Liberalized Norms for ECB & Exports

In order to mitigate the current pressure on Rupee, the Government of India has taken widespread measures by way of liberalizing External Commercial Borrowing (ECB) norms for different sectors of the Indian economy i.e. infrastructure, civil aviation, telecom etc, this will faciltate access to cheaper sources of funds.Along with ECB, the Government has liberlized certain provisions related Export of goods and services.The necessary details has been provided below:

I. Amendments in ECB Regulations

ECB for low cost affordable housing scheme

To mobilise demand in economically weaker section and low-income group category, the government has introduced low cost affordable housing scheme. In December, 2012, the Government of India, in order to promote the scheme, allowed to developers/ builders, housing finance companies and National Housing Bank to avail ECB to be invested under the scheme.

Reserve Bank of India (RBI) shas, vide A.P.(DIR Series) Circular No. 113, dated 24th June, 2013,  amended some provisions and conditions stipulated for low cost affordable housing projects, which are given as follows:

1. Developers/builders should have minimum of three (3) years’ experience in undertaking residential projects as against five (5) years prescribed earlier and should have good track record in terms of quality and delivery.

2. The condition of minimum paid-up capital of not less than INR 50 crore, as per the latest audited balance sheet, for Housing Finance Companies (HFCs) stands withdrawn. However, the condition of the minimum Net Owned Funds (NoF) of Rs. 300 crore for the past three financial years remains unchanged.

3. The aggregate limit for ECB under the low cost affordable housing scheme is extended for the financial years 2013-14 and 2014-15 with a ceiling of USD 1 billion in each of the two years, subject to review thereafter.

4. The ECB availed of by developers and builders shall be swapped into Rupees for the entire maturity on fully hedged basis.

5.  Issue of fixation of spread for on-lending by National Housing bank (NHB):

Interest rate spread to be charged by National Housing Bank (NHB) may be decided by NHB taking into account cost and other relevant factors. NHB shall ensure that interest rate spread for HFCs for on-lending to prospective owners’ of individual units under the low cost affordable housing scheme is reasonable.

6. Housing Finance Companies (HFCs) while making the applications, shall

submit a certificate from NHB, the nodal agency, that the availment of ECB is for financing prospective owners of individual units for the low cost affordable housing; 

ensure that cost of such individual units does not exceed Rs. 30 lakh and loan amount does not exceed Rs. 25 lakh; 

ensure that the units financed are having maximum carpet area of 60 square metres; and 

ensure that the interest rate spread charged by the HFCs to the ultimate buyer is reasonable.

ECB in Telecom Sector

The Government permits telecom sector companies to avail ECB for 3G spectrum allocation. With the object to give one time relaxation to these companies, government had allowed the successful bidder telecom sector companies to refinance their initial requirements met with rupee resources by availing of ECB. However, their was a condition that the ECB should have been raised within 12 months from the date of payment of final instalment to the government.

Vide A.P (DIR Series) Circular No. 114 dated 25th June, 2013 - the Reserve Bank of India has intimated the successful bidder telecom sector companies who have invested in 3G spectrum through rupee loan to raise the ECB up to 31st March, 2014.  After 31st March, 2014, these companies are not eligible to raise ECB for refinancing the rupee loan for making payment for 3G Spectrum.

Prepayment or Buyback of Foreign Currency Convertible Bonds (FCCBs)

The Government has allowed the companies to prepay or buyback the FCCBs by obtaining approval from Reserve Bank of India subject to various terms and conditions as amended by the RBI from time to time. The scheme of buyback and prepayment expired on 31st March, 2013 but has now been extended up to 31st December, 2013, vide A.P (DIR series) Circular No. 115 dated 25th June, 2013, which shall stand discontinued after 31st December, 2013.

ECB in Civil Aviation Sector

In April, 2012 civil aviation sector was allowed to avail ECB under the approval route subject to the various conditions including that ECB for working capital for civil aviation sector should be raised within 12 months from the date of issue of circular. This has been informed vide A.P. (DIR Series) Circular no. 116 dated 25th June, 2013 to the concerned borrowers that the scheme validity has now extended to 31st December, 2013.

