A summary of
made by the
Reserve Bank of
India to the law
related to external
RECENT CHANGES IN THE LAW RELATED TO EXTERNAL
COMMERCIAL BORROWINGS FOR INFRASTRUCTURE
Introduction: allowed Indian companies in the infrastructure sector to utilize 25 per cent
of fresh ECB raised by the company to refinance Rupee loans, with
The Reserve Bank of India (“RBI”) have been taking active steps to approval from the RBI. The borrowing needs to comply with the following
encourage greater foreign lending to the infrastructure sector and allow conditions:
Indian corporates borrow internationally on more favourable commercial
terms than the significantly more expensive domestic debt. The RBI has (a) at least 75 per cent of the fresh ECB proposed to be raised
also been concerned about the fact that most Indian banks have been must be utilised for capital expenditure towards a 'new
nearing the limits which have been set on the amount that can be infrastructure' project(s);
advanced to certain sectors and certain borrower groups. One of the steps
which have been taken by the RBI is several amendments to the external (b) in respect of remaining 25 per cent, the refinance must only
commercial borrowing (“ECB”) regulations to give greater flexibility to be utilized for repayment of the Rupee loan availed of for
Indian companies in the infrastrcuture sector to avail of ECBs. 'capital expenditure' of an earlier completed infrastructure
Whllst It is likely that at least some of the changes (refinancing of rupee
loans, bridge financing, borrowings in RMB, loans from group companies (c) the refinance must be utilized only for the Rupee loans which
of foreign equity holders) would not have the impact that they would are outstanding in the books of the financing bank concerned.
normally have because of the requirement to obtent the consent of the RBI
(which is at the best of times is an uncertain and time consuming process), This will allow infrastructure companies, post completion of a project,
it does reflect a change in the policy mindset, with the RBI specifically to replace at least a part of the domestic debt with much cheaper
declaring that it would be considering applications of this nature (and international debt. It also allows access to additional sources to
therefore the chances of such applications being successful increasing refinancing.
The key changes are as follows:
Under the ECB Guidelines, “Infrastructure sector” is defined as (i) power,
(ii) telecommunication, (iii) railways, (iv) roads including bridges, (v) sea
REPAYMENT OF RUPEE LOANS THROUGH ECB
port and airport, (vi) industrial parks, (vii) urban infrastructure (water
supply, sanitation and sewage projects), (viii) mining, exploration and
Under the previous guidelines, repayment of existing Rupee loans was not refining and (ix) cold storage or cold room facility, including for farm level
a permissible end-use for ECB. As a result long term rupee funds could pre-cooling, for preservation or storage of agricultural and allied produce,
be refinanced only with further rupee borrowings. The RBI has now marine products and meat.
[A.P. (DIR Series) Circular No. 25] The designated AD - Category I bank will monitor the end-use of funds
and banks in India will not be permitted to provide any form of guarantees
in relation to the bridge finance. Further the AD - Category I banks are
also required to verify the actual import of the capital goods by reviewing
the Bill of Entry.
BRIDGE FINANCE FOR THE INFRASTRUCTURE SECTOR [A.P. (DIR Series) Circular No. 26]
Since ECBs have fixed minimum average maturity and tenor, it was not ECB FOR INTEREST DURING CONSTRUCTION
possible for Indian borrowers to obtain ECBs to meet short term fundng
needs or to meet a gap between actual requirements and tied-up long The use of loan proceeds for payment of interest during construction(IDC)
term funding. was a complicated one, since the previous guidelines did not permit ECB
proceeds to be used for payment of IDC. In case of financing where there
Indian companies which are in the infrastructure sector have now been was a mix of rupee and foreign currency debt, provisions would require to
allowed to import capital goods by availing of short term credit (including be made such that only the rupee proceeds could be used for payment of
buyers’ / suppliers’ credit) in the nature of 'bridge finance', with prior IDC.
approval from the RBI, subject to the following conditions:-
RBI has now specified that interest during construction (IDC) would be a
(a) the bridge finance shall be replaced with a long term ECB; permitted end-use for companies which are in the infrastructure sector,
(b) the long term ECB shall comply with all the extant ECB
norms; and (a) that the IDC is capitalized; and
(c) prior approval shall be taken from the Reserve Bank for (b) is part of the project cost.
replacing the bridge finance with a long term ECB.
Indian banks which are designated as “Authorised Dealers” by the RBI.
They are responsible for ensuring compliance of foreign exchange
transactions with applicable regulations.
