**Executive Summary:**
This circular, issued by the Reserve Bank of India on April 27, 2018, rationalizes and liberalizes the External Commercial Borrowings (ECB) policy. It addresses requests from corporations for relaxations in the existing ECB framework. The circular harmonizes all-in-cost ceilings, revisits liability to equity ratio provisions, expands the list of eligible borrowers, and rationalizes end-use provisions for ECBs.
**Key Points / Main Content:**
* **All-in-Cost for ECB and Rupee Denominated Bonds (RDBs):**
* A uniform all-in-cost ceiling of 450 basis points over the benchmark rate is stipulated for foreign currency and rupee ECBs and RDBs.
* The benchmark rate is 6-month USD LIBOR or applicable benchmark for respective currency for Track I and Track II.
* The benchmark rate is prevailing yield of Government of India securities of corresponding maturity for Track III Rupee ECBs and RDBs.
* **ECB Liability to Equity Ratio:**
* The ECB Liability to Equity Ratio for ECB raised from direct foreign equity holders under the automatic route is increased to 7:1.
* This ratio is not applicable if the total of all ECBs raised by an entity is up to USD 5 million or equivalent.
* **Expansion of Eligible Borrowers:**
* Housing Finance Companies (regulated by the National Housing Bank) are eligible borrowers under all tracks, subject to board-approved risk management policy and 100% hedging for Track I ECBs.
* Port Trusts (constituted under the Major Port Trusts Act, 1963 or Indian Ports Act, 1908) are eligible borrowers under all tracks, subject to board-approved risk management policy and 100% hedging for Track I ECBs.
* Companies engaged in Maintenance, Repair and Overhaul and freight forwarding can raise ECBs denominated in INR only.
* **Rationalisation of End-Use Provisions:**
* A negative end-use list applies for all tracks.
* Negative end-uses include:
* Investment in real estate or purchase of land (except for affordable housing, construction and development of SEZ and industrial parks/integrated townships).
* Investment in the capital market.
* Equity investment.
* Additionally for Tracks I and III, Working capital purposes, General corporate purposes and Repayment of Rupee loans, unless raised from Direct/Indirect equity holders or from a Group company, and provided the loan is for a minimum average maturity of five years
* On-lending to entities for the above activities.
* All other provisions of the ECB policy remain unchanged.
**Impact Analysis:**
* **Category I Authorised Dealer (AD) Banks:**
* *Impact:* Need to understand the revised ECB guidelines and implement them in their dealings with corporations and other entities.
* *Action Required:* Bring the contents of this circular to the notice of their constituents and customers.
* **Corporates and Other Entities Planning to Avail ECB:**
* *Impact:* Benefit from the rationalized and liberalized ECB guidelines, including harmonized all-in-cost ceilings, revised liability to equity ratios, expanded eligible borrower list, and rationalized end-use provisions.
* *Action Required:* Review their ECB plans and strategies in light of the revised guidelines.
* **Housing Finance Companies and Port Trusts:**
* *Impact:* Now eligible to avail of ECBs under all tracks, subject to conditions like board-approved risk management policies and hedging requirements.
* *Action Required:* Ensure compliance with the conditions specified for availing ECBs.
* **Companies engaged in Maintenance, Repair and Overhaul and freight forwarding:**
* *Impact:* Now eligible to avail of ECBs denominated in INR only.
* *Action Required:* Ensure compliance with the currency conditions specified for availing ECBs.
Key Entities Referenced
Reserve Bank of India: The central bank of India, responsible for regulating the country's monetary policy and financial system. This document is issued by the Reserve Bank of India.
External Commercial Borrowings (ECB): A mechanism by which Indian companies can borrow money from foreign sources in the form of loans.
Master Direction No. 5: A comprehensive document issued by the Reserve Bank of India pertaining to External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers.
Authorised Dealer Category-I banks: Banks authorized by the Reserve Bank of India to deal in foreign exchange.
Government of India: The Union Government of India. RBI consulted with them.
National Housing Bank: The apex regulatory body for housing finance companies in India.