ECB in infrastructure sector in Renminbi

As per the prevailing ECB norms, Indian companies engaged in the infrastructure sector had been allowed to avail ECB in Renminbi i.e. Chinese Yuan. These companies had been allowed to avail ECB in Renminbi maximum up to USD 1 (one) billion for the entire sector. However, the facility of ECB in Renminbi had remained unused so far. Therefore, the above facility of availing of ECB in Renminbi has been taken away with immediate effect vide A.P (DIR Series) Circular No. 117 dated 25th June, 2013.

External Commercial Borrowings (ECB) Policy – Import of Services, Technical know-how and License Fees

ECBs can be raised by eligible borrowers for investment in import of capital goods (as classified by DGFT in the Foreign Trade Policy), new projects, modernization / expansion of existing production units in the real sector – industrial sector including small and medium enterprises (SME), infrastructure sector as defined under the ECB policy and entities in service sector viz. hotels, hospitals and software companies.

Utilization of ECB was not allowed for Import of services, payment of technical know-how and license fees but whereas now RBI vide A.P. (DIR Series) Circular No.119 dated 26th June 2013 has allowed companies to avail ECB for investment in import of services, technical know-how and payment of license fees, which have been included as part of import of capital goods by the companies for the use in the manufacturing and infrastructure sectors as permissible end users of ECB under the automatic / approval route as the case may be subject to the following conditions:

• There should be a duly signed agreement between the service provider and the borrower company;
• The original invoice raised by the service provider as per the payment schedule in the agreement should be duly certified by the borrower company;
• Declaration by the importer that the entire expenditure on import of services will be capitalised;
• Declaration by the importer that entire expenditure on import of services forms part of project cost; and
• AD category – I bank has to ensure the bonafides of the transaction.

Structured obligation and credit enhancement

Structured obligation is a debt obligation on the non-resident entity where a rupee loan is granted against the guarantee provided by a non-resident and the obligation is raised when guarantee gets invoked.

Credit enhancement reduces credit/default risk of a debt, thereby increasing the overall credit rating and lowering interest rates.

Such structured obligation and credit enhancement when entered between resident and non- resident falls under the provisions of External Commercial Borrowings. As per the current ECB norms applicable to the transaction, the facility of credit enhancement may be extended to domestic debt raised through issue of capital market instrument such as debentures and bonds. Credit enhancement can be provided by:

1. Multilateral or regional financial institutions
2. Government owned development financial institutions
3. Direct/indirect foreign equity holders under automatic route

The above credit enhancement facility is only for the Indian companies engaged exclusively in the development of infrastructure and Infrastructure finance companies. Now vide A.P. (DIR Series) Circular No.120 dated 26th June, 2013, the credit enhancement facility has been allowed for all the borrowers eligible under ECB.

Under the structured obligation, the minimum maturity period for underlying security was seven years which has been reduced to three years. Prepayment and call/put options, however, would not be permissible for such capital market instruments up to an average maturity period of 3 years.

II. Amendments in Export of Goods and Services Regulations

Export of Goods and Services – Project Exports

The exporters, who wish to undertake Project exports and service export contracts are required to submit form DPX1, PEX-1 and TCS-1 to the Approving Authority (AA) i.e. AD Bank/ Exim Bank/ Working Group, within 15 days of entering into such contract for grant of post-award approval as specified by RBI under Sections 10(4) and 11(1) of the Foreign Exchange Management Act (FEMA), 1999 (42 of 1999).

However now RBI vide A.P. (DIR Series) Circular No.118 dated 26th June 2013 has raised the time limit of submitting the forms when entering into such contract. Now the exporters have to submit these forms within 30 days of entering into such contract for grant of post-award approval.

Note:  Project export and service contracts are generally of high value and exporters undertaking them are required to offer competitive credit terms to be able to secure orders from foreign buyers in the face of stiff international competition.