On 23 September, the Reserve Bank of India (RBI) released a draft framework on external commercial borrowing (ECBs), which aims to replace the existing framework with a more rational and liberal one. Separately, on 29 September, the RBI released a policy framework for issuance of rupee denominated bonds overseas. The focus below is on the draft framework released on 23 September.
Unlike the existing regime, the draft framework divides ECBs into three categories: (a) normal ECBs, which are the ECBs under the existing ECB policy; (b) long-term ECBs, i.e. those with a minimum maturity of 10 years; and (c) rupee denominated ECBs.
For normal ECBs, the draft framework has elaborated on the list of recognized lenders to include, amongst others, overseas regulated financial entities, pension funds, insurance funds and sovereign wealth funds. The scope of end-uses has also been expanded to include, amongst others: repayment of trade credit taken for a period of up to three years for capital expenditure; payment of capital goods already shipped or imported but not paid for; on-lending to the infrastructure sector; import and/ or domestic purchase of equipment for the purpose of hire purchase, as loans against hypothecation, etc., by non-banking financial companies (subject to a minimum of 75% hedging); and purchase of second-hand domestic capital goods, plant and/or machinery.
Further, the minimum average maturity for normal or rupee denominated ECBs has been proposed as three years for ECBs up to US$50 million or its equivalent, and five years for those above US$50 million or its equivalent.
However, rather unhelpfully, the all-in-cost ceiling for normal ECBs has been proposed to be lowered by 50 basis points.
The framework for long-term ECBs and rupee denominated ECBs is largely similar to that for normal ECBs. However, unlike normal ECBs, the 50-basis-point reduction in all-in-cost does not apply to long-term ECBs. For rupee denominated ECBs, the all-in-cost ceiling is to be commensurate with the prevailing market conditions, and overseas investors will be allowed to hedge their exposure in onshore markets. Further, back-to-back hedging will also be permitted.
Also, unlike normal ECBs, the permitted end-uses for long-term and rupee denominated ECBs have been significantly liberalized with there being only a negative list of end-uses for which such ECBs cannot be used (including purchase of land, activities prohibited as per foreign direct investment guidelines, investing in the capital market, and real estate activities other than development of integrated township or affordable housing projects).
Recent news reports suggest that foreign investors are showing a lot of interest in Indian infrastructure assets. For instance, it was recently reported that two of Canada’s largest pension funds – Caisse de dépôt et placement du Québec and the Public Sector Pension Investment Board – are considering investing in the Indian infrastructure sector. Further, in a recent survey conducted by Ernst & Young, India has been ranked as the most attractive investment destination in the world for the period up to 2018. Specific to the infrastructure sector, 89% of the investors interviewed as part of the survey said that in the coming three years investment in the Indian infrastructure sector would be significant.
Compared to the Sahoo Committee’s sweeping recommendations to do away with all restrictions and regulations (other than mandatory hedging), the draft framework is clearly a more measured proposal, in line with the RBI’s previous decisions to bring in incremental reform. While clearly a step in the right direction, we feel that some of the proposed changes are, in effect, regressive in nature and, notwithstanding the other liberalization measures proposed in the draft framework, could have a significant negative impact on ECBs in India.
For instance, the decision to reduce the all-in-cost ceiling for normal ECBs is going to put further pressure on the already squeezed margin of foreign lenders. Instead, to give ECBs the much needed boost, the RBI could have con-sidered removing the all-in-cost ceiling altogether, at least for ECBs in the infrastructure sector.
Further, at least for the infrastructure sector, which is facing a massive funding shortfall, the RBI could have considered implementing the changes proposed in the Sahoo Committee’s report and doing away with restrictions other than those relating to the relevant borrowers hedging their foreign currency exposure at reasonable thresholds.
While we appreciate that implementation of recommendations in the Sahoo Committee report would result in radical changes which the RBI may not be comfortable with, such radical changes may be necessary to ensure that the infrastructure sector receives the funding it requires. The need for such liberalization becomes more evident in light of the fact that despite evidence in recent news reports that there is a lot of interest from foreign investors in the Indian infrastructure sector, due to existing regulations the Indian companies are unable to efficiently mobilize these funds.
Saurabh Bhasin is a partner at Trilegal and Suchita Saigal is a senior associate. Trilegal is a full-service law firm with offices in Delhi, Mumbai, Bangalore and Hyderabad.