RBI relaxes borrowing norms for greater access to capital

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

External commercial borrowings (ECB) have been an increasingly popular route for Indian enterprises looking for alternative funding avenues outside India. This is particularly because domestic borrowing costs are seen as being much higher than foreign borrowing.

The global economic meltdown has, however, hindered Indian entities’ access to ECBs and trade credits over the last two years.

To provide the necessary stimulus to the infrastructure sector and also flexibility to Indian corporates to raise foreign currency borrowings, the Reserve Bank of India (RBI) has ushered in changes to the existing ECB policy.

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

New terms and conditions

Presently, ECB policy maintains that any modifications to the terms and conditions of an ECB, require prior RBI approval.

In order to give Indian entities easier access to ECBs, the RBI has through a recent circular (issued on 9 February) simplified existing procedures.

As such, borrowers no longer need the consent of the RBI before amending the terms and conditions of an ECB that they have raised. Instead, authorized dealer banks have been allowed to approve the specified changes in the terms and conditions of the ECBs.

More power for dealer banks

The notification states that amendments in the drawdown and repayment schedule of foreign currency loans may now be approved by authorized dealer banks. This is for loans taken under both the approval and the automatic routes and is subject to the maintenance of the average maturity period, as declared by the borrower at the time the loan was taken.

Options for currency changes

The RBI has, however, reserved the power to approve any elongation or rollover in the repayment of the ECB when it reaches its original maturity.

The RBI has permitted authorized dealer banks to allow borrowers to change the currency of their ECBs. This is applicable to ECBs raised under both the automatic route as well as the approval route, but is subject to the authorized dealer banks ensuring that the proposed currency of borrowing is freely convertible.

Authorized dealer banks have been sanctioned by the RBI to permit borrower companies to switch their existing authorized dealer bank to implement their ECB-related transactions.

Such a change would require both due diligence and a no-objection certificate (NOC) from the existing authorized dealer bank.

Amending borrowers’ names

Authorized dealer banks have also been permitted, under the RBI notification, to allow changes in the name of the borrower company. In order to make such amendments, documents supporting such a name change need to be obtained from the registrar of companies and submitted to the authorized dealer bank.

The RBI’s efforts to liberalize existing foreign exchange borrowing norms, is aimed at giving Indian corporate houses greater flexibility in their foreign currency borrowings.

These changes also promise to make the procedural requirements of an ECB transaction less time-consuming.

Borrowing for infrastructure

The prevailing policy for ECBs allows foreign currency borrowings only for specified purposes. Such borrowings can be raised under both the automatic and approval routes.

One of the specified purposes is investment in the infrastructure sector, which encompasses power, telecommunications, railways, roads (including bridges), sea ports, industrial parks and urban infrastructure such as water supply, sanitation and sewage projects, mining, exploration and refining.

Redefining infrastructure

The RBI has, in a recent circular, enlarged the scope of the definition of the infrastructure sector to bring within its ambit cold storage or cold room facilities. The latter includes farm level pre-cooling, for the preservation or storage of agricultural and allied produce, marine products and meat.

This relaxation brought in by the RBI will help Indian corporate houses to tap overseas funds for the development of the cold storage and agricultural segments.

It is expected that these amendments will offer the necessary impetus needed for the development and enhancement of India’s infrastructure.

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


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