REGULATORY UPDATE: RBI-EXTERNAL COMMERCIAL BORROWINGS (ECB) POLICY – RATIONALISATION AND LIBERALISATION

External Commercial Borrowings (ECB): ECBs are commercial loans raised by eligible resident entities from recognized non-resident entities and should conform to parameters such as minimum maturity, permitted and non-permitted end-uses, maximum all-in-cost ceiling, etc. The parameters apply in totality and not on a standalone basis.

Track I : Medium term foreign currency denominated ECB with minimum average maturity of 3/5 years.

Track II : Long term foreign currency denominated ECB with minimum average maturity of 10 years.

Track III : Indian Rupee (INR) denominated ECB with minimum average maturity of 3/5 years.

  1. The following changes have been brought about by the notification External Commercial Borrowings (ECB) Policy – Rationalisation and Liberalisation dated 27th April 2018Uniform All-in cost Ceiling has been decided for all External Commercial Borrowings at 450 basis points over the benchmark rate. However, for track I and II rate will be 6 month USD LIBOR ( or applicable benchmark rate of the currency), whereas for Track III (Rupee ECBs) and RDBs while it will be the prevailing yield of the Government of India security of corresponding maturity. The previous All-in-cost ceiling was 300 bps and 500 Bps for Track I and Track II respectively.
  2. The External Commercial borrowing liability of a borrower towards a foreign equity holder has been increased to seven times the equity contributed by the latter as compared for four times as per the previous notification.
  3. The notification has also increased the scope for which External commercial Borrowing can be accepted:
    • Housing Finance Companies
    • Port Trusts
    • Companies engaged in the business of Maintenance, Repair and Overhaul and freight forwarding to raise ECBs denominated in INR only
  4. The notifications states that the extant positive end uses in Track I and Negative end uses in Track II and III will be replaced by only negative end uses in all the Three tracks. The common Negative uses for the all the three tracks will be as follows:
    • Investment in real estate or purchase of land except when used for affordable housing as defined in Harmonized Master List of Infrastructure Sub-sectors notified by Government of India, construction and development of SEZ and industrial parks/integrated townships.
    • Investment in capital market.
    • Equity investment.
  5. Additionally for Tracks I and III, the following negative end uses will also apply except when raised from Direct and Indirect equity holders or from a Group company, and provided the loan is for a minimum average maturity of five years:
    • Working capital purposes.
    • General corporate purposes.
    • Repayment of Rupee loans

Also, all the six negative end uses will apply to all the three tracks on lending to entities involved in activities as mentioned in the six negative uses.

Impact of the Notification:

The liberalization and rationalization of the ECB policy will have a increase the borrowing capacity of the an Indian Borrower from a Foreign source and allow for borrowing for an increased number of activities.

Source: External Commercial Borrowings (ECB) Policy – Rationalisation and Liberalisation dated 27th April 2018

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