As per a latest newspaper article, the External Commercial Borrowings (“ECB”) as percentage of the nominal GDP climbed to 9% at the end of June 2015, which according to them is the highest in the past decade or so. The Reserve Bank of India (“RBI”) on its part had amended the ECB Policy and introduced a host of new concepts in its circular dated November 30, 2015. This blog discusses the changes brought in by the circular and certain further clean-ups that would be helpful to the industry.

The broad reasons for the amendments to the ECB framework, as mentioned in the circular, relate to liberalizing the ECB regime, incentivizing the Indian Rupee (“INR”) denominated ECBs to transfer the exchange rate related risk to the lenders, expanding the list of the overseas lenders and aligning the list of infrastructure entities borrowing ECB with the ‘Harmonised List’ of the Government of India.

Tracks – MAM and currency based.

The revised ECB framework has now categorized ECBs based on Minimum Average Maturity (“MAM”) and currency denomination and has introduced three tracks routes based on the same. Track I comprises of medium term foreign currency denominated ECBs availed with a MAM of 3/5 years, Track II is long term foreign currency denominated ECBs availed with a MAM of 10 years, and Track III is INR denominated ECBs availed with a MAM of 3/5 years. While these fall under the automatic route, there are certain ECBs which still are under the RBI approval route viz. Foreign Currency Exchangeable Bonds, borrowing and on lending by the Export Import Bank of India and ECBs for the purpose of importing second-hand goods.

Change in borrowing limits

The circular has also prescribed certain changes with regards to the borrowing limits. Now the companies falling under the infrastructure sector (including hospitals and hotels) can avail ECBs upto USD 750 million, as against the earlier limit of USD 200 million and the companies in the software sector can now avail ECBs upto USD 200 million. Further, the companies in the micro finance sector are permitted to raise ECBs upto USD 100 million. All other entities can avail ECBs upto USD 500 million in a financial year. While this move looks very favorable to the infrastructure sector, in case of the other sectors, the ECB limit has been cut down by USD 250 million from the earlier regime.

Eligible lenders / Investors

The most important change with regards to the eligible lenders has been the introduction of pension funds, insurance companies, sovereign wealth funds, and financial institutions, which

are located in the “Institutional Financial Services Centres” in India, as overseas long term investors, with this move of adding pension funds, insurance companies etc., to the eligible lenders, the scope of raising ECBs has increased and keeping in mind the fact that these fund houses who have off late been showing interest in the Indian debt market. Further, the RBI has also included the group companies of eligible borrowers within the foreign equity holder definition, resulting in such group companies (having common overseas parent) to lend to Indian companies.

Certain other changes

There have also been certain additions / tweaks to the ECB framework such as (i) the list of eligible borrowers has been expanded to include REITs, Infrastructure Investment Trusts and companies providing logistic services, (ii) the permitted end uses under the revised ECB framework provide that the group companies can provide ECBs for general corporate purposes with a lower MAM of 5 years, as against 7 years in the erstwhile regime, and (iii) extension in the time limits for parking of the ECB proceeds (meant for INR expenditure) for a period of 12 months as against 6 months earlier.

Conclusion

While the above revised framework does show interesting opportunities for the infrastructure sector, sectors like the airline industry, where the working capital facilities would be phased out by March 2016 or the low cost housing schemes would face new challenges on the funding part as there would be a further dry up of funds on this financially starved sectors. The revised ECB framework has not provided any clarity on the structured obligations, trade credits and bridge financing, and we would need to await further circulars to clarify the same.