts a mandatory obligation on the parties of the ECB transaction to exercise the put or call option only after expiry of the MAMP.
  5. End-uses/Negative list: There is no change in the negative list for which the ECB can not be utilized.

    New Addition: The new addition introduces carve out in case of negative end use i.e. ECB proceeds can be utilized for working capital purpose, general corporate purpose and repayment of rupee loan availed from foreign equity holder.
  6. All-in-cost- the definition of all-in-cost remains unchanged with some additions namely,

    1. Issue related expenses should not exceed 4% of the issue size in case of FCCBs and
    2. Issue related expenses should not exceed 2% of the issue size in case of private placement
  7. Hedging provision: The Master Circular modifies the hedging requirement for infrastructure sector to 70% (earlier hedging requirement for infrastructure was 100%, with MAMP less than 5 years). The operational aspects, such as coverage requirement, tenor and natural hedging in relation to hedging, remains unchanged.
  8. Power of AD Category-1 Bank in case of prepayment of ECB: The erstwhile ECB framework gave power AD Category- 1 Bank to allow prepayment of ECBs in case of fulfillment of MAMP but the extant ECB Framework is silent if such power is still vested with the AD Category-1 Bank.
  9. Conversion of ECB into equity in phases: The Master Circular envisages additional reporting requirement through Form FC-GPR in case of conversion of ECB into equity in phases.
  10. Limits and Leverage:

    1. Limits: The erstwhile framework enumerated individual limits for raising ECBs in a financial year under the automatic route for different sectors
      for instance:
      limit in case of software development sector is
      The extant framework provides for a uniform limit of
    2. Leverage: The erstwhile framework specified the leverage limit for issuance of rupee denominated bonds in relation to the financial institutions, subject to governance by sectoral regulator.

      The extant framework also sets out that the debt-equity ratio cannot exceed 7:1 for the foreign currency denominated ECB raised from direct foreign equity holder3. It further provides for a carve out i.e. the ratio is not applicable in case the outstanding amount of all ECBs is up to
    Note: It is pertinent to note here that RBI in a step towards rationalization of ECB framework had introduced the debt equity ratio of 7:1 vide notification RBI/2017-18/169 A.P. (DIR Series) Circular No.254 dated April 27, 2018 but this ratio was deleted subsequently.
  11. Regularization in case of non-reporting – The erstwhile and extant framework both provides for the monthly reporting of actual ECB transaction, however, the extant framework moves a step ahead and provides for late submission fees in case of delay in reporting and thereby regularizes the delay in reporting.
  12. Standard Operating Procedure ("SOP") for untraceable entities: The Master Circular introduces the new concept of untraceable entity and defines untraceable entity. The ECB borrower is qualified as an untraceable entity if entity/auditor/director/promoter does not respond to email/letters or phone even after 6 or more remainders for a period of two quarters or more. Such untraceable entity is also required to fulfill both the following condition:

    1. it is found inoperative at the registered address of the company and
    2. entity has not submitted the statutory auditor's certificate for last two years or more.
  13. Unclear provisions : The Master Circular is unclear on certain aspects and below mentioned points requires clarification:

    1. The negative list for end use is inclusive which means any activity can be categorized as prohibited. If so, then how is the extant framework a step towards liberalization of ECB transactions?
    2. It is unclear if the requirement of lender to be a resident of IOSCO or FATA complaint country (as provided in para 2.1 of the Master Circular) is a general rule or merely a category of recognized lender.
    3. Para 10 of the Master Circular allows raising of ECB by entities under restructuring scheme/corporate insolvency resolution process, if specifically permitted by resolution plan. The language of para 10 suggests that the corporate debtor can raise ECB if the resolution plan permits such an arrangement, clarification is required as to how can a corporate debtor raise ECB as per by the resolution plan, as the resolution plan is prepared for the corporate debtor by the resolution applicant.

Comments:

The money market regulator towards the end of 2018 has brought significant changes into the regime of ECB thereby moving from conservative approach to a liberalized and rationalized approach. The remarkable change brought in by the extant ECB framework is doing away with the cumbersome process of identification of the track system in which the entity falls and thereby moving towards the process of ease of doing business.

The fact that economics plays a vital role in the study of law requires recognition in the present context for reasons attributed to the liberlised changes brought into the legislative framework concerning ECBs. Therefore, attention is drawn to the press release, issued by the Reserve Bank of India on 31st December 2018,5 on India's external debt as at the end of September 2018, wherein it is stated that "India's external debt witnessed a decline of 3.6 per cent over its level at end-March 2018, on account of a decrease in commercial borrowings and non-resident Indian (NRI) deposits. The decrease in the magnitude of external debt was primarily due to valuation gains resulting from the appreciation of the US dollar against the Indian rupee and major currencies .......Commercial borrowings continued to be the largest component of external debt with a share of 37.1 per cent, followed by NRI deposits (23.9 per cent) and short term trade credit (19.9 per cent)."

Acknowledging the fact that the major source of debt financing contributes to the economic growth, the fact that the extant framework is liberalised will be ascertained on publication of the next press release, which will raise curtain to the claim of liberalisation of ECB mechanism.

Further the extant framework is unclear on certain aspects highlighted in the above paragraph and clarification is required for undertaking ECB transaction, therefore, complete view as to whether the extant framework is a step towards liberalised approach is critical to the upcoming notifications.

Footnotes

1. https://rbidocs.rbi.org.in/rdocs/content/pdfs/EGAZ17122018.pdf

2. https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11456&Mode=0

3. 1. Important Terms used:

1.1..............

1.11 Foreign Equity Holder: It means (a) direct foreign equity holder with minimum 25% direct equity holding by the lender in the borrowing entity, (b) indirect equity holder with minimum indirect equity holding of 51%, or (c) group company with common overseas parent.

4. https://rbi.org.in/Scripts/NotificationUser.aspx?Id=11267&Mode=0

5. https://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/PR15057AD94442FC4A4777B03EDA9B4D282B4B.PDF

© 2018, Vaish Associates Advocates,
All rights reserved
Advocates, 1st & 11th Floors, Mohan Dev Building 13, Tolstoy Marg New Delhi-110001 (India).

The content of this article is intended to provide a general guide to the subject matter. Specialist professional advice should be sought about your specific circumstances. The views expressed in this article are solely of the authors of this article.

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
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please 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