Timothy Lopes, Executive, Vinod Kothari & Company
The Reserve Bank of India (RBI) has wide press release dated 30. 07. 2019 revised the framework for External Commercial Borrowings based on feedback from stakeholders, and in consultation with the Government of India, by relaxing the end-use restrictions with a view to ease the norms for Corporates and NBFC’s. The changes brought about can be found in the RBI Circular on External Commercial Borrowings (ECB) Policy – Rationalisation of End-use Provisions dated 30. 07. 2019
Corporate sector continue to face liquidity crunch and this move from RBI is certainly a welcome move.
ECB are commercial loans raised by eligible borrowers from the recognised lenders for the permitted end use prescribed by RBI.
The ECB framework in India is mainly governed by the Foreign Exchange Management Act, 1999 (FEMA). Various provisions in respect of this type of borrowing are also included in the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 framed under FEMA.
The RBI has also issued directions and instructions to Authorised Persons, which are compiled and contained in the Master Direction – External Commercial Borrowings, Trade Credit, and Structured Obligations.
Relaxation granted in end-use restrictions
In the earlier framework as covered in the Master Direction – External Commercial Borrowings, Trade Credit, and Structured Obligations (Master Directions), ECB proceeds could not be utilized for working capital purposes, general corporate purposes and repayment of Rupee loans except when the ECB was availed from foreign equity holder for a minimum average maturity period (MAMP) of 5 years.
Further on-lending out of ECB proceeds for real estate activities, investment in capital market, Equity investment, working capital purposes, general corporate purposes, repayment of rupee loans was also prohibited. These restrictions were made under the end-uses (Negative list) of the Master Direction.
With a view to further liberalize the ECB Framework in view of current hardship being faced by corporate sector; RBI has decided to relax these end-use restrictions.
Accordingly the said relaxations by RBI reflect as under:
|Revised ECB Framework|
|Particulars||ECBs Availed from||By||Permitted End-uses||MAMP|
|Erstwhile Provision||Foreign Equity Holder||Eligible Borrower||· Working capital purposes
· General corporate purposes or,
· Repayment of Rupee loans
|Amended Provision||Recognised Lenders*||Eligible Borrower||· Working capital purposes and,
· General corporate purposes
|Recognised Lenders*||NBFC’s||· On-lending for:
o Working Capital purposes and,
o General Corporate Purpose
|Recognised Lenders*||Eligible Borrowers including NBFC’s||· Repayment of Rupee loans availed domestically for capital expenditure and,
· On-lending for above purpose by NBFC’s
|Recognised Lenders*||Eligible Borrowers including NBFC’s||· Repayment of Rupee loans availed domestically for purposes other than capital expenditure and,
· On-lending for above purpose by NBFC’s
|*ECBs will be permitted to be raised for above purposes from recognised lenders except foreign branches/ overseas subsidiaries of Indian Banks and subject to Para 2.2 of the Master Direction dealing with limit and leverage.|
Relaxation for Corporate borrowers classified as SMA-2 or NPA
Further, Eligible Corporate Borrowers are now permitted to avail ECB for repayment of Rupee loans availed domestically for capital expenditure in manufacturing and infrastructure sector if classified as Special Mention Account (SMA-2) or Non-Performing Assets (NPA), under any one time settlement with lenders.
Permission to Lender Banks to assign loans to ECB lenders
Lender banks are also permitted to sell, through assignment, such loans to eligible ECB lenders, except foreign branches/ overseas subsidiaries of Indian banks, provided, the resultant ECB complies with all-in-cost, minimum average maturity period and other relevant norms of the ECB framework.
These permissions would reduce the burden of the lender banks who classified borrower’s account as SMA-2 or NPA.
Liberalization of the ECB policy by RBI acts as a step toward increased access to global markets by eligible Indian borrowers. In the current scenario of an economic slowdown, these changes come as a push upwards for the Indian economy.
Besides the above-mentioned changes in the Master Direction, all other provisions of the ECB policy remain unchanged.
With the backdrop of revision of various frameworks for raising funds outside India (other than by way of equity participation), RBI has issued the Master Direction – External Commercial Borrowings, Trade Credits and Structured Obligations on 26th March, 2019, in supersession of the existing Master Direction – External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers dated 1st January, 2016 (last updated on 22nd November, 2018).
The new Master Direction seeks to consolidate all applicable circulars and notifications in respect of the following:
- External Commercial Borrowing framework (ECB framework) covered in the Master Direction as Part I
- Trade Credit framework covered as Part II
- Structured Obligations covered as Part III.
The first set of changes was introduced through the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 on 17th December, 2018. Thereafter, the New ECB framework was issued on 16th January, 2019 and the Trade Credit Policy on 13th March, 2019.
New Master Direction
The erstwhile Master Direction included provisions pertaining to borrowing and lending in foreign currency, which has now been removed and is solely dealt with by Foreign Exchange Management (Borrowing and Lending) Regulations, 2018. Further, it replaces the erstwhile ECB framework and Trade Credit framework with the recently issued frameworks, separately.
The revised ECB policy and Trade Credit Policy were issued, coinciding with Foreign Exchange Management (Borrowing and Lending) Regulations, 2018.
The changes introduced pursuant to new ECB policy and Trade Credit policy have been covered by our colleagues extensively in the following write ups:
- RBI revises ECB framework – aligns with FEM (Borrowing and Lending) Regulations, 2018
- RBI revises Trade Credit Policy Framework.
Few important additions in the revised frameworks, now consolidated under the Master Directions include Standard Operating Procedure for Untraceable Entities for Ad Banks, ECB for entities under resolution under IBC, ECB for resolution applicants, Late Submission Fee for late submission of returns.
The revision of the Master Direction which was originally issued in 2016 was quite anticipated in light of the recent changes made by RBI. Although the new Master Direction does not introduce any additional change in the ECB and Trade Credit framework, it unifies all the applicable policy frameworks, thereby giving more clarity.