Under the previous regulatory framework for external commercial borrowing ("ECB"), the borrowers were restricted from using the ECB for: (a) real estate activities; (b) investment in capital market; (c) equity investments; (d) repayment of Rupee loans (unless received from a foreign equity holder); (e) working capital purposes and general corporate purposes (unless received from a foreign equity holder); and (f) on-lending for such activities.
Earlier this year, through an amendment to the ECB guidelines1, all entities permitted to avail foreign direct investment ("FDI") under 100% automatic route were also permitted to avail ECB and the start-ups were exempted from the end-use restrictions mentioned above, thus improving the ease of doing business and boosting the ECBs in India.
In continuation of its efforts to simplify the extant regime for ECB and make it more accessible, the Reserve Bank of India ("RBI") has issued a circular2 dated July 30, 2019 wherein it has relaxed the end-use restrictions for corporates and non-banking financial companies ("NBFCs"), by permitting the use of ECB proceeds for working capital requirements, general corporate purposes, repayment of Rupee loans and on-lending for such purposes.
As per the extant framework, the eligible borrowers are (i) all entities eligible to receive FDI; (ii) Port Trusts; (iii) Units in Special Economic Zones; (iv) Small Industries Development Bank of India; (v) Export-Import Bank of India; and (vi) registered entities engaged in micro-finance activities, such as registered not-for-profit companies, registered societies, trusts, cooperatives and non-governmental organizations (permitted only to raise Indian Rupee denominated ECB). The RBI has now permitted them to raise ECB for the following purposes from the recognized lenders, except foreign branches or overseas subsidiaries of Indian banks, subject to the limit and leverage requirements3:
2.1. ECBs for working capital purposes and general corporate purposes
Eligible borrowers can now raise ECB with a minimum average maturity period ("MAMP") of 10 years for working capital purposes and general corporate purposes.
NBFCs can now on-lend their ECB borrowings with MAMP of 10 years for working capital purposes and general corporate purposes.
2.2. ECBs for repayment of rupee loans availed domestically for capital expenditure
Eligible borrowers can now raise ECBs with a MAMP of 7 years for repayment of Rupee loans availed domestically for capital expenditure and similarly NBFCs can raise ECBs with a MAMP of 7 years for repayment of Rupee loans availed domestically for capital expenditure for on-lending.
However, for repayment of Rupee loans availed domestically by eligible borrowers or NBFCs for purposes other than capital expenditure, the MAMP is mandated to be 10 years.
2.3. ECB for repayment of Rupee loans availed domestically for capital expenditure in manufacturing and infrastructure sector
Eligible borrowers are also allowed to raise ECB for repayment of Rupee loans availed domestically for capital expenditure in manufacturing and infrastructure sector if such is classified as a special mention account 2 (that is, a loan or an advance where the principal or the interest payment is overdue between 61-90 days) or a non-performing asset (that is, a loan or an advance where the principal or the interest payment has remained overdue for a period of 90 days), under any one time settlement with the lenders.
Lender banks are permitted to sell such loans to the eligible lenders except foreign branches or overseas subsidiaries of Indian banks, subject to the condition that an eligible lender must comply with the ECB guidelines such as those related to all-in-cost and MAMP, amongst other applicable terms of the ECB framework.
3. INDUSLAW VIEW
The relaxation to use the ECB proceeds for working capital purposes and general corporate purposes coupled with the liberalization of the ECB framework earlier this year certainly provides the eligible borrowers with an alternative source of funding for meeting its working capital requirements.
The change may become a preferred option for availing bridge financing, as opposed to equity financing or domestic debt financing, which were earlier the only available options to meet the working capital requirement.
Further, this move will also provide the much-needed support to the struggling NBFC sector as it will allow access to fresh capital for NBFCs and will help in easing out the liquidity crunch that NBFCs in the country have been facing in recent times.
1. A.P. (DIR Series) Circular No. 17 available at https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11456&Mode=0.
For more information on the circular please refer to our Infolex News Alert: "The RBI Issues A New External Commercial Borrowing Policy" available at https://www.induslaw.com/app/webroot/publications/pdf/alerts-2019/Infolex-Newsalert-THE-RBI-ISSUES-A-NEW-EXTERNAL-COMMERCIAL-BORROWING-POLICY.pdf
3. Limit and leverage: All eligible borrowers can raise ECB up to USD 750 million or equivalent per financial year under auto route. Further, in case of FCY denominated ECB raised from direct foreign equity holder, ECB liability-equity ratio for ECBs raised under the automatic route cannot exceed 7:1. However, this ratio will not be applicable if outstanding amount of all ECBs, including proposed one, is up to USD 5 million or equivalent. Further, the borrowing entities will also be governed by the guidelines on debt equity ratio issued, if any, by the sectoral or prudential regulator concerned.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.