Tweaks to ECB directions helpful, but clarity needed

By Sawant Singh and Aditya Bhargava, Phoenix Legal

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.

Sawant Singh
Phoenix Legal

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.

Aditya Bhargava
Phoenix Legal

Notably, overseas branches and subsidiaries of domestic lenders are not eligible lenders for the purposes of ECBs covered by these changes. This change represents a shift in the regulatory mindset. Previously, entities that were the subject of restructuring or insolvency processes could only raise ECBs if it was contemplated in the resolution plan. The intention of this relaxation appears to be to enable the implementation of resolution plans that contemplate a one-time settlement with existing lenders, thereby ensuring the successful closure of the resolution process.

However, further clarification on this relaxation would be welcome, as lenders that are willing to provide loans to distressed companies, or are willing to purchase distressed loans, generally expect a much higher rate of return than the current ceiling on all-in costs set out in the ECB directions. For this relaxation to be successful, the all-in costs ceiling for this category should preferably be increased.

While the relaxations introduced on 30 July are welcome, they tend to further obscure an already complicated framework of regulations on ECBs. Further, the overlong maturities of 10 years for working capital and general corporate purposes, and seven years for the purpose of refinancing certain rupee loans, put borrowers at a disadvantage in attracting overseas lenders that can provide ECBs with maturities of between three and five years.

A possible reason for requiring such maturities is to reduce the impact of currency fluctuations. However, this could have been accomplished simply by requiring such ECBs to be rupee-denominated, thereby transferring the currency risk from the borrower. In addition, as the intention of the relaxation appears to be to enable the flow of relatively cheaper funds in the form of ECBs to borrowers to alleviate credit shortfalls, linking the all-in-costs to prevailing market conditions could also have been considered. This reflects the position in the previous version of the ECB directions and would, therefore, not be unprecedented.

From a commercial perspective, this would likely result in ECBs being made available to borrowers at rates lower than those prevailing in domestic financial markets. To summarize, while these measures are much needed, further clarifications would be required to more fully accomplish the regulatory intent.

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


Phoenix Legal
Second Floor
254, Okhla Industrial
Estate Phase III
New Delhi – 110 020, India
Vaswani Mansion, 3/F
120 Dinshaw Vachha Road, Churchgate
Mumbai – 400 020, India
Contact details
Tel +91 11 4983 0000 / +91 22 4340 8500
Fax: +91 11 4983 0099 / +91 22 4340 8501
Email: | subscripton ad blue 2022