Finance and Projects Singapore Client Alert December 2015 Revised Framework for External Commercial Borrowings: Some Key Takeaways The Reserve Bank of India ("RBI") has on 30 November 2015 notified a new framework on external commercial borrowings ("ECBs"), substantially modifying the regulatory regime for ECBs (the “2015 ECB Framework”). The table below summarises the main provisions of the 2015 ECB Framework and our key takeaways follow. Track I Track II Track III Currency of denomination and size of loan Foreign currency denominated ECB of up to United States Dollar ("USD") 50 million Foreign currency denominated ECB equal to or greater than USD 50 million Foreign currency denominated ECBs of any amount Indian Rupees ("INR") denominated ECBs of the equivalent of up to USD 50 million INR denominated ECBs equal to or greater than the equivalent of USD 50 million Minimum average maturity 3 years 5 years 10 years 3 years 5 years All-in-cost ceilings six month LIBOR + 300 basis points six month LIBOR + 450 basis points six month LIBOR + 500 basis points In line with market conditions Eligible borrowers Companies in the manufacturing, software development, shipping and airlines sectors, units in special economic zones ("SEZs"), SIDBI and the Indian EXIM Bank Entities under Track I, infrastructure companies, holding companies, core investment companies, real estate investment trusts and infrastructure investment trusts Entities under Track II, NBFCs, specified entities engaged in providing microfinance, companies providing miscellaneous services and developers of SEZs Permitted enduses More restricted than what was allowed pursuant to the automatic route under the earlier ECB regime. Notable points of departure are: Shipping and airlines companies may use ECBs for importing ships and planes only ECBs from foreign equity holders may be used for general corporate purposes but only if the average maturity is greater than five years Any purpose other than investments in capital markets, equity investments in India, real estate, on-lending and purchase of land Any purpose other than investments in capital markets, equity investments in India, real estate, on-lending and purchase of land For further information please contact Emmanuel Hadjidakis +65 6434 2781 Emmanuel.Hadjidakis @bakermckenzie.com James Huang +65 6434 2564 James.huang @bakermckenzie.com Kah Chin Chu +65 6434 2569 KahChin.Chu @bakermckenzie.com Pallavi Gopinath Aney +65 6434 2762 Pallavi.Gopinath.Aney @bakermckenzie.com Prashanth Venkatesh +65 6434 2600 Prashanth.Venkatesh @bakermckenzie.com Baker & McKenzie.Wong & Leow 8 Marina Boulevard #05-01 Marina Bay Financial Centre Tower 1 Singapore 018981 www.bakermckenzie.com 1. Size of loan: The small borrowings limit has been increased from USD 20 million to USD 50 million. 2. All-in-cost ceilings: Not only has the all-in-cost ceiling for ECBs under Track I been reduced by 50 basis points, fees paid in INR will also count towards all-in-costs. 3. Average maturity: Given the implication on capital costs for long term borrowings, banks may not play a major role in providing financing for borrowers under Track II. The ability to pass on the additional capital costs would be limited given the all-in-cost ceilings. The overseas long term investor may, in time, become the presumptive lender of choice under Track II - whether they will be able to do so immediately is another matter altogether. 4. Source of Funds: To lend under Track III, foreign lenders have to mobilise INR through swaps or outright purchases from Authorised Dealer banks. So, foreign banks with branches in India cannot leverage their INR current account and savings account deposits. Pricing for ECBs under Track III is likely to be at or about the same as for INR borrowings. 5. Recognised lenders: The pool of recognised international lenders eligible to lend to Indian companies has now been expanded to include overseas long term investors. These are prudentially regulated financial entities, pension funds, insurance companies and sovereign wealth funds. Overseas branches and subsidiaries of Indian banks are recognised lenders under Track I but not under Tracks II and III indicating the RBI's intention to limit the exposure of the Indian banks to infrastructure lending. 6. Eligible borrowers: Of most concern to the market may be the fact that ECBs can be borrowed under each track only by the specifically permitted entities set out above. Previously, all companies were treated as eligible borrowers while the end use of ECBs was restricted. Restricting the pool of borrowers will have a major impact on the market as companies in the infrastructure and telecom sectors who have traditionally accessed ECBs are no longer eligible borrowers under Track I. Crucially, the definition of infrastructure sector has now been brought in line with domestic lending norms. NBFCs are allowed to borrow only INR denominated ECBs which will increase the cost of funding for NBFCs. 7. End uses: While an ECB based onshore leveraged acquisition structure is still not permitted, the critical point to note is that refinancing of INR loans is not prohibited under Tracks II and III. If an eligible borrower is looking to restructure its INR debt and has USD income streams, the long term borrowing structure under Track II may be attractive – airlines, ports, airports and genuine trade exporters will examine and explore this option. 8. Individual limits: The individual limits under the 2015 ECB Framework are set out below: Manufacturing and Infrastructure - USD 750 million Software development - USD 200 million Microfinance - USD 100 millionAll other sectors - USD 500 million 9. Debt capital market instruments: Foreign currency bonds: The 2015 ECB Framework applies to debt capital market instruments such as foreign currency bonds including foreign currency convertible bonds and foreign currency exchangeable bonds. Major bond issuers such as the large telecom and oil marketing companies will now not be able to access the foreign currency bond market unless they comply with Track II and issue foreign currency bonds with an average maturity of 10 years. INR denominated bonds: It should be noted that the 2015 ECB Framework applies to "masala bonds" to the extent of matters not specifically discussed in the masala bonds framework (for example, creation of a security or guarantee, conversion into equity or corporates under investigation). However, only vanilla instruments can be issued under the masala bonds framework. Therefore, non-vanilla INR bonds can only be considered under the Track III route (for example, INR convertibles). It should be noted that the 2015 ECB Framework specifies that individual limits for eligible borrowers are separate from the limits allowed under the masala bonds framework. Our earlier client alert on the masala bond framework is available here. 10. Grandfathering: The RBI has allowed time until 31 March 2016 for entities to raise ECBs under the old regime if the loan agreement has already been signed. Entities raising ECBs under the erstwhile civil aviation route, foreign exporter route or low cost affordable housing route will have time until 31 March 2016 to secure their loan registration number and sign the loan agreement. This client alert is provided as general information and does not constitute legal advice. Baker & McKenzie does not practice Indian law and the summaries of Indian regulations contained herein are derived from discussions with Indian counsel. ©2015. All rights reserved. Baker & McKenzie.Wong & Leow is a member of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a “partner” means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an “office” means an office of any such law firm.