Relaxation for external commercial borrowings
July 1, 2019
RBI has relaxed the end-use restrictions for External Commercial Borrowings (ECBs) under its Circular dated 30 July 2019 with immediate effect.
Under the extant regulations, ECB proceeds could not be utilised for working capital, general corporate purposes and repayment of Rupee loans except when the ECB was availed from a foreign equity holder for a minimum average maturity period of 5 years. On-lending for these activities out of ECB proceeds was also prohibited.
Borrowers are now permitted to raise ECBs for working capital requirements, general corporate purposes and for repayment of Rupee loans from recognised lenders except foreign branches / overseas subsidiaries of Indian banks. The revised ECB policy provides for the following end-use relaxations subject to Limit and leverage requirements of paragraph 2.2 of the Master Directions dated 26 March, 2019 :
- Borrowing for working capital purposes and general corporate purposes with a minimum average maturity period for 10 years is permitted. Borrowing by NBFCs for on lending for working capital purposes and general corporate purposes with a minimum average maturity period of ten years is also permitted.
- Eligible borrowers can avail ECBs with a minimum average maturity period of 7 years for repayment of Rupee loans availed domestically for capital expenditure. Borrowing by NBFCs for on-lending for the same purpose is also permitted. The minimum average maturity period of the ECB for repayment of Rupee loans availed domestically for purposes other than capital expenditure and for on-lending by NBFCs for such other purposes, is required to be 10 years.
- Eligible corporate borrowers are permitted to avail ECB for repayment of Rupee loans availed domestically for capital expenditure in manufacturing and infrastructure sector, if classified as SMA -2 or NPA under any one time settlement with lenders. Lender banks are also permitted to sell such loans, through assignment, to eligible ECB lenders except foreign branches and overseas subsidiaries of Indian banks, provided that the resultant ECB complies with all-in-cost, minimum average maturity period and other relevant norms of the ECB framework.
SAM & Co comment
The 30 July 2019 Circular issued by the RBI and the consequent amended “Master Direction – External Commercial Borrowings, Trade Credits and Structured Obligations” issued on August 8, 2019 have relaxed the extant end-use restrictions. However, ECB is still not permitted to be raised from foreign branches/subsidiaries of Indian banks for working capital purposes, general corporate purposes or repayment of rupee loans.
While the above relaxation in end-use of ECB proceeds is a welcome move in the present environment of shortage of domestic finance, the long minimum average maturity period stipulated, especially for working capital purposes and general corporate purposes, is likely to cause a practical hindrance in the use of these relaxations by making such transactions unattractive to lenders.