Acountry’s economy has a direct correlation with the performance of companies and accessibility to funds. Accordingly, poor performance by companies leads to difficulties in servicing debt and/or accessing additional debt (thereby overleveraging) and then in turn stressed assets. Stressed assets lead to issues for the lending institutions, including increased provisioning requirements and lack of liquidity. Reduction in the capacity of the banking system to provide funding further adversely affects companies and thereby the economy.
Organizations such as the International Monetary Fund and the Asian Development Bank have trimmed their growth forecasts for India and now expect growth of 7.4% to 7.5%. Among the reasons for such revisions in projections are the slowdown in public investment, stressed corporate balance sheets and declining exports.
The Financial Stability Report issued by the Reserve Bank of India (RBI) in December 2015 lists the infrastructure sector as one of the five sectors that contribute to around 53% of the stressed assets in India today. There is no doubt that infrastructure is also the sector in need of maximum funding in India.
Keeping in mind the above, the RBI, via a circular on 30 March, issued certain clarifications in relation to the external commercial borrowing (ECB) regulations. The circular permitted companies in the infrastructure sector, non-banking financial companies-infrastructure finance companies (NBFC-IFCs), NBFC-asset finance companies (NBFC-AFCs), holding companies and core investment companies (CICs) to raise ECB under track I, subject to 100% hedging. It was also clarified that NBFC-IFCs, NBFC-AFCs, holding companies and CICs can only use such ECB to finance or further on-lend to the infrastructure sector.
The previous ECB regulations allowed companies in the infrastructure sector to avail of ECBs of a shorter tenure. In the revised framework for the ECB regulations introduced via a circular on 30 November 2015, the RBI mentioned that companies in the infrastructure sector could only avail of ECBs which had a minimum average maturity of more than 10 years. This caused a serious stir in the industry. Apart from causing issues for borrowers, several recognized lenders (such as Japan Bank of International Cooperation) would not be forthcoming to provide such long tenure loans to the infrastructure sector. Further, export credit agencies, which are required to follow Organization for Economic Cooperation and Development arrangements, are restricted from providing loans over 10 years.
It is important to highlight that the calculation of minimum average maturity, as provided in the ECB regulations, would mean that the effective tenure would have to be over 10 years. Additionally, under the revised framework, since the infrastructure sector did not have access to ECB under track I, companies in the sector were not allowed to avail of loans from the foreign branches or subsidiaries of Indian banks. All of these issues led to the secretary of road, transport and highways writing to the RBI governor requesting a change. In light of the above, the clarification provided in the 30 March circular comes as a great respite.
As already mentioned, the 30 March circular also states that ECBs to be obtained by the infrastructure sector and the above-mentioned companies must be entirely hedged. Under the previous ECB regulations on specific sectors, NBFC-IFCs, NBFC-AFCs, etc., were required to hedge the entire amount borrowed.
The Sahoo Committee Report (in February 2015), which reviewed the framework of access to domestic and overseas capital markets, had also recommended that every borrower’s ability to borrow should be linked with its ability to hedge. Additionally, the report recommended that all borrowers should be mandated to hedge a specific percentage of the borrowing and should also demonstrate the hedging of their foreign currency exposures.
The 30 March circular has also mentioned that the board of a company availing of ECB under track I should have a duly approved risk management policy. In addition, the circular mentioned that entities operating in the exploration, mining and refinery sectors – which are not included in the harmonized master list of infrastructure sub-sectors but were eligible to raise ECB under the previous ECB framework – will be deemed to be in the infrastructure sector for qualifying to raise ECB under track I. Mining is another of the five sectors that the RBI reckons contribute to around 53% of the stressed assets in India today.
The changes brought about by the 30 March circular were imperative for the infrastructure sector but were largely corrective in nature. Among the other clarifications provided in the circular, it is important to highlight that the RBI now clearly mentions that investment in non-convertible debentures made by foreign portfolio investors will not be governed by the ECB regulations.
Babu Sivaprakasam is a partner, Deep Roy is an associate partner and Sharmila Ratnam is an associate at Economic Laws Practice. This article is intended for informational purposes and does not constitute a legal opinion or advice.
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