Reserve Bank of India (‘RBI’) has recently issued Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 (‘New Regulations’) in supersession of Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000 and Foreign Exchange Management (Borrowing and Lending in Rupees) Regulations, 2000 (collectively, ‘Erstwhile Regulations’).
This is the second time in span of two years, where RBI has completely revamped the ECB framework in order to meet the growing need of accessing foreign funds, when corporates are facing liquidity crunch in domestic market. Under the New Regulations, RBI has drastically rationalized the policy related to minimum maturity period, end use restriction and amount to be raised as ECB.
Key changes brought about in this regime through New Regulations are set out hereunder:
- Definition of External Commercial Borrowings (‘ECB’) and External Commercial Lending (‘ECL’)
With a view to provide precision on the subject, the term “External Commercial Borrowings” has been defined to mean the borrowing by an eligible resident entity from outside India and “External Commercial Lending” as the lending by a person resident in India to a borrower outside India.
- Entities eligible to raise ECB and provide ECL
For ECB: The entities eligible to raise ECB under New Regulations are wider as compared to that given in Erstwhile Regulations read with FED Master Direction No. 5/ 2015-16, dated 1st January, 2016 (‘ECB Master Directions’).
While the Erstwhile Regulations categorized the eligible borrowers under different tracks, the New Regulations simply provide that the entities eligible to receive foreign direct investment as per the extant FDI Regulations are also eligible to raise ECB from person resident outside India.
Similar approach is applied for determining recognized lender for ECB. Contrary to the Erstwhile Regulations which provided a complicated system for recognized lender under different tracks, New Regulations determine the same as a resident of FATF1 or IOSCO2 compliant county. Further, multilateral and regional financial institution where India is a member country shall also be considered as a recognized lender.
For ECL: In addition to the Indian entities permissible to lend in favour of their overseas JV and wholly owned subsidiaries, a person resident in India is also allowed to lend in foreign exchange out of the funds held in his EEFC account. However, such lending is subject to trade related purposes to the overseas importer along with limit, if any imposed by RBI in consultation with government of India. This provision earlier required guarantee from a reputed bank outside India where the loan exceeds certain limit, however, the extant regulations are silent on issuance of such guarantee.
- Forms of ECB
Erstwhile Regulations read with ECB Master Directions outline several forms of ECB, however, under the New Regulations, the varied forms in which ECB may be raised will be prescribed by RBI.
- Maturity period
Earlier, ECB was categorized under three tracks, Medium term foreign currency denominated ECB with minimum average maturity of 1/3/5 year(s), Long term foreign currency denominated ECB with minimum average maturity of 10 years and Indian Rupee (INR) denominated ECB with minimum average maturity of 1/3/5 year(s). However, in supersession, the New Regulations have prescribed the minimum average maturity for a period of 3 years.
It means that under the extant regulations, all the sectors are at par with reference to the minimum average maturity period unless otherwise notified by RBI.
The relaxation of maturity period to 3 years will have a mixed impact on the Industry , while REITS and INVITS3 will cherish this , since they were earlier required to comply with 10 years minimum average maturity period, the manufacturing concerns will find it tough as earlier they were allowed a minimum average period of 1 year vide A. P. (DIR Series) Circular No. 9 dated 19th September, 2018.
New Regulations provide an inclusive list in respect of the end-uses where borrowed funds cannot be deployed. Unlike Erstwhile Regulations, the end-uses prescribed under New Regulations seem more rational.
For eg. under the Erstwhile Regulations, the borrowed funds cannot be parked for working capital purposes, general corporate purposes, etc., which in itself is a significant limitation. However, there is no such restriction for deploying borrowed funds in the New Regulations. The end-uses in which ECB proceeds cannot be utilized under the extant regulations are majorly limited to the sectors/ activities in which FDI is not permitted i.e. chit funds, agricultural, plantation, real estate activities, trading in TDRs4, etc.
- Limits of borrowings
All eligible borrowers are now entitled to raise ECB upto USD 750 million or its equivalent per financial year. This was the highest limit which was available only to infrastructure and manufacturing sectors and certain classes of NBFCs under the Erstwhile Regulations.
However, for startups, the RBI has continued with its conservative approach by providing a limit of ECB for only USD 3 million or its equivalent per financial year.
Further, an individual resident in India may borrow a sum upto USD 250,000 or its equivalent subject to the terms and conditions, which are yet to be notified.
- Provisions governing trade credit
The limit of borrowing under trade credit has been raised to USD 50 million or its equivalent from USD 20 million or its equivalent per import transaction.
For import of capital goods, the maturity period has been reduced upto 3 years from upto 5 years from the date of shipment under the New Regulations.
Further, the all-in-cost ceiling for raising trade credit has been reduced to 250 basis points from 350 basis points over 6 months LIBOR or applicable benchmark.
- Hybrid Instruments
Certain hybrid instruments such as optionally convertible debentures, covered und0er the erstwhile regime, shall now be governed by the specific regulations to be issued in this respect.