May 01, 2018
ECB Norms’ Simplified : Another Step towards Liberalisation
The Reserve Bank of India (“RBI”) vide A.P. (DIR Series) Circular No. 25 dated April 27, 2018 (“Circular”), has further liberalised the norms for raising External Commercial Borrowings (“ECBs”) (including Rupee denominated bonds overseas) by Indian corporates and other entities.
We have summarised the key changes brought in by the Circular hereunder:
1. Rationalisation of all-in-cost for ECBs and Masala Bonds
The all-in-cost ceiling for ECBs (all three tracks) as well as for Rupee denominated bonds overseas (commonly referred to as Masala Bonds) has been harmonised, and the different all-in-cost ceilings for different tracks of ECBs and Masala Bonds as prescribed under the current regime, have been done away with.
The uniform all-in-cost ceiling as stipulated by RBI is 450 points over the benchmark rate, which is: (a) 6 month USD LIBOR (or applicable benchmark for respective currency) for Track I and Track II; and (b) prevailing yield of the Government of India securities of corresponding maturity for Track III and Masala Bonds.
2. Revision in the ECB Liability: Equity ratio requirement
Under the current norms, if ECB is raised by a borrower from its direct equity holder under automatic route, the ECB liability of the borrower (outstanding + proposed ECBs) towards such foreign equity holder cannot be more than 4 times of the equity contributed by the latter.
RBI has now increased the aforesaid ratio of 4:1 to 7:1. This ratio will however not apply if total of all ECBs raised by an entity is up to USD 5 million or equivalent.
3. Expansion of Eligible Borrowers’ list
The list of entities eligible to borrow funds overseas under the ECB framework has been expanded, to include Housing Finance Companies and Port Trusts, which are now eligible to raise ECBs under all tracks. Such eligible entities, however must have a board approved risk management policy and keep their ECB exposure hedged 100% at all times for raising ECBs raised under Track I.
Also, companies engaged in the business of Maintenance, Repair and Overhaul and freight forwarding are now allowed to raise ECBs, however only under Track III.
Significantly, now these companies would not have to wait for an approval from the RBI for raising funds under the amended ECB framework.
4. Rationalisation of End-Use prescriptions
Under the current regime, a positive list of end-use prescriptions has been prescribed under Track I, while a negative list is prescribed for ECBs raised under Track II and Track III.
RBI has now stipulated a negative list for all the three tracks, which includes (a) investment in real estate or purchase of land except when used for affordable housing, construction and development of SEZ and industrial parks/integrated townships; (b) investment in capital market; and (c) equity investment.
Additionally, for Tracks I and III, the following 3 additional 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; and (f) repayment of rupee loans.
Further, the negative end use relating to on-lending to entities involved in all the six activities mentioned above will also apply for all 3 tracks.
For any details and clarifications, please feel free to write to: