The Reserve Bank of India (“RBI”) issued a circular on November 30, 2015 to revise the framework for External Commercial Borrowings (“ECB Circular”). The revised ECB framework is to come into effect on the publication of the relevant/ applicable regulations, under the Foreign Exchange Management Act, 1999 (“FEMA”), in the official gazette and will endeavor to implement a more liberal approach regarding ECBs and changes in relation to, inter alia, fewer restriction on end uses, higher all in cost for long term borrowings, liberal regimes in relation to Rupee denominated ECBs where the currency risk is borne by the lender, expansion of list of eligible overseas long term lenders, and further to align the list of infrastructure entities eligible for ECB with the Harmonised Master List of Infrastructure sub-sectors approved by the Government of India vide a notification issued on March 27, 2012.

Entities desirous of raising ECBs under the extant ECB guidelines may raise loans by March 31, 2016, provided that the loan agreement has already been signed before the coming into effect of the revised framework. However, borrowers availing ECB facilities for working capital as airline companies or as consistent foreign exchange earners under the US$ 10,000,000,000 (United States Dollars Ten billion) scheme or for low cost affordable housing projects will be required to sign their loan agreements and obtain their Loan Registration Number from the RBI by March 31, 2016.

Salient features of the ECB Circular are summarised below:

  1. The revised ECB framework is to compromise of 3 (three) main tracks, depending on the ECBs’ Minimum Average Maturity period (“Maturity Period”) as described below:
    1. “Track I” will comprise of medium term foreign currency denominated ECBs that have a Maturity Period of 3 (three) years for ECB up to US$ 50,000,000 (United States Dollar Fifty million) from the erstwhile limit of US$ 20,000,000 (United States Dollars Twenty million) or that have a Maturity Period of 5 (five) years for ECBs above US$ 50,000,000 (United States Dollar Fifty million);
    2. “Track II” will comprise of long term foreign currency denominated ECBs with Maturity Period of 10 (ten) years, irrespective of the amount; and
    3. “Track III” will comprise of Rupee denominated ECBs with Maturity Period(s) and threshold limit(s) similar to that of Track I.
  2. Eligible borrowers that can avail ECBs under Track I will comprise of, inter alia, companies in the manufacturing and software development sector, shipping and airlines, units in Special Economic Zones (“SEZ”) and the Export Import Bank of India;
  3. Eligible borrowers that can avail ECBs under Track II will include all entities under Track I along with companies under the infrastructure sector, holding companies, core investment companies, Real Estate Investment Trusts and Infrastructure Investment Trusts under the Securities and Exchange Board of India’s (“SEBI”) regulatory framework;
  4. Eligible borrowers that can avail ECBs under Track III will include all entities under Track II along with Non-Banking Financial Companies (“NBFC”), NBFCs - Micro Finance Institutions (“NBFC – MFI”), nonprofit companies registered under the Companies Act, 1956 / 2013 (“Companies Act”), societies, trust and cooperative, Non– Government Organisations (“NGO”) engaged in micro finance, companies engaged in miscellaneous services, inter alia, relating to research and development, training, companies supporting the infrastructure sector, providing logistics services and developers of SEZs/ National Manufacturing and Investment Zones;
  5. Eligible lenders/ investors that can provide ECBs to entities under Track I will comprise of entities, inter alia, international banks, international capital markets, multilateral financial institutions/ regional financial institutions and Government owned financial institutions, export credit agencies, suppliers of equipment, foreign equity holders, overseas long term investors, pension funds, insurance companies, sovereign wealth funds, financial institutions located in International Financial Services Centres in India and overseas branches/ subsidiaries of Indian banks, subject to certain conditions under the ECB Circular;
  6. Except for overseas branches/ subsidiaries of Indian banks, lenders/ investors under Track I will be permitted to extend ECBs to entities under Track II and III as well;
  7. All-in-Cost (“AIC”) for ECBs have been revised and lowered, mechanisms for calculation for which have been specified separately under each Track;
  8. Permitted end-uses under each Track, have been enumerated in detail in the ECB Circular. Moreover, previous restricted end uses of ECB proceeds, for purposes such as real estate activities, investment in capital markets, investing in equity domestically and also for on-lending to other entities for the abovementioned purposes have been removed. Moreover, proceeds can also be utilised for acquisition of land under the Track II and III categories. Further, under Track II, holding companies can also utilise the ECB proceeds for providing loans to their infrastructure Special Purpose Vehicles (“SPV”);
  9. NBFCs coming under the Track III criteria will be permitted to utilise their ECB proceeds for providing hypothecated loans to domestic entities, for acquisition of capital goods/ equipment;
  10. Individual sector limits of ECBs that can be raised under the automatic route, for all 3 (three) tracks will be US$ 750,000,000 (United States Dollars Seven hundred fifty million) for companies in the infrastructure and manufacturing sectors, US$ 200,000,000 (United States Dollars Two hundred million) for companies in the software development sector, US$ 100,000,000 (United States Dollars One hundred million) for entities engaged in micro finance activities and US$ 500,000,000 (United States Dollars Five hundred million) for all other remaining entities;
  11. A no-objection certificate will be required from existing domestic lenders, when invoking a charge against hypothecated movable asset(s), in the event that the overseas borrower requires the movable asset(s) be taken out of India;
  12. ECBs will be permitted to be credit enhanced/ guaranteed/ insured by overseas parties(ies), provided that they fulfill the criteria for “recognised lender” under the extant ECB guidelines. Financial intermediaries such as Indian banks, All-India Financial Institutions, NBFCs will not be permitted to invest in FCCBs in any manner;
  13. The parking of ECB proceeds will depend on the utilisation and the denomination for utilisation of the proceeds, the guidelines for which have been provided for in the ECB Circular;
  14. Entities that are under Joint Lender Forum (“JLF”)/ Corporate Debt Restructuring (“CDR”) may raise ECB with the explicit permission of the JLF/ CDR Empowered Committee.

The draft of the revised framework was put before the public on September 23, 2015 and the framework was accordingly calibrated by taking into account the emerging financing needs of Indian entities and macroeconomic developments. The revised framework is a great step forward and a welcomed change for resident entities desirous of lending from foreign lenders, the revised framework has been made more liberal towards external borrowings by classifying more resident entities as eligible borrowers and recognising additional entities as lenders, expanding end-uses and even removing stringent restrictions that were present in the extant ECB guidelines.