Tweaks to ECB directions helpful, but clarity needed

Until recently, proceeds of external commercial borrowings (ECB) were not allowed to be used for working capital or general corporate purposes, or for the repayment of rupee loans, except where an ECB with a minimum average maturity of five years was obtained from a foreign equity holder. ECBs for on-lending for such purposes were also not permitted by the ECB directions.

This reflected a shift in the regulatory position prior to January 2019, where a rupee-denominated ECB could be used for repayment of rupee loans. The lack of traction in credit offtake in the Indian financial sector prompted feedback to the Reserve Bank of India (RBI) and the Indian finance ministry to relax these requirements. It appears that this, coupled with low interest rates in foreign jurisdictions, made them consider relaxations to the ECB directions.

On 30 July 2019, the RBI permitted ECBs with a minimum average maturity of 10 years from recognized lenders, other than overseas branches or subsidiaries of Indian banks, for working capital and general corporate purposes. Non-banking financial companies (NBFCs) can also use this route to raise ECBs for on-lending for these purposes. Further, ECBs with a minimum average maturity of seven years can now be raised from recognized lenders, other than overseas branches or subsidiaries of Indian banks, for repayment of domestic rupee loans raised for capital expenditure. NBFCs can also use this route to raise ECBs for on-lending for these purposes.

The RBI also permitted ECBs to be obtained from recognized lenders, other than overseas branches or subsidiaries of Indian banks, to repay domestic rupee loans obtained for capital expenditure in the manufacturing and infrastructure sectors pursuant to a one-time settlement arrangement where the borrower is classified either as a “special mention account-2” (where amounts are overdue for a period between 61-90 days), or as a “non-performing asset”. In this category, the RBI also permitted lenders to assign such loans to eligible ECB lenders so long as the resulting ECB complies with the requirements prescribed in the directions.

Sawant Singh and Aditya Bhargava are partners in the Mumbai office of Phoenix Legal.

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