The Reserve Bank of India (“RBI”) announced certain key amendments to its policy on foreign currency borrowings (External Commercial Borrowings or “ECB”) in A.P. (DIR Series) Circular No. 46, on January 2, 2009 (the “Circular”). These amendments are the latest in a series of measures taken by the Government of India and the RBI – including the introduction of a scheme for early redemption of Foreign Currency Convertible Bonds - to mitigate the impact of the global financial crisis in India and to improve access to funding for Indian companies.

Overview of existing ECB policy:

  • ECB refers to commercial loans raised by eligible Indian borrowers from international capital markets or eligible non-resident lenders, such as international banks and multilateral financial institutions.
  • ECBs can be raised under both the Automatic Route (i.e. without prior RBI approval, subject to fulfillment of specified conditions) or under the Approval Route (i.e. with prior RBI approval), but may only be utilised for permitted end-uses. Under the Automatic Route, ECB up to US$500 million per borrower each year is permitted for Rupee or foreign currency expenditure for permitted enduses. With prior approval from the RBI, Indian companies can borrow an additional US$250 million each year, provided that the average maturity of this additional borrowing is more than 10 years.
  • Permitted end-uses include investment in the industrial and infrastructure1 sectors (e.g., import of capital goods, new projects, modernisation or expansion), overseas direct investment and 3G spectrum license fees. ECB may not be used for on-lending, investment in capital markets, acquisitions in India, real estate, working capital, general corporate purposes or repayment of existing Rupee loans.
  • ECBs are subject to certain maturity restrictions. ECB of up to US$20 million in a year must have a minimum average maturity of three years; ECB between US$20 million and US$500 million must have a minimum average maturity of five years.
  • Prepayment of ECB up to US$500 million is allowed without RBI approval, subject to compliance with minimum average maturity requirements. Prepayment of ECB above this amount is subject to RBI approval. Refinancing through fresh ECB is also permitted provided the fresh ECB is raised at a lower cost and the outstanding maturity of the original ECB is maintained.

The RBI has further liberalised its ECB policy as follows:

  • Removal of interest rate ceilings under Approval Route: Previously, ECB interest rates were capped for three to five year ECBs at 6-month LIBOR plus 300 bps, and for ECBs with a maturity of more than five years, at 6-month LIBOR plus 500 bps. The Circular provides that ECB borrowed by June 30, 2009 may carry interest rates that exceed these ceilings, subject to prior RBI approval.
  • Reintroduction of exemption in respect of Integrated Townships: In recent times, ECB has not been permitted in the real estate sector. The Circular reintroduces a previously applicable exemption (withdrawn in May 2007) in respect of the development of integrated townships. The Circular provides that Indian borrowers may use ECB for investment in the development of integrated townships, provided that RBI approval is received and a minimum land area of 100 acres is developed. Integrated townships are defined as including housing, commercial premises, hotels, resorts, city and regional level urban infrastructure facilities such as roads and bridges, mass rapid transit systems and manufacture of building materials.
  • Use of ECB proceeds for lending by NBFCs: The Circular permits financial intermediaries (known as Non-Banking Financial Companies or “NBFCs”) involved exclusively in infrastructure sector financing to receive ECB from multilateral and regional financial institutions and governmentowned development financial institutions for on-lending to borrowers in the infrastructure sector, subject to RBI approval. The aggregate direct lending commitment of these lenders to infrastructure projects in India is required at all times to be at least three times their ECB lending to NBFCs.
  • Use of ECB proceeds in the hotel, hospital and software sectors: The Circular permits hotels, hospitals and software companies to raise ECB up to US$100 million each year for foreign currency or Rupee capital expenditures without prior approval from the RBI. Previously, hotels, hospitals and software companies could only use ECB to import capital goods with prior approval from the RBI.


The RBI is loosening the regulatory reins on external commercial borrowing by Indian corporates in an attempt to respond to current changing market conditions. Removal of interest rate ceilings for ECB under the Approval Route reflects the escalating cost of finance from offshore lenders. Reintroduction of the integrated township exemption appears to be an attempt to facilitate access to foreign capital for cash-strapped Indian real estate companies. Likewise, allowing hotels, hospitals and software companies to access ECB for a wider range of permitted uses without prior approval from the RBI, and permitting on-lending by NBFCs in the infrastructure sector, appear to be timely and progressive measures designed to counteract the contraction of liquidity in these sectors.

Consistent with past practice, the RBI seems to be reacting in a cautious and incremental manner. Given the extent to which credit has contracted globally, additional steps in this direction appear likely in the months ahead.