The RBI has revised the ECB framework to allow companies in the infrastructure sector to raise shorter term foreign currency denominated ECBs with a minimum average maturity of 5 years.

The Reserve Bank of India (RBI) has, through its circular dated 30 March 2016 (Circular), relaxed the existing External Commercial Borrowings (ECBs) policy to allow, companies and financial institutions raising funds for the infrastructure sector to raise shorter term ECBs, albeit subject to a 100% hedging requirement.

The RBI had on 30 November 2015, released a revised framework on ECBs (Revised Framework), under which the RBI had laid out three tracks through which Indian borrowers could borrow funds from overseas. Track I allowed shorter term ECBs with a minimum average maturity (MAM) of 3/5 years. Track II covered long term ECBs with a MAM of 10 years while Track III allowed ECBs denominated in Indian Rupees with a MAM of 3/5 years. The Revised Framework also provided for a specific list of eligible borrowers under each Track.

Although the RBI had generally expanded the list of eligible borrowers under the Revised Framework, companies and financial institutions raising funds for the infrastructure sector were only allowed to raise ECBs under Track II and Track III. The RBI seemed to have made this change to encourage long term borrowing in this sector, however, this proved to be counter-productive as it greatly reduced the availability of funds for infrastructure projects and impaired the Indian borrower's flexibility in securing short term ECBs. The current Circular therefore seeks to address this concern.

Key changes introduced by the Circular

  1. Eligible borrowers and MAM

Companies in the infrastructure sector, Non-Banking Financial Companies-Infrastructure Finance Companies (NBFC-IFCs), Non-Banking Financial Companies-Asset Finance Companies (NBFC-AFCs), holding companies and core investment companies (CICs) are now eligible to avail ECBs under Track I. While the MAM for all borrowers under Track I is 3/5 years (depending on the amount borrowed), the MAM for the entities listed above is at least 5 years irrespective of the amount of borrowing.

  1. Hedging requirement

The RBI has allowed companies in the infrastructure sector, NBFC-IFCs, NBFC-AFCs, holding companies and CICs to avail foreign currency ECBs under Track I, subject to 100% hedging of the exposure. The cost of hedging is a significant expense that borrowers will need to account for when availing ECBs which could impact the utilising of ECBs under this track. This 100% hedging requirement is to be verified by Authorised Dealer Category-I banks and filings under ECB-2 returns are required to be made to the RBI. Further, these borrowers are required to have a board approved risk management policy in place.

  1. Inclusion of sub-sectors under the infrastructure sector

Under the Revised Framework, companies operating in sectors set out in the Government's Harmonised Master List of Infrastructure sub-sectors were permitted to raise ECBs. The exploration, mining and refinery sectors are not included in this list and therefore, though under the previous ECB regime they were allowed to raise ECBs, they seemed to have been excluded from the Revised Framework.

To address this lacuna, the Circular, specifically provides that for the purposes of raising ECBs, the exploration, mining and refinery sectors will be deemed to be included in the infrastructure sector and therefore companies in these sectors may avail ECBs under Track I.

  1. End-use

The Circular requires companies in the infrastructure sector to utilise the proceeds raised under Track I for the specific end-uses permitted under this Track, which include capital expenditure in the form of import of capital goods services, expansion of projects, modernisation, refinancing of existing ECBs etc. However, NBFC-IFCs and NBFC-AFCs are permitted to raise ECBs only for financing infrastructure.

  1. Individual limit for borrowing

Under the Revised Framework, companies in the infrastructure and manufacturing sectors are permitted to avail ECBs up to USD 750 million in a financial year under the automatic route, in all three tracks. Now, NBFC-IFCs, NBFC-AFCs, holding companies and CICs may also avail ECBs under all three tracks without government approval up to USD 750 million in a financial year.

The RBI's current decision to open up Track I ECBs for the infrastructure sector is a positive development and a much needed change to address the critical needs of this sector. Though having said that, a 100% hedging requirement could still make ECBs under this route inefficient and uneconomical for many borrowers.