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The Reserve Bank of India (RBI) released its revised External Commercial Borrowings (ECB) policy framework on November 30, replacing the existing ECB policy with a more rational and liberal one. The new set of norms is based on domestic and global macroeconomic conditions, the challenges faced in external sector management and the experience gained in administering the ECB policy.
Also, the new rules allow international financial institutions and domestic companies to issue rupee-denominated bonds.
These changes may usher in better times for businesses, giving them access to debt from a larger global pool, levelling the playing field and helping debt-starved large projects achieve financial closure.
New instruments The new policy introduces two new debt instruments — the long-term ECBs (with a minimum average maturity of 10 years) and rupee denominated bonds. Both instruments appear to be more aligned with foreign equity instruments, where the end use of capital is concerned. However, the RBI has opted for a negative list prohibiting certain end uses of long-term ECBs and rupee denominated bonds. These include real estate activities, market investments, and on-lending to other entities engaged in activities prohibited under this list.
Based on the recommendations submitted in February of a committee constituted by the Finance Ministry under the chairmanship of MS Sahoo, the new framework also provides for overseas lenders to hedge their currency exposure risks in onshore markets.
More lenders Other key changes introduced in the new policy include the addition of overseas regulated financial entities, pension funds and insurance funds to the list of recognised lenders.
Further, there has been an expansion of the list of end uses for which the ECBs may be utilised.
It now includes refinancing of trade credit for import of capital goods, on-lending to infra special purpose vehicles (SPVs), overseas investment in joint ventures, on-lending to the infrastructure sector, as well as loans against hypothecation or leasing to infrastructure sector by all NBFCs. Also, the all-in-cost ceilings have been reduced by 50 base points from each of the existing caps. These will also be subject to periodic review.
The introduction of long-term ECBs would greatly benefit capital-intensive, cash-starved industries. For example, there are several infrastructure projects in the road and power sectors that are stalled due to lack of funding. These are now thrown a lifeline by being permitted to avail of long-term ECBs.
Issues remain While this overhaul of ECB guidelines is welcome, certain provisions of the earlier guidelines continue to be in force. One, there is disparity in the regulations governing ECBs availed of by companies in various sectors, the rationale for which remains discretionary and ad hoc.
For example, raising of ECBs (other than from a shareholder) for general corporate purposes and working capital requirements (other than from direct foreign equity shareholders) is not permitted, except for companies in the civil aviation sector through an approval route.
Companies in the consultancy services sector are not entitled to raise ECBs.
ECBs play an important role in promoting and sustaining economic growth, in that they provide domestic firms with resources at low costs. . According to the Sahoo Committee report, a predominant portion of the ECBs availed of in India are under the automatic route, indicating that debt with minimal interference is preferred.
The approval regime is cumbersome and restrictive. It should ideally be replaced with a liberalised structure where companies are required to adhere to commercially prudent norms that address market failures.
As observed by the Sahoo Committee, regulatory intervention in financial markets should be minimal and restricted only to addressing systemic risks through periodic comprehensive reviews.
Given our substantial foreign exchange reserves, risks pertaining to the weakening of the rupee should not be a deterrent.
It would be wise to take a calculated risk and embrace the opportunities that a liberal ECB framework, with limited restrictions on borrowers, lenders, all-in-costs, end-use, etc. would afford.
The writer is Managing Partner, BMR Legal. With assistance from Roshan Thomas, Partner, BMR Legal
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