Executive Summary:
This circular from the Reserve Bank of India, dated March 30, 2016, revises the External Commercial Borrowings (ECB) framework, taking into account external funding sources and the needs of the infrastructure sector. It modifies eligibility criteria, hedging requirements, and usage of ECB proceeds for specific entities. The circular also clarifies existing guidelines regarding refinancing of ECBs, Foreign Currency Convertible Bonds (FCCBs), and Non-Banking Financial Companies (NBFCs).
Key Points / Main Content:
Revised ECB Framework:
* Infrastructure sector companies, NBFCs (IFCs and AFCs), Holding Companies, and Core Investment Companies (CICs) are eligible to raise ECB under Track I with a minimum average maturity period of 5 years, subject to 100% hedging.
* Exploration, Mining, and Refinery sectors are deemed as infrastructure sectors for ECB eligibility.
* Infrastructure sector companies shall utilize ECB proceeds raised under Track I for permitted end uses; NBFCs (IFCs and AFCs) can only raise ECB for financing infrastructure.
* Holding Companies and CICs shall use ECB proceeds only for on-lending to infrastructure Special Purpose Vehicles (SPVs).
* The individual borrowing limit under the automatic route is USD 750 million for eligible companies.
* Infrastructure sector companies, Holding Companies, and CICs can continue to raise ECB under Track II.
Hedging and Risk Management:
* Companies added under Track I should have a Board-approved risk management policy.
* Designated AD Category-I banks must verify 100% hedging compliance during the ECB's currency and report to RBI through ECB 2 returns.
Clarifications on Existing Framework:
* Refinancing of ECBs raised under the previous framework is allowed if it's at a lower all-in-cost, the borrower is eligible under the extant framework, and the residual maturity is maintained or elongated.
* The ECB framework does not apply to investments in Non-Convertible Debentures (NCDs) in India made by Registered Foreign Portfolio Investors (RFPIs).
* Minimum average maturity for Foreign Currency Convertible Bonds (FCCBs) / Foreign Currency Exchangeable Bonds (FCEBs) is 5 years, irrespective of the borrowing amount, and call/put options cannot be exercised before 5 years.
* Only NBFCs under RBI's regulatory purview can raise ECB. Under Track III, NBFCs can raise ECBs for on-lending for activities, including infrastructure, as permitted by the RBI.
* Delegation of powers to designated AD Category-I banks does not apply to FCCBs/FCEBs.
* In ECB forms, "Bank loans" should be read as loans as foreign equity holders institutions other than banks, also provide ECB as recognized lenders.
Impact Analysis:
AD Category-I Banks:
* Impact: Responsible for verifying hedging compliance, reporting to RBI, and processing ECB applications under the revised guidelines.
* Action Required: Update internal procedures, monitor hedging positions, and report accurately to RBI. Bring the circular to the notice of their constituents and customers.
Infrastructure Companies, NBFCs (IFCs and AFCs), Holding Companies, and CICs:
* Impact: Benefit from expanded access to ECB under Track I, subject to specific conditions and hedging requirements.
* Action Required: Review eligibility, develop or update risk management policies, ensure hedging compliance, and utilize ECB proceeds as specified.
Borrowers under Previous ECB Framework:
* Impact: May be able to refinance existing ECBs under more favorable terms if they meet eligibility criteria.
* Action Required: Evaluate refinancing options to reduce costs and ensure compliance with the revised framework.
Foreign Portfolio Investors (FPIs):
* Impact: The ECB framework does not apply to investments in Non-Convertible Debentures (NCDs) in India made by Registered Foreign Portfolio Investors (RFPIs).
* Action Required: None.
Key Entities Referenced
Reserve Bank of India: The central bank of India, responsible for regulating the banking sector and managing the country's monetary policy.
External Commercial Borrowings (ECB): A mechanism that allows Indian companies to borrow money from foreign sources in the form of loans. The circular revises the framework for ECBs.
Authorised Dealer Category-I Banks: Banks authorized by the Reserve Bank of India to deal in foreign exchange.
Infrastructure Sector: A key sector of the Indian economy that includes industries related to building and maintaining the country's essential systems and facilities.
