Reserve Bank Of India's Overhaul Of The External Commercial Borrowing Framework: A Comparative Snapshot

Aspect

Existing framework under ECB Regulations

Changes in Amendment Regulations

BTGA Comments

What are the permitted forms of ECB?

The ECB Regulations only consider the following as forms of ECBs:

• For both Foreign Currency denominated ECBs ("FC ECBs") and Indian Rupee denominated ECBs ("INR ECBs") – loans including bank loans; floating/ fixed rate notes/ bonds/ debentures (other than fully and compulsorily convertible instruments); trade credits beyond 3 years and financial leases;

• For FC ECBs only – foreign currency convertible bonds ("FCCBs") and foreign currency exchangeable bonds ("FCEBs"); and

• For INR ECBs only – floating/ fixed rate preference shares and plain vanilla Rupee denominated bonds issued overseas, which can be either placed privately or listed on exchanges as per host country regulations.

Simplified to now be any form of commercial borrowing arrangement that involves the payment of agreed interest by whatever name called and the repayment of principal and includes FCCBs and FCEBs.

Important to note: the following would not be treated as being ECBs:

• trade credit up to 3 years raised in terms of the Amendment Regulations;

• export advances received in terms of the Amendment Regulations;

• investment received in terms of FEMA (Debt Instrument) Regulations, 2019;

• investment received from Foreign Venture Capital Investor (FVCI) through debt instruments under FEMA (Non-Debt Instrument) Rules, 2019; and

• convertible notes issued under FEMA (Non-Debt Instrument) Rules, 2019.

The Amendment Regulations simplifies the permitted forms of ECB by adopting an open ended definition rather than specifying a detailed list of identified instruments.

Who is an eligible borrower?

The ECB Regulations only permit the following classes of entities to raise ECBs:

• For FC ECBs – Indian entities eligible for foreign direct investment (FDI); port trusts; units in Special Economic Zones; Small Industries Development Bank of India (SIDBI); and the Export-Import Bank of India (EXIM); and

• For INR ECBs – all entities eligible to raise FC ECBs and registered entities engaged in micro-finance activities, viz., registered not for profit companies, registered societies/ trusts/ cooperatives and non-government organisations.

Broader list of eligible borrowers namely:

• Any person resident in India (other than an individual) incorporated, established or registered under Indian law;

• An eligible borrower under a restructuring scheme or insolvency resolution process if specifically permitted under the restructuring or resolution plan; and

• An eligible borrower under investigation or appeal provided such borrower also discloses the details under Form ECB-1 or Revised Form ECB-1.

The Amendment Regulations significantly broaden the eligible borrower base, enabling a wider range of entities including societies, infrastructure investment trusts (InvITs), and real estate investment trusts (REITs) to access ECBs.

Who is a recognised lender?

The ECB Regulations permit the following to lend ECBs:

• Lenders should be a resident of a financial action task force (FATF) or international organisation of securities commission (IOSCO) compliant country;

• Multilateral and regional financial institutions where India is a member country are considered as recognised lenders;

• Individuals as lenders are permitted if they are foreign equity holders or for subscription to bonds/debentures listed abroad; and

• Foreign branches of Indian banks are permitted as recognised lenders only for FC ECBs (except for FCCBs and FCEBs).

Flexible definition of recognised lender being:

• A person resident outside India;

• A branch outside India of an entity whose lending business is regulated by the RBI; and

• A financial institution or its branch set up in the International Finance Service Centre (IFSC).

The definition of lender is more flexible and inclusive, expanding the lender base to cover individuals (without prior restrictions) as well as persons residing in jurisdictions that are not necessarily FATF or IOSCO compliant.

What is the borrowing limit?

Up to USD 750 million per financial year.

Higher of:

1. outstanding ECB up to USD 1 billion; or

1. total outstanding borrowing (external and domestic) up to 300% of net worth as per the last audited standalone balance sheet.

Important to note:

1. Eligible borrowers that are regulated by financial sector regulators are exempt from this limit.
2. The outstanding borrowing will not include non-fund based credit and funds raised through issuance of securities which are mandatorily convertible to equity.

The overall borrowing limit for ECBs has been increased with financial sector entities being exempted from any borrowing cap.

Additionally, since this provision sets the monetary cap as the higher of a fixed threshold (USD 1 billion) or a variable limit linked to net worth, it enables larger borrowers to raise ECBs beyond the fixed threshold where supported by their net worth, while also allowing smaller borrowers to access ECBs up to the enhanced fixed threshold of USD 1 billion.

What is the cost of borrowing and penal interest on an ECB?

• Cost of borrowing for FC ECBs – capped at benchmark rate plus 500 bps spread for fresh FC ECBs after December 2021 and benchmark rate plus 550 bps spread for existing FC ECBs. The benchmark rate would be any widely accepted interbank rate or ARR of 6-month tenor, applicable to the currency of borrowing;

• Cost of borrowing for INR ECBs – capped at benchmark rate plus 450 bps spread. The benchmark rate would be the prevailing yield of the Government of India securities of corresponding maturity

• Penal interest for FC and INR ECBs – capped at a maximum of 2% plus the contracted rate of interest.

• Cost of borrowing: The cost of borrowing is to be in line with prevailing market conditions. In the case of fixed rate loans, the floating rate plus spread of the corresponding swap should not be more than the ceiling.

• Penal interest: Prepayment charge/ penal interest, if any, for default or breach of covenants shall be in line with prevailing market conditions.

Important to note: ECB from related parties shall be carried out on arm's length basis.

No fixed cap prescribed on the all-in cost or penal interest thereby potentially making the raising of debt by Indian borrowers easier. The parties to the ECB don't need to seek regulatory approval (including any authorised dealer approval) in relation to setting of borrowing costs so long as the borrowing costs would be in line with prevailing market conditions and commercial considerations.

