RBI unveils revised ECB framework to broadbase access to overseas debts The Reserve

Bank of India (RBI) periodically reviews External Commercial Borrowings (ECB)

guidelines (Extant Framework). This is in keeping with the macro-economic policy intent
spelt out in its quarterly review of the Monetary Policy. Previously, calibration of ECB
guidelines has been incremental measures principally broad basing eligible borrowers and
lenders criteria, expanding enduses, and adjusting all-in-cost limits. In 2015, the RBI
embarked upon a comprehensive review of Extant Framework. This was to take
cognizance of rapidly evolving overseas debt instruments (eg rupee denominated bonds
to be issued overseas by a wider set of Indian borrowers). The draft of revised ECB
framework1 was placed in public domain for consultation in September 2015. After taking
into comments and feedback from public, a comprehensive framework for ECB2 (Revised
Framework) has now been announced by the RBI vide Circular 32, dated November 30,
2015. The revised framework shall come into effect from the date of its notification in
Official Gazette3 . All borrowings to be made till March 31, 2016, shall continue to be
governed under the Extant Framework, provided relevant loan agreement was signed by
or before the date of notification of the Revised Framework. In this alert, we have
summarized board policy contours of the Revised Framework, and key takeaways vis--vis
applicability or shortcomings of the Extant Framework. A SYNOPSIS The Revised
Framework for ECBs is premised on the following overarching themes a) A more liberal
approach is needed towards allowing overseas borrowings by Mukesh Butani, New Delhi
+91 11 3066 3010 mukesh.butani@bmrlegal.in Rajeev Dimri, New Delhi +91 124 669
5050 rajeev.dimri@bmradvisors.com Gokul Chaudhri, New Delhi +91 124 669 5040
gokul.chaudhri@bmradvisors.com Bobby Parikh, Mumbai +91 22 6135 7010
bobby.parikh@bmradvisors.com Amit Jain, Pune +91 20 668 19010
amit.jain@bmradvisors.com eligible Indian borrowers, with fewer restrictive covenants as
to end-uses, allin-cost limits; allowing elongated minimum maturity term to allow permit a
more sustainable repayment schedules, etc; b) The revised framework should allow an
alternative to foreign currency denominated borrowings by permitting INR instruments,
and thus, providing currency risk hedge to Indian borrowers; and c) The framework for
overseas borrowings should facilitate access to relatively long-term funds, by expanding
list of eligible lenders to include overseas Insurance Companies, Pension Funds, Sovereign
Wealth Funds. With the above principles in perspective, the revised Framework introduced
threedistinct tiers of eligibility criteria and related conditionalities for ECB (referred to as
tracks) as following Track-wise structure: Basis Minimum Average Maturity (MAM)
and currency of borrowing, the Revised Framework comprises of the following three tracks:
Track I: Medium term foreign currency denominated ECB with MAM of 3/5 years; Track
II: Long term foreign currency denominated ECB with MAM of 10 years; and Track III:
Indian Rupee denominated ECB with MAM of 3/5 years Eligible Borrowers: Providing for a
track-wise list of eligible borrowers, key distinct features of the Revised Framework vis--
vis the Extant Framework are as under: Companies in infrastructure sector have been
placed under Track II, ie long term ECB; going forward, therefore, overseas borrowings by
such entities shall need to comply with 10 year Minimum Average Maturity, unless ECB is
denominated in INR (ie under Track III). For this purpose, definition of Infrastructure
sector has been aligned with the Harmonized Master List of Infrastructure sub-sectors. As
per the revised definition, mining, exploration and refining have been omitted from the list
of infrastructure sub-sectors eligible to raise ECBs; whilst a few sub-sectors have been
added to the list such as slurry pipelines, terminal markets, etc. REITs / InVITs are now
eligible to raise ECB under Track II and Track III All NBFCs are now eligible to raise ECB
under Track III, subject to enduse restrictions Holding companies are now allowed to on-
lend to Infrastructure SPVs under Track II, subject to elongated MAM term, amongst other
relevant conditions which may apply Hotels and hospitals earlier covered under specified
service sectors are not covered in the list; however, specified hotels and hospitals are
included in the definition of infrastructure and eligible for borrowing under Track II The
conditionality in case of Core Investment Companies (CIC) regarding compliance of
leverage and hedging have been done away with Logistic services companies, classified
within companies engaged in miscellaneous service, are now eligible to avail ECB under
Track III Special Economic Zone (SEZ) / National Manufacture Investment Zones
(NMIZ) developers, hitherto under approval route, are now covered under automatic
route under Track III The Revised Framework maintain status quo on (in)eligibility of LLPs
to raise ECBs. Recognized Lenders: The list of recognized lenders under the Revised
Framework has been broad-based to include long term lenders, such as: Prudentially
regulated financial entities Pension Funds Insurance Companies Sovereign Wealth
Funds Financial institutions located in International Financial Services Centres in India
While overseas branches / subsidiaries of Indian banks are covered under Track I category,
the same is explicitly excluded from Track II and Track III category. This move is
predominantly targeted to ensure borrowings in infrastructure sector are funneled from
overseas sources of funds (rather than round tripping of domestic funds). Under Track III
category, NBFC MFIs are now permitted to avail ECB also from overseas organizations
/individuals, subject inter alia, to compliance with the requirement of furnishing a
certificate of due diligence from overseas bank . All in cost ceiling: All-in-cost ceilings
have been reduced by 50 bps from each of the existing caps (except in case of long term
foreign currency ECBs). For instruments under Track III, all-in-cost ceiling would be in line
with market conditions. Further, definition of all-in-cost ceiling has been amplified to
explicitly include guarantee fees whether paid in foreign currency or INR; and exclude
commitment fees from the permitted range. End-use restrictions: Revised Framework is
premised on a more liberal approach consisting in minimal end-use restrictions, preferably
as negative list than detailed list of prohibition. Under Track I, a positive list of permitted
end-uses is prescribed. The revised Framework permits ECBs for general corporate
purposes (including working capital) to be availed from indirect equity holder
(shareholding > 51 percent) or a group company (common overseas parent), in addition to
direct equity holder (shareholding > 25 percent) as provided under the Extant Framework.