[A.P. (DIR Series) Circular No. 27] Further, the RBI has now permitted that apart from the direct foreign equity
holders, indirect equity holders and group companies can also advance
CLARIFICATIONS IN RELATION TO ECBS FROM FOREIGN EQUITY amounts to the Indian borrower, after obtaining approval from the RBI, in
HOLDERS the following manner:
The previous guidelines permitted Indian borrowers from obtaining ECBs (i) Service sector units, in addition to those in hotels, hospitals
from “foreign equity holders”. A ‘foreign equity holder’ to be eligible to and software, could also be considered as eligible borrowers
advance an ECB under the automatic route required a minimum holding of if the loan is obtained from foreign equity holders. This would
25% of the paid-up equity in the borrower. Further in case of ECB more facilitate borrowing by training institutions, research and
than US$ 5 million, the debt-equity ration could not exceed 4:1 (i.e. the development companues, miscellaneous service companies,
proposed ECB could not exceed the foreign equity holding by more than etc;
(ii) ECB from indirect equity holders may be considered provided
This policy has not been further clarified and rationalized as follows: the indirect equity holding by the lender in the Indian company
is at least 51 per cent ; and
(i) The term 'debt' in the debt-equity ratio has been replaced with
'ECB liability' and the ratio will be known as 'ECB liability'- (iii) ECB from a group company may also be permitted provided
equity ratio. This is to ensure that other borrowings/debt are both the borrower and the foreign lender are subsidiaries of
not considered in working out this ratio. the same parent.
(ii) In addition to the paid-up capital contributed by the foreign While seeking approval from the RBI, the borrower shall ensure that the
equity holder, paid-up capital, free reserves (including the total outstanding amount of ECBs (including the proposed ECBs) from a
share premium received in foreign currency) as per the latest foreign equity lender does not exceed 7 times the equity holding, either
audited balance sheet shall be reckoned for the purpose of directly or indirectly of the lender (in case of lending by a group company,
calculating the equity of the foreign equity holder. equity holdings by the common parent would be reckoned).
(iii) For calculating the ECB liability, not only the proposed [A.P. (DIR Series) Circular No. 29]
borrowing but also the outstanding ECB from the same foreign
equity holder lender would be reckoned. ECB IN RENMIMBI
Indian companies in the infrastructure sector, have been allowed to avail paid-up capital, to provide credit enhancement for infrastructure companies.
of ECBs in Renminbi (RMB), under the approval route, subject to an Further, all credit enhancement by all eligible non-resident entities are now
annual cap of USD one billion. permitted under the automatic route and no prior approval will be required
from the RBI for such credit enhancement.
AD Category- I bank have been permitted to open Nostro accounts in
Renminbi (RMB). However, banks in India have been prohibited from [A.P. (DIR Series) Circular No. 28]
providing any form of guarantees for RMB borrowings.
ENHANCEMENT OF ECB LIMIT UNDER THE AUTOMATIC ROUTE
It is expected that this liberalization will add impetus to lending to Indian
companies by Chinese Banks. Chinese Banks have already started The limit for ECBs have been enhanced from USD 500 million in a
becoming fairly active in advancing ECBs to Indian corporates, particularly financial year to USD 750 million. Corporates in specified service sectors
power plants and other infrastructure projects which will be using Chinese viz. hotel, hospital and software, can now avail of ECB up to USD 200
equipment. million or equivalent (up from US $ 100 million). However, the proceeds of
the ECBs cannot be used for acquisition of land.
[A.P. (DIR Series) Circular No. 30]
[A.P. (DIR Series) Circular No. 27]
CREDIT ENHANCEMENT FOR STRUCTURED OBLIGATIONS
ECBS DESIGNATED IN INDIAN RUPEES
The existing guidelines permitted Indian companies in the infrastructure
sector and Infrastructure Finance Companies (“IFCs”) to obtain “credit Eligible borrowers have been permitted to borrow ECBs designated in INR
enhancement” by multilateral / regional financial institutions and Government from foreign equity holders under the automatic/ approval route. NGOs
owned development financial institutions for domestic debt raised through engaged in micro finance activities can avail of ECBs designated in INR
issue of capital market instruments, such as, debentures and bonds. This under the automatic route from overseas organizations and individuals as
policy has not been further liberalized to permit promoters of the Indian well.
company (direct foreign equity holder(s) holding a minimum of 25 % of the
paid-up capital and indirect foreign equity holder, holding atleast 51% of the [A.P. (DIR Series) Circular No. 27]
IFCs are non banking financial corporations which are designated as
Infrastructure Finance Corporations by the RBI.
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