It would however be advisable for the parties to an ECB to maintain appropriate documentation that records the reasoning for any understanding on the level of borrowing costs agreed (e.g. a report detailing the prevailing interest rates for similar borrowings).

What is the tenor (minimum average maturity period or MAMP) of an ECB?

MAMP for all ECBs is generally 3 years. However, different MAMP would be applicable for certain specified categories of ECBs namely:

• by manufacturing companies up to USD 50 million;

• from foreign equity holders for working capital purposes or general corporate purposes or repayment of Rupee loans;

• for working capital purposes or general corporate purposes or for on-lending by non-banking financial companies (NBFCs);

• for repayment of Rupee loans availed domestically for capital expenditure or for on-lending by NBFCs for such purpose; and

• for repayment of Rupee loans availed domestically for purposes other than capital expenditure or for on-lending by NBFCs for such purpose.

Uniform MAMP of 3 years for all ECBs.

Important to note: A MAMP of between 1 year to 3 years has only been permitted for manufacturing companies with borrowings up to USD 150 million. Other borrowers would not have access to a reduced MAMP.

The existing multiple MAMP categories are to be consolidated into a uniform 3-year MAMP for all ECBs, irrespective of their end use. The only exception being entities in the manufacturing sector where a lower MAMP is allowed. This provides a greater flexibility to lenders and borrowers when structuring loans.

What are the end-use restrictions in respect of an ECB?

Under ECB Regulations, the following are the restrictions on the end use of ECBs:

• for real estate activities;

• investment in capital markets;

• equity investments in unlisted equity securities;

• working capital purposes (apart from where the ECB has been provided by a foreign equity holder or where the ECB has been raised by an NBFC for on-lending for such purposes);

• general corporate purposes (apart from where the ECB has been provided by a foreign equity holder or where the ECB has been raised by an NBFC for on-lending for such purposes);

• repayment of Rupee loans (apart from where the Rupee loan has been raised in India for capital expenditure/ other purposes or where the ECB has been raised by an NBFC for on-lending for such purposes); and

• On-lending to entities for the above activities, (apart from where the ECB has been raised by an NBFC for the purposes as mentioned above).

The Amendment Regulations now provide that the use of ECBs for the following activities would be restricted:

• business of chit funds/ Nidhi company;

• real estate business and construction of farmhouses provided that: (a) in case of a construction development project, the borrower shall sell plots only after ensuring development of trunk infrastructure; and (b) in case of industrial parks, such park shall comprise of a minimum of 10 units with no single unit occupying more than 50% of the allocable area and the industrial activity shall cover not less than 66% of the total allocable area;

• agricultural and animal husbandry, except (a) floriculture, horticulture and cultivation of vegetables and mushrooms under controlled conditions; (b) development and production of seeds and planting material; (c) animal husbandry (including breeding of dogs), pisciculture, aquaculture and apiculture; and (d) services related to agro and allied sectors;

• plantation except tea, coffee, rubber, cardamom, palm oil tree, olive oil tree plantation;

• trading in transferrable development rights (TDR);

• transacting in listed/unlisted securities except for transactions undertaken by an Indian entity for corporate actions such as merger, demerger, amalgamation, arrangement, or acquisition of control in accordance with applicable Indian laws;

• repayment of domestic INR loan, (i) which was availed for a restricted end-use; or (ii) which is classified as a non-performing asset as per the applicable prudential norms; and

• on-lending for any purposes for which funds cannot be borrowed and utilised as per the Amendment Regulations.

Permitting usage of ECB proceeds as part of a corporate reorganization process or to help finance an control acquisition of an Indian entity, is a significant liberalisation by the RBI and could act as a fillip to corporate restructuring as well as control level acquisitions of entities.

In addition, it is significant that the RBI is permitting using ECBs for investment in real estate, agriculture and horticulture (subject to conditions) and to repay Indian Rupee domestic loans and to that extent reducing the equity risk for entities investing into India.

Further, the Amendment Regulations now permit the utilisation of ECB proceeds to retire earlier borrowings (provided that the earlier borrowings were not taken for a purpose that is restricted under the ECB Regulations and that the earlier borrowings are not non-performing assets).

Refinancing ECB

Under ECB Regulations, the all-in cost of the new ECB must be lower than the all-in cost of the existing ECB which is proposed to be refinanced.

Borrowers are free to refinance on the terms they deem fit, provided that refinancing doesn't result in failure to meet MAMP requirement applicable on the original borrowing (weighted outstanding maturity in case of multiple borrowings).

The restriction on credit spread has been dropped allowing Indian borrowers to refinance without meeting the lower cost test.

Reporting

• Reporting of actual ECB transactions by borrowers on a monthly basis in a prescribed form within 7 working days from the close of the month.

• Reporting of any changes in ECB parameters by borrowers in revised Form ECB within 7 days from the change being made effective.

• Reporting would be linked to receipt of ECB proceeds and debt servicing and not monthly reporting. Reporting to be done in Form ECB-2 within 7 calendar days from the end of the month in which the proceeds were received or debt servicing undertaken.

• Reporting of changes in ECB parameters by borrowers in Revised Form ECB-1 within 7 calendar days from the end of the month in which such change was given effect.

Important to note: Where, following drawdown, a borrower fails to undertake the prescribed reporting for four consecutive quarters and the designated AD Bank records multiple unsuccessful attempts to establish contact and observes non-operation at the registered office, the borrower may be classified as untraceable and reported to the RBI and the Directorate of Enforcement.

Reporting requirements have been strengthened as well as simplified.