By Simran Jalan (simran@vinodkothari.com)

External Commercial Borrowing (ECBs) are commercial loans raised by eligible resident entities from non-resident entities. The Reserve Bank of India (RBI), in consultation with the Government of India, has issued a notification (Notification)[1] to liberalise the norms governing the foreign borrowings for infrastructure companies.

Brief of the key changes is discussed in this article.

Relaxation in Minimum Average Maturity Period

As per the Master Direction on External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers (Master Direction)[2], issued by RBI the minimum average maturity period for eligible borrowers shall be 5 years irrespective of the amount of borrowing.

Further, “eligible borrowers” are Companies in infrastructure sector, Non-Banking Financial Companies -Infrastructure Finance Companies (NBFC-IFCs), NBFCs-Asset Finance Companies (NBFC-AFCs), Holding Companies and Core Investment Companies (CICs). Also, Housing Finance Companies, regulated by the National Housing Bank, Port Trusts constituted under the Major Port Trusts Act, 1963 or Indian Ports Act, 1908.”

Pursuant to the notification, the minimum average maturity period for the aforesaid eligible borrowers has been reduced to 3 years from 5 years, irrespective of the amount of borrowing.

The change introduced by the RBI has provided relaxation to the infrastructure companies availing overseas investments.

Hedging Requirements

The average maturity requirement for exemption from mandatory requirement for aforementioned borrowers of ECBs has been reduced to 5 years from the extant 10 years. Currently, the ECBs issued above 10 years were exempt from the mandatory hedging requirement. Pursuant to this Notification, the ECBs issued for more than 5 years shall be exempted from the mandatory hedging provisions.

Accordingly, the RBI explained, that the ECBs issued with a minimum average maturity of 3 to 5 years, in the infrastructure space, will have to comply with the 100% mandatory hedging requirement. Further, the designated AD Category-I bank shall verify that 100 per cent hedging requirement is complied with and report the position to RBI through ECB 2 returns.

It is also clarified that ECBs raised prior to the date of this Notification, will not be required to mandatorily roll-over their existing hedges.

Further, RBI issued a Circular[3] on Novemeber 26, 2018, and reduced the mandatory hedge coverage from 100% to 70% for ECBs raised under Track I of the ECB framework by the aforesaid eligible borrowers issued for a maturity period between 3 and 5 years. The Circular clarifies that the ECBs raised prior to this Circular will be required to mandatorily roll-over their existing hedges only to the extent of 70% of outstanding ECB exposure.

Conclusion

This move of RBI is an effort to encourage the capital flows against the backdrop of widening current account deficit. These measures of the RBI is expected to make it slightly cheaper for Indian companies and banks to tap the debt markets overseas.

However, it is not evident from the Master Direction that ECBs above 10 years were exempt from mandatory hedging requirements. We expect clarifications from RBI in this regard.

[1] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11408&Mode=0

[2] https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10204#C7

[3] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11418&Mode=0

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