With the aim of further liberalising the foreign currency loan regime in India, the Reserve Bank of India (‘RBI’) has, pursuant to the circular dated January 16, 2019 (‘Circular’), introduced sweeping changes and rationalised the extant framework for external commercial borrowings (‘ECBs’) and Rupee denominated bonds.

The RBI notification dated December 17, 2018 had consolidated and streamlined the provisions of the principal regulations relating to borrowing and lending in foreign currency and Indian Rupees under the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 (‘B&L Regulations’), which superseded the Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000 and Foreign Exchange Management (Borrowing or Lending in Rupees) Regulations, 2000. The framework/guidelines which were expected to be notified by the Government / RBI in furtherance of the B&L Regulations have been notified by RBI by issuance of the Circular. The Master Direction on ECBs, Trade Credit, Borrowing and Lending in Foreign Currency dated January 1, 2016 (‘ECB Master Directions’), and the associated FAQs, is still to be updated to reflect the changes made pursuant to the Circular, and provide further clarity (including on operational aspects). However, the amended ECB policy has come into force with effect from January 16, 2019.

Some of the key changes introduced by the Circular are set out below.

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 upto USD 750 million (approx. INR 5,250 crores) or its equivalent per financial year (irrespective of specified activities/sector), which otherwise is in compliance with the parameters set out in the ECB Regulations, 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 (approx. INR 1,400 crores) for the software sector, USD 100 million (approx. 700 crores) for micro finance activities etc.), which have now been aggregated. Pursuant to the Circular, 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), trade credits 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. Some of such 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 Circular, any resident of Financial Action Task Force or International Organization of Securities Commission compliant country can provide ECB to eligible Indian borrowers.

Additionally, note that:

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

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

(iii)    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 10 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 1 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’. Earlier, 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 Circular 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:

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

(ii)     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 Circular.

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, should be now 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 agreeable 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.

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 (‘IBC’) can raise ECB only if specifically permitted under the resolution plan. Further, pursuant to a circular dated February 7, 2019, RBI has relaxed 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.