Gradual liberalization of ECB policy welcomed

By Shardul Thacker, Mulla & Mulla & Craigie Blunt & Caroe

In February 2010, the Reserve Bank of India (RBI) made significant amendments to simplify the norms for external commercial borrowing (ECB).

It did away with the obligation cast on Indian entities to obtain the consent of the RBI prior to amending the terms of ECBs raised by them.

In addition, as per the relaxed norms, the RBI delegated its powers to authorized dealer banks to approve the specified changes in the terms and conditions of the ECBs available.

Thus, Indian corporates could modify the drawdown and repayment schedules as also change the currency of the loan both under the automatic and the approval routes, subject to approval from the authorized dealer banks.


In May 2010, the RBI liberalized its ECB norms in respect of infrastructure finance companies (IFC) i.e. non-banking finance companies that were categorized as IFCs.

Shardul Thacker,Partner,Mulla & Mulla & Craigie Blunt & Caroe
Shardul Thacker
Mulla & Mulla & Craigie Blunt & Caroe

These companies have been permitted to use ECBs for on-lending to the infrastructure sector, as defined in the existing ECB policy, under the approval route.

As a measure of liberalization of the existing procedures, it has been decided to permit the IFCs to obtain ECBs, including the outstanding ECBs, up to 50% of their owned funds under the automatic route, subject to their compliance with the prudential guidelines.

ECBs by IFCs above 50% of their owned funds would require the approval of the RBI and will, therefore, be considered under the approval route.

Refinancing rupee loans

In July 2010, the RBI released a circular relating to ECBs and take out financing. In it the RBI liberalized its norms with regard to refinancing of domestic rupee loans with ECBs, which was not permitted until then. This was done keeping in view the special funding needs of the infrastructure sector.

As such, it was decided to permit take-out financing through ECBs, under the approval route, for refinancing of rupee loans from the domestic banks by eligible borrowers in the sea port and airport, roads including bridges and power sectors for the development of new projects, subject to certain conditions framed by the RBI.

Service sector

In August 2010, the RBI further liberalized the ECB norms in respect of entities in different service sectors viz., hotels, hospitals and software. These service sectors were allowed to obtain ECBs up to US$100 million per financial year under the automatic route, for foreign currency and or rupee capital expenditure for permissible end-uses.

In a later review, it was decided by the RBI to consider applications from companies in the hotel, hospital and software sectors to obtain ECBs beyond US$100 million under the approval route, for foreign currency and or rupee capital expenditure for permissible end-uses.

The proceeds of the ECBs should not be used for acquisition of land.

Core investment companies

The RBI on 5 January 2011 issued a circular with regard to the regulatory framework for core investment companies (CICs). In it the RBI modified definitions in the guidelines for CICs that it considers as systemically important.

These progressive guidelines have taken up the important concept of a CIC.

Although CICs have always been an established concept, their governance and regulation were sporadic and scattered in various places. The 5 January circular is a consolidated circular.

It modifies the definitions of the following terms: adjusted net worth, CIC, market value of quoted investments, outside liabilities, systematic important CIC and total assets.

Remaining attractive

By balancing the regulatory mechanism with evolving market forces, the RBI has ensured that India’s banking sector will remain in and maintain good health. The banking sector has given healthy interpretation to the regulations and thereby created customer confidence and attracted inflows of global funds into the Indian economy.

However, faster than expected global recovery may enhance the attractiveness of investment opportunities of advanced economies, which could impact capital flows to India.

This may increase the vulnerability to India’s external sector. Hence, the composition of capital inflows needs to shift towards longer-term commitments such as foreign direct investment.

Shardul Thacker is a partner with Mulla & Mulla & Craigie Blunt & Caroe in Mumbai.


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