Summary of the New Framework

As part of the Central government's aim to improve ease of doing business in India, the Reserve Bank of India (RBI) on 16 January 2019 notified a new external commercial borrowings framework (New ECB Framework). The New ECB Framework rationalises the existing external commercial borrowings framework (Old ECB Framework) by merging the existing Track I (medium-term foreign currency denominated ECB) and Track II (long-term foreign currency denominated ECB) into one track as 'Foreign Currency Denominated ECB'. Existing Track III (Indian Rupee denominated ECB) and the Indian Rupee denominated bonds (Masala Bonds) route has been merged as 'Rupee Denominated ECB'.

In its attempt to simplify the Old ECB Framework and influence the inflow of foreign debt, the RBI has further expanded the list of eligible borrowers, widened the list of recognised lenders, reduced the minimum average maturity period (MAMP) to 3 years and set a uniform individual limit of USD 750 million in a financial year for eligible borrowers, applicable across both types of ECB. The merging of Track III and Masala Bonds will also enable eligible borrowers to issue Masala Bonds without undergoing the verification process of the RBI that was previously required.

The RBI has also reduced the mandatory hedging requirement from 100% to 70% under the Foreign Currency Denominated ECB option for those entities covered under the term 'infrastructure space companies'. Further, under the Old ECB Framework, ECB proceeds raised from a recognised lender under Track II (which required a MAMP of 10 years) could be utilised to repay domestic Rupee loans. However, the RBI has removed such refinancing as a permissible end use in the new ECB Framework, unless the ECB is raised from foreign equity holders with a MAMP of 5 years. This may have an adverse impact on various sectors, but specifically the renewable energy sector which generally relies on refinancing of expensive long-term domestic Rupee debt with relatively cheaper offshore funds under the ECB route, once projects become operational.

While there are some ambiguities in the New ECB Framework announced by the RBI, we hope that the updated Master Directions (to be released by the RBI) will bring further clarity.

Key Changes

The key differences introduced under the New ECB Framework are summarised below:

(a) Merging of Tracks

Old Framework

New Framework

Three separate tracks (Track I, Track II and Track III) and a separate route for Masala Bonds.

The New ECB Framework has collapsed the tracks into two options i.e. Tracks I and II are merged as 'Foreign Currency Denominated ECB' and Track III and the Masala Bonds are merged as 'Rupee Denominated ECB'.

The tracks have been classified under two heads based on currency. Also, previously Masala Bonds were subject to a verification process by the RBI, but under the New ECB Framework there is no such requirement.

(b) Uniform Minimum Average Maturity Period

Old Framework

New Framework

Varying MAMP prescriptions for different ECB tracks:
-  1/3/5 years for medium-term ECB;
-  10 years for long term ECB; and
-  3/5 years for Masala Bonds.

Uniform MAMP of 3 years across all forms of ECB.
-  Manufacturing sector companies can raise ECB with MAMP of 1 year for ECB up to USD 50 million in a financial year. 
- ECBs raised from foreign equity holders and utilised for working capital purposes, general corporate purposes or repayment of Rupee loans, must have MAMP of 5 years.

The reduction in MAMP should attract more foreign funds for eligible Indian borrowers.

(c) Expanded list of Eligible Borrowers

Old Framework

New Framework

Separate lists of eligible borrowers for each track.

All entities eligible to receive foreign direct investment can borrow under the New ECB Framework irrespective of the type of ECB.

This is a key step in liberalisation as previously there was a narrow list of eligible borrowers. This change is expected to open ECB avenues for a range of new borrowing entities, such as companies in the service sector.

(d) Expanded list of Recognised Lenders

Old Framework

New Framework

Specific list of identified entities that could be lenders for different tracks of ECBs.

A single list of 'recognised lenders' for both ECB options.  The expanded list includes:
(i) lenders who are resident of an FATF or IOSCO compliant country;
(ii) Multilateral and Regional Financial Institutions where India is a member country;
(iii) individuals if they are foreign equity holders or subscribing to bonds listed abroad;
(iv) foreign branches/subsidiaries of Indian banks only for Foreign Currency Denominated ECB (except FCCBs and FCEBs).

