Liberalization of External Commercial Borrowing norms
Nemin Shah (Chartered Accountant)
Ekta Dave (Chartered Accountant)
On December 17, 2018, the Reserve Bank of India (‘RBI’) had notified fresh Regulations with respect to External Commercial Borrowings (‘ECB’). These Regulations superseded the earlier Regulations issued in 2000. In continuation, on January 16, 2019, the RBI issued a Circular [A.P. (DIR) Circular 17] to give effect to the aforesaid Notification and prescribed fresh regulations with respect to ECB.
In simple terms, ECB means any loan obtained by a person resident in India from a non-resident. Certain capital instruments which are not fully and compulsorily convertible into equity shares are also classified as ECB, for example – Optionally Convertible Preference Shares.
In the wake of considerable volatility in the value of the Rupee against the US Dollar, some steps were required to be taken to enhance inflow of foreign exchange in order to stabilize the Rupee. To this end, the RBI has liberalized the Regulations with respect to ECB.
Eligible Borrowers
Earlier, different Eligible Borrowers operating in different sectors were prescribed under different Categories – Track I, Track II and Track III, however, these categories have now been eliminated. The definition of Eligible Borrowers has been simplified, and now all entities eligible to receive Foreign Direct Investment (‘FDI’) are now eligible for ECB as well. Thus, an Indian company, an Indian LLP operating in a sector where FDI under automatic route up to 100% is permitted and Start-up companies are eligible for ECB. Apart from these, Port Trust, SIDBI, EXIM Bank, Units in an SEZ and registered entities engaged in micro-finance activities continue to be eligible for ECB.
LLPs being permitted to raise ECB is a significant change. Earlier, the regulations allowing FDI in LLPs specifically restricted the LLPs with FDI from availing ECBs. However, this condition has been removed in 2017. The current change in the definition of Eligible Borrowers could pave the way for LLPs to avail ECB. However, the aforementioned circular does not expressly mention permitting LLPs to avail ECBs among the list of significant changes in the ECB Regulations. Hence, there is a possibility that this may be an unintended consequence.
Recognized Lenders
Earlier, a large list of Recognized Lenders was prescribed under different Categories – Track I, Track II and Track III. Since these categories have been eliminated, a common list of Recognized Lenders has been prescribed. The key criterion is that the lender should be a resident of a FATF or IOSCO compliant country.
The Financial Action Task Force (‘FATF’) is an inter-governmental body established in 1989 by the Ministers of its Member countries. The objectives of FATF are to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system.
FATF compliant country is a country that is a member of FATF or a member of a FATF-Style Regional Body, and should not be a country identified in the public statement of the FATF as (i) A country having a strategic Anti-Money Laundering or Combating the Financing of Terrorism deficiencies to which counter measures apply; or (ii) A country that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the Financial Action Task Force to address the deficiencies.
IOSCO compliant country is a country whose securities market regulator (similar to SEBI) is a signatory to the International Organization of Securities Commission\'s (‘IOSCO’) Multilateral Memorandum of Understanding (Appendix A Signatories) or a signatory to bilateral Memorandum of Understanding with the Securities and Exchange Board of India (SEBI) for information sharing arrangements.
Further to the above basic criteria, the following are also Recognized Lenders:
- Multilateral and Regional Financial Institutions where India is a member country;
- Individuals as lenders would be permitted only if they are foreign equity holders or for subscription to bonds/debentures listed abroad; and
- Foreign branches / subsidiaries of Indian banks would be permitted as recognized lenders only for foreign currency ECBs, subject to certain restrictions.
End-use restrictions
The end-use restrictions remain unchanged. ECB cannot be availed for the following:
- Real estate activities.
- Investment in capital market.
- Equity investment.
- Working capital purposes except from foreign equity holder.
- General corporate purposes except from foreign equity holder.
- Repayment of Rupee loans except from foreign equity holder.
- On-lending to entities for the above activities.
Earlier, these restrictions were applicable separately to Track I, Track II and Track III but now are consolidated into one list.
Minimum Average Maturity Period
The Minimum Average Maturity Period (in simple terms – the duration of the ECB) should be 3 years. However, in case ECB is raised from foreign equity holder and utilized for the purpose of working capital purposes, general corporate purposes or repayment of Rupee loans, the Minimum Average Maturity Period should be 5 years. A special benefit of a Minimum Average Maturity Period of 1 year was extended to manufacturing companies in order to avail ECB upto US$ 50 million or equivalent in a financial year vide A.P. Circular dated September 19, 2018. The same continues to apply even under the new Regulations.
All-in-cost ceiling – interest rate
The All-in-cost ceiling (the interest rate) on ECBs will continue to be benchmark rate plus 450 basis points. The benchmark rate is the 6-month London Interbank Offered Rate (‘LIBOR’) or any other 6-month interbank interest rate applicable to the currency of borrowing, for e.g. Euro Interbank Offered Rate (‘EURIBOR’).
ECB under Automatic route
ECB upto US$ 750 million or equivalent per financial year is permitted (subject to fulfillment of above criteria) under the automatic route i.e. no approval is required to be obtained from the RBI. Earlier, different limits were prescribed for different sectors – e.g. US$ 750 million for infrastructure and manufacturing sector, US$ 200 million for software development sector, etc. For availing ECB above US$ 750 million or equivalent, prior approval of the RBI will be required.
Conclusion
Thus, the RBI have simplified the ECB Regulations considerably by permitting all entities eligible for FDI as eligible borrowers, thus eliminating sector-wise criteria. Also, the limits for ECB under automatic route has been streamlined at US$ 750 million rather than applying different limits to different sectors. The most significant change is permitting LLPs to avail ECB. It remains to be seen whether this was a conscious decision or an unintended consequence.