The year 2019 has brought a flurry of legal and regulatory reforms to facilitate doing business in India. The Reserve Bank of India ("RBI") has also joined the bandwagon of regulatory reforms by liberalising the policy on external commercial borrowings ("ECBs").
By virtue of its power to regulate borrowing or lending in foreign exchange under Section 6 of the Foreign Exchange Management Act, 1999 the RBI regulates ECBs which are commercial loans raised by eligible resident entities from recognised non-resident entities and should conform to parameters such as minimum maturity, permitted and non-permitted end-uses, maximum all-in-cost ceiling, etc. Under A.P. (DIR Series) Circular 04 of RBI dated 30thJuly 2019 ("ECB Circular")1, the end-use provisions have been amended.
New ECB Framework
As part of the Central Government's aim to improve ease of doing business in India, the RBI on 16thJanuary 2019 notified a new external commercial borrowings framework ("New ECB Framework")2. The New ECB Framework rationalises the [i]Old ECB Frameworkby merging the existing Track I and Track II into one track as "Foreign Currency Denominated ECB''.
Under the Old ECB Framework, there were separate lists of Eligible Borrowers for each track. Under the New ECB Framework, the list of Eligible Borrowers has been expanded to include all entities eligible to receive FDI. Thus, an Indian company, an Indian LLP operating in a sector where FDI under automatic route up to 100% is permitted and including start-up companies are eligible for ECB. Additionally, Port Trusts, Units in SEZ, SIDBI, EXIM Bank, registered entities engaged in micro-finance activities, viz., registered not for profit companies, registered societies/trusts/cooperatives and non-government organisations can also borrow under this framework.
The New Framework liberalised the category of "Recognised Lenders" to include any person as long as the Recognised Lenders are residents of a 3Financial Action Task Force ("FATF") or 4International Organization of Securities Commissions ("IOSCO") compliant country subject to certain exceptions.
The New Framework further permitted availing of ECBs by Indian subsidiary from its parent company subject to fulfilment of conditions5. The term 'Foreign Equity Holder' means:
- direct foreign equity holder with minimum 25% direct equity holding by the lender in the borrowing entity,
- indirect equity holder with minimum indirect equity holding of 51%, and
- group company with common overseas parent company.
Rationalisation of End – Uses
A brief analysis of the nature of changes is presented in a comparative chart below:
|Sr. No.||Position prior to 30th July 2019||Position from 30th July 2019|
|1.||Minimum Average Maturity Period for General Corporate Purposes and Working Capital Purposes|
|ECB raised from a foreign equity holder and utilised for general corporate purposes and working capital purposes was repayable with minimum average maturity period of 5 years.||ECB raised from recognised lenders (except for foreign branches/overseas subsidiaries of Indian banks) is now repayable for general corporate purposes and working capital purposes with minimum average maturity period of 10 years|
|2.||Repayment of Rupee Loans|
|ECB raised from a foreign equity holder and utilised for repayment of Rupee loans was repayable with minimum average maturity period of 5 years.||ECB raised from recognised lenders
(except for foreign branches/overseas subsidiaries of Indian banks)
is now repayable with minimum average maturity period of 7 years
provided that the loan has been availed domestically for capital
In the event the Rupee loan has been availed domestically for purposes other than capital expenditure, the same is repayable with minimum average maturity period of 10 years.
|3.||Repayment of Rupee loans availed domestically for capital expenditure in manufacturing and infrastructure sector|
|ECB raised from a foreign equity holder and utilised for repayment of Rupee loans was repayable with minimum average maturity period of 5 years.||Eligible corporate borrowers which have
been classified as SMA -2 or NPA under a one – time
settlement with lenders are permitted to avail ECB for repayment of
Lender banks are permitted to sell the Rupee loans (by way of an assignment of the Rupee loan) to eligible lenders under the ECB Regulations except for foreign branches/overseas subsidiaries of Indian banks provided the requirements of ECB Regulations such as all-in cost, minimum average maturity period and other relevant norms of the ECB Regulations are complied with.
|4.||On – lending by NBFCs|
|ECB proceeds were not permitted to be utilised inter aliafor on-lending for working capital purposes, general corporate purposes and repayment of rupee loans.||NBFCs are permitted to borrow under the
ECB route where minimum average maturity period will be 10 years.
NBFCs have been permitted to utilise the funds for on –
lending for working capital purposes and general corporate
NBFCs are permitted borrow under the ECB route with minimum average maturity period of 7 years where funds may be utilised by the NBFCs for on – lending for repayment of rupee loans availed domestically for capital expenditure.
In the event NBFCs have borrowed for on – lending for repayment of rupee loans availed domestically for purposes other than capital expenditure, the minimum average maturity period is 10 years.
The ECB Circular attempts to overhaul the nature of uses for which borrowers may adopt the ECB route and therefore, avail debt funding from foreign lenders. The relaxation in permitted end uses via the ECB Circular conveys the RBI's intent to liberalise external debt funding opportunities for Indian entities thereby reducing their dependence on equity based funding. However, the whether the regulatory overhaul turns out to become a harbinger of liberalisation will only be reflected over the passage of time.
 A.P. (DIR Series) Circular No. 4 of RBI dated 30thJuly 2019 available at https://rbidocs.rbi.org.in/rdocs/notification/PDFs/NT20F2121527F10B4CB7B93F63AE8B5C4760.PDF, last visited on 19thAugust 2019
 A.P. (DIR Series) Circular No. 17 dated 16thJanuary 2019 available at https://rbidocs.rbi.org.in/rdocs/notification/PDFs/NT1096DD257F73C9F4BD280F9C2A2CAD084F1.PDF,last visited on 19thAugust 2019
 http://www.fatf-gafi.org/about/membersandobservers/, last visited on 19thAugust 2019
 https://www.iosco.org/about/?subsection=membership&memid=1, last visited on 19thAugust 2019
 In case the ECB is raised from direct equity holder, the ECB limit of i.e. upto USD 750 million or equivalent, will also be subject to ECB liability of the equity ratio requirement. The ECB liability of the borrower (including all outstanding ECBs and the proposed one) towards the foreign equity holder should not be more than seven times of the equity contributed by the latter.
[i] Old ECB Framework:The old framework for raising loans through ECB comprises the following 3 tracks:
|Track I||Track II||Track III|
|Medium term foreign currency denominated ECB with minimum average maturity of 3/5 years. Manufacturing sector companies may raise foreign currency denominated ECBs with minimum average maturity period of 1 year.||Long term foreign currency denominated ECB with minimum average maturity of 10 years.||Indian Rupee (INR) denominated ECB with minimum average maturity of 3/5 years. Manufacturing sector companies may raise INR denominated ECBs with minimum average maturity period of 1 year.|
Existing Track III (Indian Rupee denominated ECB) and the Indian Rupee denominated bonds (Masala Bonds) route has been merged as "Rupee Denominated ECB''. The merging of Track III and Masala Bonds will also enable Eligible Borrowers to issue Masala Bonds without undergoing the verification process of the RBI that was previously required.
August 23, 2019
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