This is a significant change and is expected to open the ECB route to a wider base of investors like private equity funds, hedge funds, etc. who will now be able to provide funding to Indian entities, with or without any equity exposure.

(e) All-in-Cost Ceiling

Like the Old ECB Framework, the New ECB Framework provides for a uniform all-in-cost of benchmark rate plus 450 basis points and excludes prepayment charges/fees from the all-in-cost ceiling. However, unlike the Old ECB Framework, the new framework now provides for a cap of 2% over and above the contracted rate of interest on the outstanding principal amount in relation to prepayment charges.

(f) End Use

Old Framework

New Framework

Refinancing of domestic Rupee loans under Track II was permitted.

End use for refinancing of domestic Rupee loans is permitted only if the ECB is from foreign equity holders with a MAMP of 5 years.

Under Track II of the Old ECB Framework which required a 10-year MAMP, refinancing of domestic debt was allowed as a permissible end use. In the New ECB Framework, the RBI has done away with the end use for refinancing of domestic Rupee loans under that window and has only permitted refinancing of Rupee debt as a permissible end use where the ECB is raised from foreign equity holders with a MAMP of 5 years. This is expected to have an adverse impact on various sectors including the renewable energy sector.

(g) Uniform Individual Limits

Old Framework

New Framework

Individual limits of up to:
-  USD 750 million for companies in infrastructure and manufacturing sectors, Infrastructure Finance Companies, Asset Finance Companies, Holding Companies and Core Investment Companies;
-  USD 200 million for companies in software development sector;
-  USD 100 million for entities engaged in micro finance activities; and
-  USD 500 million for remaining entities, in a financial year under the automatic route.

All eligible borrowers can raise ECBs up to USD 750 million in a financial year under the automatic route.
A rule-based dynamic limit of 6.5% of the GDP at current market prices for outstanding stock of ECBs has also been announced through a RBI circular dated 20 December 2018.  Details of how such dynamic limits will be implemented are awaited.

(h) Reduced Hedging Requirements

Old Framework

New Framework

Mandatory hedging requirement of 100% for specified eligible borrowers under Track I.

Reduction in mandatory hedging requirement from 100% to 70% for 'infrastructure space companies' under the Foreign Currency Denominated ECB track.
'Infrastructure space companies' inter alia includes companies in the infrastructure sector and non-banking finance companies undertaking infrastructure financing.

(i) Late Submission Fee (LSF) for delay in Reporting

Old Framework

New Framework

Any contravention of the Old ECB Framework invited penal action under provisions of the Foreign Exchange Management Act, 1999 (FEMA).

Any borrower, who is otherwise in compliance of ECB guidelines, except for a delay in reporting drawdown of ECB proceeds before obtaining LRN or Form ECB 2 returns, can regularize the delay by payment of a late submission fee, as prescribed.
However, Form ECB and Form ECB 2 returns reporting contraventions will be treated separately.  Non-payment of late submission fee will be treated as a contravention of reporting provision and shall be subject to compounding or adjudication as provided in FEMA.

With the inclusion of this change, borrowers who are otherwise in compliance can regularise their reporting delays without having to go to the RBI for compounding contraventions.

(j) Renamed Form ECB

Form 83 has been renamed Form ECB under the New ECB Framework.

(k) Standard Operating Procedure (SOP) for Untraceable Entities

The New ECB Framework introduces a new concept of 'SOP for Untraceable Entities' which provides the action plan to be undertaken by the RBI against untraceable entities who are in contravention of reporting provisions under the New ECB Framework, for eight quarters or more.

(l) ECB by Entities under Restructuring

Old Framework

New Framework

Entities under restructuring could raise ECB only with explicit permission of the Joint Lender Forum/Corporate Debt Restructuring Empowered Committee.

Entities under a restructuring scheme/corporate insolvency resolution process can raise ECBs only if specifically permitted under the resolution plan.

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.