Easier external commercial borrowing policy welcome

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.

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.

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.