In a circular dated 16 January 2019, the RBI has formulated a new framework for External Commercial Borrowings (ECBs) and Rupee Denominated Bonds.
The revised framework is expected to improve the ease of doing business and to strengthen the AML/CFT framework . The revised guidelines are instrument neutral. They provide for the following key changes:
Indian Inc. breathed a huge sigh of relief with the announcement of the new framework for ECB. As stated in its objective, the new framework has, in a large measure, improved the ease of doing business and strengthened the AML/CFT framework. The most significant change introduced is the expansion of the definition of “eligible borrowers”, which ensures that in all sectors of the economy where FDI is permitted, ECB is also permitted under the automatic route.
While the phrase used by the RBI in defining “eligible borrowers” is “entities eligible to receive FDI”, it is important to note that under the regulations governing foreign investments in India, FDI or ‘Foreign Direct Investment’ is defined as investment through capital instruments by a person resident outside India either in an unlisted Indian company, or in 10 percent or more of the post issue paid-up equity capital of a listed Indian company. Further, under the same regulations ‘capital instruments’ means equity shares, debentures, preference shares and share warrants issued by an ‘Indian company’. Thus, apart from a limited number of specified entities such as port trusts, effectively, only ‘Indian companies’ are eligible to receive ECB, despite the use of the much broader term “entities” by the RBI.
The list of ‘recognised lenders’ has also been substantially liberalised with any resident of FATF or IOSCO compliant country being eligible as a recognised lender, in addition to multilateral and regional financial institutions where India is a member country. However, individuals and foreign branches/subsidiaries of Indian banks are permitted to be “recognized lenders” subject to certain restrictions.
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