Besides doing away with the specific sector coverage, specified MAM has also been
reduced to 5 years as against 7 years in the Extant Framework. The positive list
specifically incorporates utilization of ECB proceeds for import of vessels and aircrafts by
shipping and airlines companies. Further, ECBs will now also be permitted for import of
second hand goods (as per DGFT guidelines) under the approval route. Under Track II, a
negative list approach is opted; whilst restrictions on end-use are almost identical as
provided under the Extant Framework, the restriction in respect of raising of ECB for
general corporate purposes (including working capital) has been done away with. Track
III, ie the framework of INR denominated ECBs provides for certain additional permitted
end-use in case of NBFCs, such as providing hypothecated loans to domestic entities for
acquisition of capital goods / equipments and providing capital goods / equipment to
domestic entities by way of lease and hire-purchases. Further, developers of SEZ / NMIZs
are now permitted to raise ECB for providing infrastructure facilities within SEZ / NMIZ,
under automatic route. Individual limits under automatic route: The individual limits
under automatic route for companies in infrastructure and manufacturing sectors (ie upto
USD 750 million or equivalent) and software sector (ie upto USD 200 million or equivalent)
remain unchanged. For other eligible borrowers, the limit specified is USD 500 million or
equivalent. Companies in micro-finance activities can avail ECB under automatic route
upto USD 100 million or equivalent. Separately, limits specified4 in respect of INR
denominated bonds remains at USD 750 million. ECBs beyond the aforementioned limits
to be covered under the approval route. Currency of Borrowing: ECB can be raised in
any freely convertible currency as well as in INR. For INR-denominated ECB, lenders (other
than foreign equity holders) are required to mobilize INR through swaps / outright sale
undertaken through an AD Cat I bank in India. Whilst change of currency from one
convertible foreign currency to another convertible foreign currency / INR is freely
permitted; however, reverse currency conversion process is prohibited. Refinancing of
existing ECB: Utilization of proceeds of fresh ECB is permitted to refinance existing ECB,
provided a) there is no reduction in residual maturity of the ECB, and b) fresh ECB has
lower all-in-cost. The prohibition on raising fresh ECB for this purpose, from overseas
branches / subsidiaries of Indian banks have been done away with. Prepayment of ECBs:
Prepayment of ECBs, irrespective of the quantum involved may be permitted by AD banks
in India subject to compliance with the stipulated MAM as applicable to the contracted
loan. The extant limit of USD 500 million has been thus, done away with. Parking of
Proceeds: Whilst the conditions regarding parking of ECB proceeds are broadly similar to
those prescribed under the Extant Framework, the Revised Framework permits ECB
borrowers to park ECB proceeds in term deposits with AD banks up to 12 months (against
6 months earlier). Others: RBI has maintained stipulations in respect of other parameters
of ECB like hedging, security for raising ECBs, conversion of ECB into equity, reporting
requirements, powers delegated to AD banks, ECB Liability-equity ratio etc. Applicability /
Transition provision: RBI has issued operational guidelines for the revised ECB framework
which is to come into force with effect from the date of publication of the relative
Regulation framed under FEMA, 1999 in the official Gazette ie December 2, 20155 . A
transition period upto 31 March 2016 has been allowed to ECBs contracted till
commencement of the revised framework. Further, in respect of following special carve-
out schemes, borrowers must sign the loan agreement and obtain Loan Registration
Number (LRN) before 31 March 2016 from RBI: ECB facility for working capital by airlines
companies; ECB facility for consistent foreign exchange earners under the USD 10 billion
Scheme; and ECB facility for low cost affordable housing project BMR Comments The
Revised Framework creates three distinct clusters for ECB, termed as Tracks with defined
rules for each cluster which makes the framework modular with distinct rules. The
collective outcome from the Revised Framework is expected to be welcomed by borrowers
and lenders, as it expands the list of eligible categories of both borrowers and lenders. For
example, REITs and InVITS can access ECBs. There is an expected emphasis for
infrastructure sectors which requires significant funding both equity and debt, with the
latter being quantitatively required to be twice or more of the equity needs. In this regard,
the exclusion of refining sector from the revised definition of infrastructure is puzzling.
More so as the refining sector will need to bring in significant capital expenditure for
upgrading fuel from BS IV to BS VI norms the ongoing debate of pollution possibly got
missed in the ECB framework! There is no explanation either why exploration and mining
industry has been excluded from the infrastructure sector. The question is whether this
makes these sectors ineligible across the defined tracks or will these fall in the general
category of ECBs which have lesser MAM. If the former outcome, then it is worrying for
mining projects, which have already been hassled by the policy ambiguity around
allocation of natural resources and cancellation of coal licenses. If the latter is correct then
the industry will have a sigh of relief and hope for an enabling clarification from the RBI.
The Revised Framework overrides the much amended, edited and sporadically updated
Extant Framework, and creates a more broad-based and clear set of guidelines for 2016
and beyond. It is hoped that the Revised Framework shall promote long term financing of
large projects, particularly in infrastructure sector in India.