RBI Update: External Commercial Borrowings Policy – Revised Framework

 

By its circular RBI/2015-16/255 A.P. (DIR Series) Circular No. 32 dated 30 November 2015 (“Circular“), the Reserve Bank of India (“RBI“) has revised the existing External Commercial Borrowings (“ECB“) framework to liberalise the policy on overseas borrowings by inter alia reducing the cost of ECB, expanding the list of recognised overseas lenders, and increasing the limit of ECB.

The revised framework for ECB, as encapsulated under the Circular, is set out below :

(i) ECB has been categorised in the following three categories :

    • Track I: Medium term foreign currency denominated ECB with minimum average maturity of 3 years for ECB upto USD 50 million and minimum average maturity of 5 years for ECB beyond USD 50 million.

 

    • Track II: Long term foreign currency denominated ECB with minimum average maturity of 10 years.

 

    • Track III – Medium term Indian Rupee denominated ECB with minimum average maturity of 3 years for ECB upto USD 50 million and minimum average maturity of 5 years for ECB beyond USD 50 million.

 

(ii) The list of overseas lenders have been expanded to include long-term lenders such as, Insurance Companies, Pension Funds and Sovereign Wealth Funds.

(iii) A small negative list of end-use restrictions and higher all-in-cost ceiling have been made applicable under Track II and Track III.

(iv) Overseas branches and subsidiaries of Indian banks are permitted to lend under Track I only, subject to prudential norms issued by the RBI.

(v) A transitional period upto 31 March 2016 has been provided to eligible borrowers who have executed loan agreements prior to the date of Circular to avail ECB under the previous ECB policy.

(vi) Authorised dealer category 1 banks have been entrusted with more powers by RBI to regulate ECBs in relation to inter alia security creation, reporting and changes in certain terms and conditions of ECBs.

(vii) Infrastructure and manufacturing companies are allowed to raise ECB upto USD 750 million or equivalent, software companies are allowed to raise ECB upto USD 200 million or equivalent, micro-finance companies are allowed to raise ECB upto USD 100 million or equivalent and all other entities can raise upto USD 500 million.

Important terms of the Circular
Track I Track II Track III
Eligible Borrower Companies in manufacturing, software development sectors, shipping, airlines companies, units in Special Economic Zones (SEZs). All the companies listed under Track I alongwith companies in infrastructure sector, holding companies and Core Investment Companies (CICs). All the companies listed under Track II alongwith Non Banking Finance Companies (NBFCs), NBFCs-Micro Finance Institutions (NBFCs-MFI) and other miscellaneous companies.
Lenders International banks, international capital markets, multilateral financial institutions, export credit agencies, suppliers of equipment, foreign equity holders, overseas long term investors, overseas branches / subsidiaries of Indian banks. All entities listed under Track I except, overseas branches / subsidiaries of Indian banks. All entities listed under Track I except, overseas branches / subsidiaries of Indian banks. In case of NBFCs-MFIs, other eligible MFIs, not for profit companies and NGOs, ECB can also be availed from overseas organisations and individuals.
All-in-cost ceiling
  • For ECB with minimum average maturity period of 3 to 5 years – 300 basis points per annum over 6 month LIBOR or applicable bench mark for the respective currency.
  • For ECB with average maturity period of more than 5 years – 450 basis points per annum over 6 month LIBOR or applicable bench mark for the respective currency.

Penal interest, if any, for default or breach of covenants should not be more than 2 per cent over and above the contracted rate of interest.

The maximum spread over the benchmark will be 500 basis points per annum.

Remaining conditions, as given under Track I, shall be applicable.

The all-in-cost should be in line with the market conditions.
End-use ECB proceeds can be utilised for capital expenditure inter alia in the form of :

  • Import of capital goods;
  • local sourcing of capital goods;
  • new project;
  • modernisation/expansion of existing units;
  • overseas direct investment in joint ventures/ wholly owned subsidiaries;
  • acquisition of shares of public sector undertakings at any stage of disinvestment;
  • refinancing of existing trade credit raised for import of capital goods;
  • payment of capital goods already shipped / imported but unpaid; and
  • refinancing of existing ECB provided the residual maturity is not reduced.
The ECB proceeds can be used for all purposes excluding the following :

  • Real estate;
  • Investing in capital market;
  • new project;
  • equity investment domestically;
  • On-lending to other entities with any of the above objectives; and
  • Purchase of land.

ECB proceeds can be used by holding companies for providing loans to their infrastructure SPVs

NBFCs can use ECB proceeds inter alia for :

  • On-lending to the infrastructure sector;
  • Providing hypothecated loans to domestic entities for acquisition of capital goods/equipments;
  • providing capital goods/equipment to domestic entities by way of lease and hire-purchases.

For all other entities eligible under this track, the restrictions shall be the same as mentioned under Track II.

Detailed guidelines have been provided in the Circular.

To view the full text of the Circular, click here.

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