The Reserve Bank of India (RBI) has made significant amendments to the Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000, which govern policies relating to external commercial borrowings (ECB).
The changes, which were announced in a circular on 9 December 2009, have been introduced in light of improving conditions in the financial sector – in particular, the establishment of a progressive credit market. They are expected to help further firm up the monetary policy environment.
All-in-cost ceiling limit
Under the ECB policy as it was before the amendments were introduced, the RBI had withdrawn the cap that previously applied on the all-in cost of loans under the approval route. The all-in cost of a loan is defined in the regulations to include the rate of interest, other fees and foreign currency expenses (while excluding the commitment fee, pre-payment fee and fees payable in Indian rupees). This relaxation allowed Indian corporations to keep borrowing money during the global economic crisis and the consequent liquidity drought on overseas markets.
Now that market conditions have improved, the RBI has decided to tighten the ECB norms by reinstating the all-in-cost ceiling on overseas borrowings, with effect from 1 January 2010.
Indian companies intending to raise funds abroad for a term of five years may now pay an all-in cost not exceeding 300 basis points above the London interbank offered rate (Libor). Likewise, for ECBs raised with a maturity of more than five years, the limit on the all-in cost has been placed at 500 basis point above Libor.
The amended regulations also require any eligible borrower utilizing ECBs after 31 December 2009 to provide the RBI with a copy of the loan agreement through its authorised dealer, in cases where the loan agreement was executed on or prior to 31 December 2009 and the all-in cost exceeds the stipulated ceiling limits. The RBI will then consider such proposals under the approval route.
Previously, Indian companies engaged in the development of integrated townships were permitted to use ECBs under the approval route until 31 December 2009.
The modified regulations have extended the end date of this permission. Developers establishing integrated townships may now continue to borrow funds from the overseas market until 31 December 2010 under the approval route.
Buyback of FCCBs
Before the recent amendments were made, Indian corporations were permitted to buy back foreign currency convertible bonds (FCCBs) (under either the automatic route or the approval route) until 31 December 2009.
With the easing of the liquidity crisis and the advent of rising stock prices, the RBI has changed its position on this issue. The amended regulations now disallow the buyback of FCCBs with effect from 1 January 2010.
Previously under the ECB policy, non-banking financial companies (NBFCs) exclusively involved in the financing of the infrastructure sector were permitted to obtain ECBs only from multilateral or regional financial institutions and government-owned development financial institutions, for lending on to borrowers in the infrastructure sector, under the RBI’s approval route.
The RBI has now modified the policy to allow NBFCs exclusively engaged in financing infrastructure projects to obtain ECB from recognized lenders, including international banks, under the approval route. However, the NBFCs are required to conform to prudential standards laid down by the RBI and to fully hedge their currency risks, as the funds are to be utilized for investment in rupee assets.
Previously, only the acquisition of a 3G spectrum licence was classified as an eligible end-use for funds raised by telecommunication companies via ECB under the automatic route.
The ECB norms have now been relaxed for the sector, allowing telcos to access the ECB route for overseas borrowings for the purpose of paying for spectrum allocation as well as for licences.
The new borrowing regime is expected to promote the long-term flow of funds from the overseas market, while also maintaining protective controls to insulate the system from the erratic foreign exchange market.
Shardul Thacker is a partner with Mulla & Mulla & Craigie Blunt & Caroe in Mumbai.
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