Foreign Exchange Management Act, 1999: An Act of the Parliament of India to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India.
Major Port Trusts Act, 1963: A law governing the constitution and operation of major port trusts in India.
RESERVE BANK OF INDIA
Mumbai - 400 001
RBI/2017-18/169
A.P. (DIR Series) Circular No.25 April 27, 2018
To
All Category-I Authorised Dealer Banks
Madam / Sir,
External Commercial Borrowings (ECB) Policy – Rationalisation and Liberalisation
Attention of Authorized Dealer Category-I (AD Category-I) banks is invited to Master Direction No.5
dated January 1, 2016 on External Commercial Borrowings, Trade Credit, Borrowing and Lending
in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers, as
amended from time to time.
2. Corporates and other entities planning to avail ECB to meet their capital needs have been
approaching RBI for relaxations in the existing ECB framework. In light of the requests received
and experience gained in administering the ECB regime, it has been decided, in consultation with
the Government of India, to further rationalise and liberalize the ECB guidelines as under:-
(i) Rationalisation of all-in-cost for ECB under all tracks and Rupee denominated bonds
(RDBs) :
With a view to harmonising the extant provisions of Foreign Currency and Rupee ECBs and RDBs,
it has been decided to stipulate a uniform all-in-cost ceiling of 450 basis points over the benchmark
rate. The benchmark rate will be 6 month USD LIBOR (or applicable benchmark for respective
currency) for Track I and Track II, while it will be prevailing yield of the Government of India
securities of corresponding maturity for Track III (Rupee ECBs) and RDBs.
(ii) Revisiting ECB Liability to Equity Ratio provisions:
It has been decided to increase the ECB Liability to Equity Ratio for ECB raised from direct foreign
equity holder under the automatic route to 7:1. This ratio will not be applicable if total of all ECBs
raised by an entity is up to USD 5 million or equivalent.(iii) Expansion of Eligible Borrowers’ list for the purpose of ECB:
It has been decided to permit:
a) Housing Finance Companies, regulated by the National Housing Bank, as eligible
borrowers to avail of ECBs under all tracks. Such entities shall have a board approved risk
management policy and shall keep their ECB exposure hedged 100 per cent at all times for
ECBs raised under Track I.
b) Port Trusts constituted under the Major Port Trusts Act, 1963 or Indian Ports Act, 1908 to
avail of ECBs under all tracks. Such entities shall have a board approved risk management
policy and shall keep their ECB exposure hedged 100 per cent at all times for ECBs raised
under Track I.
c) Companies engaged in the business of Maintenance, Repair and Overhaul and freight
forwarding to raise ECBs denominated in INR only.
(iv) Rationalisation of end-use provisions for ECBs:
Currently, a positive end-use list is prescribed for Track I and specified category of borrowers,
while negative end-use list is prescribed for Track II and III. It has now been decided to have
only a negative list for all tracks. The negative list for all Tracks would include the following:
a. Investment in real estate or purchase of land except when used for affordable housing as
defined in Harmonised Master List of Infrastructure Sub-sectors notified by Government of
India, construction and development of SEZ and industrial parks/integrated townships.
b. Investment in capital market.
c. Equity investment.
Additionally for Tracks I and III, the following negative end uses will also apply except when raised
from Direct and Indirect equity holders or from a Group company, and provided the loan is for a
minimum average maturity of five years:
d. Working capital purposes.
e. General corporate purposes.
f. Repayment of Rupee loans.
Finally, for all Tracks, the following negative end use will also apply:
g. On-lending to entities for the above activities from (a) to (f).3. All other provisions of the ECB policy shall remain unchanged. AD Category - I banks may bring
the contents of this circular to the notice of their constituents and customers.
4. The aforesaid Master Direction No. 5 dated January 01, 2016 is being updated to reflect the
changes.
5. The directions contained in this circular have been issued under section 10(4) and 11(2) of the
Foreign Exchange Management Act, 1999 (42 of 1999) and are without prejudice to permissions /
approvals, if any, required under any other law.
Yours faithfully
Shekhar Bhatnagar
Chief General Manager-in-Charge