Non-Banking Financial Companies (NBFCs): Financial institutions that provide banking services without holding a banking license. Several types of NBFCs are mentioned, including Infrastructure Finance Companies (NBFC-IFCs) and Asset Finance Companies (NBFC-AFCs).
Holding Companies: Companies that own a controlling interest in other companies.
Core Investment Companies (CICs): A type of NBFC that primarily invests in the equity shares of other companies.
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
RESERVE BANK OF INDIA
Mumbai - 400 001
RBI/2015-16/349
A.P. (DIR Series) Circular No.56 March 30, 2016
To
All Category-I Authorised Dealer Banks
Madam / Sir,
External Commercial Borrowings (ECB) – Revised framework
Attention of Authorized Dealer Category-I (AD Category-I) banks is invited to A.P. (DIR
Series) Circular No.32 dated November 30, 2015 and paragraph no. 1.8, 2.2, 2.4.1,
2.4.2, 2.4.5, 2.4.6, 2.5, 2.16 and 2.16.xiii of 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.
2. Taking into account prevailing external funding sources, particularly for long term
lending and the critical needs of infrastructure sector of the country, the extant ECB
guidelines have been reviewed in consultation with the Government of India.
Accordingly, it has been decided to make the following changes in the ECB framework:
i. Companies in infrastructure sector, Non-Banking Financial Companies -
Infrastructure Finance Companies (NBFC-IFCs), NBFCs-Asset Finance
Companies (NBFC-AFCs), Holding Companies and Core Investment Companies
(CICs) will also be eligible to raise ECB under Track I of the framework with
minimum average maturity period of 5 years, subject to 100 per cent hedging.
ii. For the purpose of ECB, “Exploration, Mining and Refinery” sectors which are not
included in the Harmonised list of infrastructure sector but were eligible to take
ECB under the previous ECB framework (c.f. A.P. (DIR Series) Circular No. 48
dated September 18, 2013) will be deemed as in the infrastructure sector, and
can access ECB as applicable to infrastructure sector under (i) above.iii. Companies in infrastructure sector shall utilize the ECB proceeds raised under
Track I for the end uses permitted for this Track. NBFCs-IFCs and NBFCs-AFCs
will, however, be allowed to raise ECB only for financing infrastructure.
iv. Holding Companies and CICs shall use ECB proceeds only for on-lending to
infrastructure Special Purpose Vehicles (SPVs).
v. The individual limit of borrowing under the automatic route for aforesaid
companies shall be as applicable to the companies in the infrastructure sector
(currently USD 750 million).
vi. Companies in infrastructure sector, Holding Companies and CICs will continue to
have the facility of raising ECB under Track II of the ECB framework subject to
the conditionalities prescribed thereof.
3. The companies added under Track I should have a Board approved risk
management policy. Further, the designated AD Category-I bank shall verify that 100
per cent hedging requirement is complied with during the currency of ECB and report
the position to RBI through ECB 2 returns.
4. On the ECB framework announced vide aforesaid Circular dated November 30, 2015,
it is further clarified that:
i. The designated AD Category-I banks may, under the powers delegated to them,
allow refinancing of ECBs raised under the previous ECB framework, provided
the refinancing is at lower all-in-cost, the borrower is eligible to raise ECB under
the extant ECB framework and residual maturity is not reduced (i.e. it is either
maintained or elongated).
ii. ECB framework is not applicable in respect of the investment in Non-convertible
Debentures (NCDs) in India made by Registered Foreign Portfolio Investors
(RFPIs).
iii. Minimum average maturity of Foreign Currency Convertible Bonds (FCCBs)/
Foreign Currency Exchangeable Bonds (FCEBs) is 5 years irrespective of the
amount of borrowing. Further, the call and put option, if any, for FCCBs shall not
be exercisable prior to 5 years.
iv. Only those NBFCs which are coming under the regulatory purview of the
Reserve Bank are permitted to raise ECB. Further, under Track III, the NBFCsmay raise ECBs for on-lending for any activities including infrastructure as
permitted by the concerned regulatory department of RBI.
v. The provisions regarding delegation of powers to designated AD Category-I
banks is not applicable to FCCBs/FCEBs.
vi. 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.
5. All other aspects 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.
6. Master Direction No. 5 dated January 01, 2016 is being updated to reflect the
changes.
7. The directions contained in this circular has 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