In supersession of the previous Master Direction issued by the Reserve Bank of India (‘RBI’) and consolidating inter alia the RBI circulars dated January 16, 2019 (in relation to the new external commercial borrowings framework), February 7, 2019 (in relation to external commercial borrowing facility for resolution applicants under Corporate Insolvency Resolution Process) and March 13, 2019 (in relation to revised framework for trade credits), RBI has issued the latest Master Direction on External Commercial Borrowings, Trade Credits and Structured Obligations dated March 26, 2019 (‘ECB Master Direction’).

With the aim of liberalising the foreign currency loan regime in India, RBI has introduced certain sweeping changes and rationalised the extant framework for external commercial borrowings (‘ECBs’), Rupee denominated bonds and trade credits (‘TCs’). No changes have been made to Part III of the ECB Master Direction which deals with structured obligations.

Further, through the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 (‘B&L Regulations’) issued on December 17, 2018, RBI has also streamlined the regulations pertaining to borrowing and lending in foreign currency and Indian Rupees. Accordingly, the ECB Master Direction no longer deals with provisions pertaining to borrowing and lending in foreign currency (as was the case earlier).

The key highlights of the ECB Master Direction are set out below:

A.       ECB FRAMEWORK

1.       Merging of Tracks: Earlier, the foreign currency (‘FCY’) denominated ECB could be availed under Track I (short-term foreign currency ECB) and Track II (long-term foreign currency ECB) respectively. The RBI has now merged the FCY denominated ECB into a single track. Further, the RBI has also merged Track III (Rupee denominated ECB) and the framework on Rupee denominated bonds (i.e. masala bonds) as ‘Rupee denominated ECB’. Earlier, the framework for ECBs and masala bonds were separate.

2.       ECB Limits: ECB up to USD 750 million or its equivalent per financial year (irrespective of specified activities / sector), which otherwise is in compliance with the parameters set out in the ECB Master Direction, can be raised under the automatic route. Earlier, the ECB regulations set out different limits for ECBs which could be raised by ‘eligible’ entities / borrowers engaged in specified activities / sectors under the automatic route (such as upto USD 200 million for the software sector, USD 100 million for micro finance activities etc.), which have now been aggregated. Pursuant to the ECB Master Direction, there are no sector specific limits.

3.       Form of ECB: As was the case previously, both FCY ECB and INR ECB can be availed by way of loans including bank loans, securitised instruments (e.g. floating / fixed rate notes, bonds, non-convertible, optionally convertible or partially convertible debentures), TCs beyond three years or financial lease. In addition, INR ECB can also be availed in the form of preference shares. Foreign currency convertible bonds (‘FCCBs’) as well as foreign currency exchangeable bonds (‘FCEBs’) continue to be a mode for availing FCY ECB.

4.       Eligible Borrowers: The list of ‘eligible borrowers’ has been expanded to include all entities eligible to receive foreign direct investment (‘FDI’). Additionally, port trusts, units in special economic zones, 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 now avail ECB. Examples of companies which can now avail ECB are companies in sectors such as animal husbandry, agriculture, petroleum and natural gas, broadcasting, insurance etc.

5.       Recognised Lender: The RBI had specified certain categories of entities which could provide ECB to eligible Indian borrowers. As per the ECB Master Direction, any resident of Financial Action Task Force or International Organization of Securities Commission compliant country can provide ECB to eligible Indian borrowers. Additionally, it is pertinent to note that:

(a)    Multilateral and regional financial institutions, where India is a member country, will be recognized lenders under the ECB Master Direction;

(b)      Individuals as lenders can only be permitted if they are foreign equity holders or subscribers to bonds / debentures listed abroad; and

(c)      Foreign branches / subsidiaries of Indian banks continue to be recognized lenders for FCY ECB (except FCCBs and FCEBs).

6.       Minimum Average Maturity Period (‘MAMP’): Earlier, Track I and Track III ECBs were required to have a MAMP of three / five years whereas Track II ECB was required to have a MAMP of ten years except in certain cases wherein specific MAMP was prescribed by RBI. The MAMP for all ECBs is now prescribed as three years. However, for ECBs raised from foreign equity holders and utilised for working capital purposes, general corporate purposes or repayment of rupee loans (in negative list in respect of other lenders), the MAMP will be five years. The MAMP for ECB up to USD 50 million per financial year raised by companies in the manufacturing sector will continue to be one year.

