Fema Law Newswre : Infrastructure Sector companies and certain NBFCs allowed to raise ECB (External Commercial Borrowings) for shorter duration

Infrastructure Sector companies and certain NBFCs allowed to raise ECB (External Commercial Borrowings) for shorter duration
The Reserve Bank of India (RBI) with a view of development of Infrastructure of India has expanded the scope of funding through ECB, particularly for infrastructure sector, vide issuance of circular: A.P. (DIR Series) Circular No.56; dated 30th March, 2016.
Now, infrastructure sector companies, non-banking finance companies (NBFCs), infrastructure finance companies (NBFC-IFCs), asset finance companies (NBFC-AFCs), holding companies and Core Investment Companies (CICs) will also be eligible to raise ECB under Track I of the ECB framework issued by the RBI in November, 2015.
  • Earlier position:
In the said ECB framework (released in November, 2015), RBI had detailed three tracks through which Indian companies could borrow from offshore market. Track-I allowed companies to borrow foreign currency loans with a minimum maturity of three-five years, Track-II allowed long-term borrowings of minimum ten year maturity and Track-III enabled rupee-denominated ECB to be issued to offshore investors with a minimum maturity of three-five years.
Those allowed to borrow under Track-I were manufacturing companies, software companies, shipping and airlines, special economic zones, Small Industries Development Bank of India and EXIM Bank. Infrastructure companies, CICs, real estate investment trusts and infrastructure investment trusts were allowed to borrow under Track-II and Track-III which are basically the borrowings for longer duration while NBFCs were allowed only to borrow under Track-III.
Thus, until now, infrastructure companies could raise only long term external borrowings of more than ten years and all NBFCs were allowed only to borrow rupee denominated ECB with a minimum maturity of three-five years.
  • Present position:
RBI made adjustments to the afore-mentioned categories and permitted infrastructure companies and NBFCs to borrow for a minimum maturity of three-five years, subject to 100% hedging. Thus, the relaxed provisions, comes with the stipulation that such borrowings must be fully hedged, which may make it expensive for companies to raise funds overseas. It has been further been provided that:
  • The individual borrowing limit of $750 million prescribed for infrastructure companies would continue to apply;
  • The cost ceiling for five-year ECBs is retained at 450 basis points1 above the six-month LIBOR2 while that of a 10-year loan is retained at 500 bps above Libor;
  • While infrastructure companies can use the ECB proceeds raised under Track I for the end uses permitted for this Track, NBFCs-IFCs and NBFCs-AFCs will be allowed to raise ECB under Track I only for financing infrastructure;
  • Holding companies and CICs can use foreign loan proceeds only for on-lending to infrastructure special purpose vehicles;
  • The companies added under Track I should have a Board approved risk management policy which is to determine and manage for risks involved in shorter duration borrowings;
  • The designated AD Category-I bank shall verify that 100 % hedging requirement is complied with during the currency of ECB and report the position to RBI through ECB 2 returns.
In addition, the RBI has clarified the following concerns qua the ECB framework released on 30th November, 2015 vis-à-vis the revised framework:
  1. The designated AD Category-I banks may allow refinancing of ECBs raised under the previous ECB framework, provided
    1. the refinancing is at lower all-in-cost;
    2. the borrower is eligible to raise ECB under the extant ECB framework; and
    3. The residual maturity is not reduced (i.e. it is either maintained or elongated);
  2. ECB framework is not applicable in respect of the investment in Non-convertible Debentures (NCDs) in India made by Registered Foreign Portfolio Investors (RFPIs), since such investments are governed through the schedule 5 of the FDI Regulations;
  3. Minimum average maturity of Foreign Currency Convertible Bonds (FCCBs)/ Foreign Currency Exchangeable Bonds (FCEBs) is five years irrespective of the amount of borrowing. Further, the call and put option for FCCBs shall not be exercisable prior to five years;
  4. Only those NBFCs which are coming under the regulatory purview of the RBI are permitted to raise ECB i.e the entities holding valid certificate of registration from RBI for carrying on the NBFC business. Further, under Track III, the NBFCs may raise ECBs for on-lending for any activities including infrastructure as permitted by the concerned regulatory department of RBI;
  5. The provisions regarding delegation of powers to designated AD Category-I banks is not applicable to FCCBs/FCEBs;
  6. In the forms of ECB, the term “Bank loans” shall be read as “loans” as foreign equity holders / institutions other than banks, also provide ECB as recognized lenders.

[1] One basis point is one-hundredth of a percentage point
[2] LIBOR i.e. London interbank offered rate, is a benchmark rate that world’s leading banks charge each other for short-term loans.
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