On 6 July 2022, the Reserve Bank of India (RBI) issued a press release setting out measures it proposed to introduce to “mitigate volatility and dampen global spillovers” caused by “high risk aversion” gripping financial markets amid “recession risks”. This press release followed months of the RBI’s Sisyphean efforts to defend the currency in a climate of tightening monetary policy rates and increasing inflation.
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The measures proposed in the press release aim to further diversify and expand the sources of foreign exchange funding. Among other measures, the press release proposes a number of relaxations in the regulatory framework for a limited time period for borrowers raising debt from offshore lenders through external commercial borrowings (ECB) or through the issue of corporate debt instruments to foreign portfolio investors (FPIs).
Currently, under the “general route” for FPIs, FPIs are only permitted to invest in corporate debt instruments with a residual maturity of at least one year. Further, not more than 30 per cent of an FPI’s investments can have a residual maturity of less than one year. The press release proposes to exempt investments by FPIs in corporate debt instruments made up to 31 October 2022 from these limits. Such investments will not be taken into account for the computation of the 30 per cent limit until the maturity of such investments or their sale by the FPI. The press release also proposes allowing FPIs to invest in commercial paper and non-convertible debentures with an original maturity of up to one year.
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Such investments will also not be taken into consideration for the computation of the thresholds. The issue of commercial paper and non-convertible debentures with an original maturity of up to one year is also subject to additional regulations of the RBI, such as the minimum net worth and tangible net worth of the issuer, the minimum rating of the instrument, and certain other disclosure and documentation requirements. In order to fully implement the proposed relaxations for FPIs’ investment in instruments with an original maturity of up to one year, further regulatory changes will have to be brought in, none of which appear to have been contemplated in the press release.
The press release further proposes to increase some limits and ceilings under the ECB framework, again for a limited-time window. Under the current ECB framework, all eligible borrowers can raise ECBs to an aggregate of USD750 million or its equivalent in each financial year under the automatic route. The press release proposes to increase this limit of USD750 million to USD1.5 billion for ECBs raised up to 31 December 2022. The current ECB framework prescribes an all-in cost ceiling for ECBs, which the press release proposes to raise by 100 basis points until 31 December 2022, subject to the borrower having an investment grade rating.
However, the press release ultimately merely sets the stage for changes to be introduced and does not make the changes itself. Such changes will need to be implemented through specific directions issued by the RBI in the exercise of its supervisory powers. To implement the relaxations and exemptions for FPIs set out in the press release, the RBI issued a stand-alone circular on 7 July 2022, which clarified that the window for the relaxations for FPIs will commence on 8 July 2022 and expire on 31 October 2022, both dates inclusive. While other measures proposed by the press release have been put into effect by various separate circulars issued by the RBI, it is somewhat strange that the relaxations of limits on ECBs have not yet been implemented through a circular.
The changes proposed by the press release offer temporary respite but do not bring about long-term structural changes and are not expected to increase foreign exchange flows into India beyond the windows prescribed in the press release. It is hoped that the RBI will propose further measures that will make the necessary structural changes to provide stable sources of foreign exchange flows into India over the long term.
Sawant Singh and Aditya Bhargava are partners at Phoenix Legal. Sristi Yadav, is a senior associate.
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