7.       End-Uses: There has been no change to the negative list of end-uses prescribed by the RBI (especially as the FCY borrowing tracks have been merged) except the clarification on negative end use of ‘real estate activities’. The ECB regulations specified that ECB could not be availed for investment in real estate or purchase of land. While real estate activities continue to be a prohibited end-use for availing ECBs, the ECB Master Direction now defines ‘real estate activities’ to mean any real estate activity involving owned or leased property for buying, selling and renting of commercial and residential properties or land and also includes activities either on a fee or contract basis assigning real estate agents for intermediating in buying, selling, letting or managing real estate. However, this does not include construction / development of industrial parks / integrated township / SEZ, purchase / long term leasing of industrial land as part of new project / modernisation of expansion of existing units or any activity under ‘infrastructure sector’ definition.

8.       All-in-Cost (‘AIC’): The RBI has provided few clarifications in relation to AIC, which are as follows:

(a)      It has been clarified that Export Credit Agency charges and guarantee fees, whether paid in Rupees or FCY, will be included in AIC; and

(b)     Various components of AIC have to be paid by the borrower without taking recourse to the drawdown of ECB i.e. ECB proceeds cannot be used for payment of interest / charges.

9.       Late Submission Fee (‘LSF’) for Delay in Reporting: Any borrower, who is otherwise in compliance with ECB regulations, can regularize delay in reporting / form submissions by payment of LSF as prescribed in the ECB Master Direction.

10.      Form 83: Earlier, Indian borrowers were required to obtain a Loan Registration Number (‘LRN’) by submission of Form 83 to the AD Bank. However, Form 83 has now been done away with and has been replaced with Form ECB. Accordingly: (i) to obtain an LRN, borrowers are now required to submit duly certified Form ECB; and (ii) changes in ECB parameters, including reduced repayment by mutual agreement between the lender and borrower, is now required to be reported to RBI through revised Form ECB.

11.      Raising of ECB by Start-ups: Any entity recognized by the Central Government as a ‘start-up’ is allowed to raise ECB up to USD 3 million (approx. INR 21 crores) or equivalent per financial year. The AIC can be mutually agreed between the borrower and the lender. This is in line with the earlier ECB framework. It has been clarified that start ups under the special dispensation or other start ups which are eligible to receive FDI, can also raise ECB under the general ECB Framework.

12.      Raising of ECB by Entities under Restructuring: Any entity which is under restructuring scheme / corporate insolvency resolution process (‘CIRP’) under the Insolvency and Bankruptcy Code, 2016 can raise ECB only if specifically permitted under the resolution plan. Further, RBI has relaxed the end-use restrictions for resolution applicants under CIRP and has allowed raising ECBs from recognised lenders (except branches / overseas subsidiaries of Indian banks) under the approval route for repayment of Rupee term loans of such entities.

B.        TC FRAMEWORK

13.      TC Limits: Under the automatic route, TCs upto USD 50 million or its equivalent per import transaction can be raised. In relation to oil / gas refining and marketing, airline and shipping companies, this limit has been further relaxed and TCs upto USD 150 million or its equivalent per import transaction can be raised. Earlier, the ECB regulations prescribed a limit of USD 20 million, or its equivalent, for all companies.

14.      Form of TC: TCs can be in the nature of buyers credit and/or suppliers credit, and can be raised in any freely convertible foreign currency (‘FCY TC’) or Indian Rupees (‘INR TC’). Further, change of currency of TC from FCY to any other freely convertible foreign currency or INR is freely permitted. However, change of currency from INR to any freely convertible foreign currency is not permitted.

15.      Eligible Borrower: Any person resident in India and acting as an importer can raise TC. Further, TCs can also be raised by: (i) a unit or developer in a SEZ (including a Free Trade Warehousing Zone (‘FTWZ’)) for purchase of capital or non-capital goods within an SEZ including FTWZ; and (ii) an entity in a Domestic Tariff Area for purchase of capital or non-capital goods from a unit or developer of a SEZ including FTWZ.

16.      Recognised Lender: For buyers credit, banks, financial institutions, foreign equity holders located outside India and financial institutions in International Finance Service Centres located in India can provide TC. Foreign branch / subsidiaries of Indian banks are permitted as recognised lenders only for FCY TC.

17.      Period of TC: In case of import of capital goods, TC can be raised for up to three years, whereas in case of non-capital goods, the period is capped at one year or the operating cycle, whichever is less. However, in case of shipyards / shipbuilders, the period of TC for import of non-capital goods is up to three years.

18.      All-In-Cost: The AIC ceiling has been reduced from 350 basis points to 250 basis points per annum.

19.    Security for TC: TCs can be secured by movable assets (including financial assets) or immovable assets (excluding land in SEZs) of the importer, or through corporate or personal guarantees. TCs can also be secured by: (i) AD banks providing bank guarantees in favour of overseas lenders on behalf of the importer for an amount not exceeding the TC; (ii) overseas guarantees issued by foreign banks or overseas branches of Indian banks.