Over the last few months, the Reserve Bank of India (RBI) has introduced key relaxations to the exchange control policy governing external commercial borrowings (ECBs) raised by Indian entities. ECBs have emerged as an important resource-raising avenue for Indian corporates, particularly with rising interest rates in the domestic financial markets. Liberal policy changes on this account are therefore bound to find favour with India Inc.
The changes were introduced through three circulars dated 29 May 2008, 2 June 2008 and 11 July 2008.
End use and all in costs
The first relaxation relates to capital expenditure in rupees. At present, borrowers proposing to raise ECBs up to US$20 million for permissible rupee expenditure require prior approval from the RBI.
The 29 May circular relaxes this policy by allowing borrowers in the infrastructure sector to raise ECBs worth up to US$100 million for permissible rupee expenditure, provided the necessary RBI approval has been obtained.
The new policy also enhances the existing ECB limit to US$50 million for all other borrowers, again with the prior consent of the RBI.
In addition, under the 29 May circular all-in cost ceilings have been increased for all ECBs. For ECBs with an average maturity between three to five years, the all-in cost ceiling has been revised from 150 to 200 basis points over six month London interbank offered rate (LIBOR) and for ECBs with an average maturity over five years, the ceiling has been increased from 250 to 350 basis points over six months LIBOR.
Borrowers in the services sector
Currently, borrowers in the services sector are not eligible to benefit from ECBs under the automatic route. The 2 June circular now permits entities in the services sector (hotels, hospitals and software companies) to raise ECBs up to US$100 million per financial year, for the purpose of importing capital goods when approval has been granted.
Even prior to the specific inclusion of this sector under the approval route, the RBI had permitted service sector companies to raise ECBs once specific approval had been obtained.
In our own experience, approvals have been granted for ECBs far exceeding US$100 million. Whether the 2 June circular should be viewed as reinforcement of the RBI’s existing intention to permit such ECBs more freely, or rather an indication of limits up to which such approvals would be granted, is a debatable point. In either event, specific recognition of such entities as eligible borrowers certainly lends more clarity to the stated policy and should be viewed as a step in the right direction.
RBI approval for security creation
The RBI has finally relaxed approval requirements for creation of security by a borrower on immovable assets and financial securities and for the issuance of corporate or personal guarantees in favour of an overseas lender or security trustee in order to secure ECBs raised by it. This administration has now been delegated to AD Category I banks that have the power to grant a “no objection” provided that certain objective criteria are met.
Relaxations to ECB policy signify an interesting reversal in the regulator’s stance given that the RBI had until very recently sought to squeeze credit inflows through the ECB route.
The reduction of the all-in cost ceilings in May 2007 to the limits existing prior to the 29 May circular, sparked negative reactions within the lending community. The RBI’s decision to restore these ceilings to their original levels should revive commercial interest for overseas lenders. Similarly, the enhancement of limits under the approval route for rupee capital expenditure, particularly in the infrastructure sector, demonstrates the priority this sector holds on the government’s agenda and should elicit interest from lenders and borrowers alike.
However, given the urgent need to plug the infrastructure deficiencies of the nation, perhaps the RBI could have done away with the condition to seek its approval (which was its position prior to August 2007).
Given that the prerequisite to obtain RBI approval has been retained, it will be interesting to see how forthcoming such approvals will be, both in the infrastructure sector and for other corporate borrowers for rupee capex. The RBI had virtually shut off ECBs for rupee capital expenditure with the introduction of the approval regime in August 2007.
According to some industry sources, fresh ECBs for rupee capex have hardly ever been permitted even through this narrow window. The recent move in the rupee–dollar equation – in favour of the dollar – and the commitment to support economic growth through critical infrastructure projects, should hopefully result in a more liberal approach to granting such approvals.
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