Easier external commercial borrowing policy welcome

By Babu Sivaprakasam and Deep Roy, Economic Laws Practice
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The policy on external commercial borrowings (ECBs) was implemented with the objective of sup-plementing domestic capital in order to enable Indian entities to meet their capital requirements. However, as highlighted in the report of the Committee to Review the Framework of Access to Domestic and Overseas Capital Markets dated 24 February, the only potential market failure associated with ECBs is systemic risk arising from currency exposure. To negate such risks, eligible Indian borrowers often hedge their currency risks associated with ECBs, adding to the cost of the borrowing. The Reserve Bank of India (RBI), by its circular dated 29 September, has permitted the issue of rupee denominated bonds overseas (RDBs) by eligible Indian borrowers, which will facilitate the transfer of the currency risks from the Indian entities to the offshore entities.

Framework on RDBs

The entities eligible to issue RDBs are “any corporate or body corporate” and real estate investment trusts (REITs) and infrastructure investment trusts (InvITs) under the regulatory jurisdiction of the Securities and Exchange Board of India. As opposed to the provisions of the Master Circular on External Commercial Borrowings and Trade Credits dated 1 July (ECB guidelines), the RDB circular expands the scope of eligible borrowers to include REITs and InvITs.

Babu Sivaprakasam
Babu Sivaprakasam

RDBs will have a minimum maturity of five years. If they have a call or put option against the borrower, the option can only be exercised on the completion of five years. Instead of stipulating the all-in-cost ceilings, the RDB circular merely states that the all-in-cost of RDBs should be as per prevailing market conditions. This is a major shift from the present position and the factors influencing RDB pricing would have to be ascertained. These may include the security available to the bond holders, which has been allowed to be provided under the RDB circular.

Any investor from a Financial Action Task Force compliant jurisdiction can invest in RDBs. Since the currency risk lies with the offshore investors, the RDB circular permits such investors to hedge their exposure in rupees with authorized dealer banks in India. Banks incorporated in India are allowed to act as arrangers and underwriters in relation to RDB issuances, but are presently restricted from accessing RDBs in any other manner. Clearly, the RBI does not want to retain the risk associated with such bonds within the Indian banking system.

Deep Roy
Deep Roy

RDBs can be issued up to an amount equivalent to US$750 million a year, under the automatic route. Though the RDB circular is silent on the issue, one would assume that such an amount would be the aggregate of all of an Indian entity’s ECBs during a particular year. Further, in a contradistinction from the ECB guidelines, the RDB circular states that the proceeds of RDBs can be used for all purposes except for the negative list of end-uses provided in the RDB circular. Thus, RDB proceeds may be used for repayment of existing rupee loans and for general corporate purposes, since this is not expressly prohibited under the RDB circular.

Draft framework on ECBs

The RBI also released a draft framework on ECBs, aimed at rationalizing and liberalizing the ECB guidelines, on 23 September. The draft framework seeks to expand the list of recognized lenders/investors to include overseas regulated financial entities, pension funds, insurance funds, sov-ereign wealth funds and similar long-term investors, and also proposes to enable Indian banks to participate as ECB lenders, subject to the prudential norms prescribed by the RBI.

Indian companies issuing RDBs may also need to comply with the provisions of the Companies Act, 2013, as a specific exemption has not yet been provided in relation to such issuances, unlike in the case of foreign currency convertible bonds and foreign currency exchangeable bonds. This would imply that Indian companies may be required to adhere to the provisions of the Companies Act regarding private placement of securities and appointment of debenture trustee, and to make the relevant filings with the Registrar of Companies.

In view of the current economic conditions, the recent steps taken by the RBI for liberalization of the policy on ECBs are laudable. The RDB circular facilitates the expansion of the international investor base, thereby providing a new avenue for Indian borrowers to meet their development needs. Since the hedging costs of such entities are obviated, RDBs might prove to be a cheaper option for Indian entities.

The RDB circular is minimal in terms of stipulations, which is evident from its small negative list of end-uses of RDBs. However, it will be crucial for the Indian borrowers to diligently comply with both Indian laws and the laws of the jurisdiction in which RDBs are issued. In the long run, the evolution of such bonds in international jurisdictions could play a role in strengthening the Indian economy.

Babu Sivaprakasam is a partner, Deep Roy is an associate partner and Megha Agarwal 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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