Revised ECB framework: Simpler or more complex?

By Sawant Singh and Aditya Bhargava, Phoenix Legal

As part of easing capital account controls on the Indian economy, the Reserve Bank of India (RBI) has gradually been liberalizing regulations on external commercial borrowings (ECBs) from overseas lenders. A report of the Committee to Review the Framework of Access to Domestic and Overseas Capital Markets in February 2015 noted that: (a) ECBs are susceptible to currency fluctuation risk which in turn could affect “systemic stability”; (b) the regulatory framework for ECBs must be consistent and the approach must be predictable; (c) any regulations must be principle-based and not prescriptive; and (d) the ECB framework must be sector and participant neutral in that it should not discriminate among types and categories of borrowers and end-uses.

Sawant Singh

In view of the above, the report presented what must be described as radical recommendations: (i) removing all restrictions on borrowers, lenders, end-use, amount, maturity, and all-in cost ceilings; (ii) aligning the negative list in the ECB framework with that of the foreign direct investment policy; (iii) permitting all lenders from a Financial Action Task Force compliant jurisdiction; and (iv) requiring borrowers to demonstrate hedging prior to obtaining ECBs. Notably, the committee also recommended disallowing overseas branches of Indian banks from extending ECBs to Indian borrowers. While the government and the RBI reportedly disagreed with the recommendations, concerned that they would open the proverbial floodgates and risk economic instability, both appeared willing to engage in consultations to reform the ECB framework.

Aditya Bhargava

With this background, the RBI’s release of the draft framework on ECBs on 23 September for public comments came as a pleasant surprise to market participants. Taking the form of a simplified list of “dos” and “don’ts” for raising ECBs, the draft framework proposed easing the prevailing requirements around eligible borrowers and end-uses, and also proposed expanding the scope of recognized lenders to include pension funds, sovereign wealth funds, insurance funds, and other “long term investors”. The draft framework also emphasized shifting the currency risk to overseas lenders and further proposed introducing a “small negative list” for rupee denominated borrowings.

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Sawant Singh is a partner and Aditya Bhargava is a principal associate at the Mumbai office of Phoenix Legal.



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