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The Reserve Bank of India ("RBI") has released draft amendments to the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 ("Draft ECB Amendment Regulations"). The Draft ECB Amendment Regulations propose to make deep structural reforms and overhaul and revamp External Commercial Borrowings ("ECB") framework.
Some of the key changes proposed to the ECB framework under the Draft ECB Amendment Regulations are as follows:
Key changes
Eligible borrowers
Current position
In the last round of liberalisation, the RBI had substantially expanded the criteria of eligible borrowers permitted to avail ECBs to include any entity eligible to receive Foreign Direct Investment ("FDI").
Proposal
The RBI intends to further expand the list to include persons resident in India (other than an individual) incorporated, established or registered under the Central or State Act and subject to being permitted to borrow in term of applicable laws.
Implication
Entities which are incorporated in India (irrespective of the sector in which it operates and whether FDI is permitted in that entity) will be allowed to raise an ECB. This will now include limited liability partnerships who were earlier not permitted to borrow ECBs.
Recognised lenders
Current position
A lender (other than for certain specified categories) should be from a Financial Action Task Force ("FATF") or International Organisation of Securities Commissions ("IOSCO"), compliant jurisdiction.
Proposal
The Draft ECB Amendment Regulations propose to remove the requirement that an ECB lender should be from a FATF or IOSCO compliant jurisdiction. Any person resident outside India/branch outside India or in the International Financial Services Centre ("IFSC") of an entity whose lending business is regulated by the RBI, can lend an ECB.
Implication
All foreign residents will be able to extend ECBs irrespective of their jurisdiction being FATF or IOSCO compliant. Further, offshore and IFSC branches of Indian banks will also be able to extend Indian Rupees ("INR") ECBs.
Based on the Draft ECB Amendment Regulations, treasury centres of corporates (which are not regulated by RBI) may not be permitted to extend ECBs to their parent entity in India, which may need to be revisited at the time of finalisation of this regulation.
Borrowing limits
Current Position
Borrowers can raise ECB up to USD 750,000,000 (US Dollars seven hundred and fifty million) in a financial year under the automatic route. Borrowing entities are also required to comply with the debt equity ratio imposed by any sectoral or prudential regulator.
Proposal
The borrowing limit is now proposed to be enhanced to the higher of: (a) USD 1,000,000,000 (US Dollars one billion) will be permitted for all borrowers that are not regulated by financial sector regulators; or (b) total outstanding borrowing (both external and domestic) up to 300% of net worth as per the last audited balance sheet. No limit will apply to borrowers that are regulated by financial sector regulators (RBI, Securities and Exchange Board of India etc.). However, they will need to comply with the limits imposed by such financial sector regulators.
Implication
Entities with a high networth will be able to borrow a higher amount of ECBs without prior approval of the RBI. Earlier such frequent borrowers who were breaching the earlier annual cap for ECBs were going under the RBI approval route. Further, non-banking financial companies and other entities regulated by financial service regulators will be able to borrow without a cap under the ECB guidelines. It should be clarified whether the term 'outstanding borrowings' would include undrawn sanction limits or only the amounts that are drawn will be calculated within this limit.
Ceiling on cost of borrowing
Current position
Currently an all-in-cost ceiling of 500 (five hundred) Basis Points ("bps") over the benchmark for Foreign Currency ("FCY") ECB and 450 (four hundred and fifty) bps spread over the benchmark applies for INR ECB. Additionally, prepayment charge and penal interest can be up to an additional 2%.
Proposal
The cost of borrowing is proposed to be in line with market conditions, subject to satisfaction of the Authorised Dealer Bank ("AD Banks").
For ECBs with an average maturity period of less than 3 (three) years, the cost of borrowing is proposed to be additionally linked with cost ceiling specified for Trade Credits ("TCs") (i.e. benchmark rate plus 300 (three hundred) bps for FCY TCs and benchmark rate plus 250 (two hundred and fifty) bps for INR TCs). In the case of fixed rate loans, the swap cost plus spread should not be more than the ceiling.
Additionally, the ceiling of 2% on penal or default interest and prepayment penalty is proposed to be linked with prevailing market conditions as well.
Implication
This may increase the volume of ECBs and result in high-yield ECBs.
However, providing AD Banks with the discretion to determine the prevailing market rate may cause uncertainty and lead to varying practice by various AD Banks. RBI should consider setting out an objective criterion to what will constitute 'prevailing market rate' which may be overseen by AD Banks.
Minimum average maturity
Current position
The minimum average maturity of an ECB was determined basis its end-use.
Proposal
The minimum average maturity is now proposed to be 3 (three) years, irrespective of the end-use, other than for borrowers in the manufacturing sector for an ECB upto USD 50,000,000 (US Dollars fifty million) which may be between 1 (one) to 3 (three) years.
Further, the minimum Average Maturity Period ("MAMP") requirements will not need to be met if:
- ECB is converted into a non-debt instrument;
- ECB is repaid from proceeds of issue of non-debt instruments (on a repatriation basis) received after the drawdown of the ECB;
- waiver of the debt by a lender; or
- closure, merger, acquisition, resolution or liquidation of the lender or borrower.
The restriction on foreign branches or subsidiaries of Indian banks lending for certain end-uses (such as general corporate, working capital and repayment of INR debt) also appears to have been removed.
Implication
This will help borrowers to avail themselves of ECBs for varied end uses. Long term capital of 7 and 10 year maturities was scarce in the ECB market and with the liberalised position, the borrowers will have access to capital for larger pool of end uses.
No MAMP requirement for repayment of ECBs through raising of foreign equity will help structuring financing transactions effectively. RBI should consider expressly clarifying non-applicability of MAMP in case of payment under a corporate insolvency resolution process under the Insolvency and Bankruptcy Code, 2016 and a payment event of default under the loan document to provide better clarity to the ECB lenders.
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