The Reserve Bank of India, the central bank of India, has issued new regulations for borrowing and lending in foreign exchange. The key highlights of the revised borrowing and lending guidelines are provided from now on:
- Definition of External Commercial Borrowings (‘ECB’) and External Commercial Lending (‘ECL’)
To providing precision on the subject, the term “External Commercial Borrowings” has been defined to mean the borrowing by an eligible resident entity from outside India and “External Commercial Lending” as the lending by a person resident in India to a borrower outside India.
- Entities eligible to raise ECB and entities eligible to provide ECL
For ECB
: The entities eligible to raise ECB under New Regulations are wider as compared to that of the earlier policy.
While the previous regulations categorized the eligible borrowers under different tracks, the New Regulations simply provide that the entities eligible to receive foreign direct investment as per the extant FDI Regulations are also eligible to raise ECB from a person resident outside India.
A similar approach is applied for determining recognized lender for ECB. Contrary to the previous regulations which provided a complex system for a recognized lender under different tracks, New Regulations determine the same as a resident of FATF or IOSCO compliant country. Further, multilateral and regional financial institution where India is a member country shall also be considered as a recognized lender.
For ECL: In addition to the Indian entities permissible to lend in favor of their overseas JV and wholly owned subsidiaries, a person resident in India is also allowed to lend in foreign exchange out of the funds held in his EEFC account. However, such lending is subject to trade-related purposes to the overseas importer along with limit, if any imposed by RBI in consultation with the Government of India. This provision earlier required a guarantee from a reputed bank outside India where the loan exceeds a certain limit. However, the extant regulations are silent on the issuance of such guarantee.
- Maturity period
Previously, ECB was categorized under 3 (three) tracks: (i) Medium term foreign currency denominated ECB with minimum average maturity of 1/3/5 yrs; (ii) Long term foreign currency denominated ECB with minimum average maturity of 10 yrs; (iii) and Indian Rupee (INR) denominated ECB with minimum average maturity of 1/3/5 yrs. However, the New Regulations have prescribed the minimum average maturity for a period of 3 years.
It means that under the extant regulations, all the sectors are on par concerning the minimum average maturity period unless otherwise notified by RBI.
- Borrowing Limits
All eligible borrowers are now entitled to raise ECB up to USD 750 million or its equivalent per financial year. This was the highest limit which was available only to infrastructure and manufacturing sectors and certain classes of NBFCs under the previous regulations.
However, for startups, the RBI has continued with its conservative approach by providing a limit of ECB for only USD 3 million or its equivalent per financial year.
Further, an individual resident in India may borrow a sum up to USD 250,000 or its equivalent subject to the terms and conditions, which are yet to be notified.
- End-uses
New Regulations provide an inclusive list in respect of the end-uses where borrowed funds cannot be deployed. For instance: under the previous regulations, the borrowed funds were not allowed to be parked for working capital purposes, general corporate purposes, etc., which in itself was a significant limitation. However, there is no such restriction for deploying borrowed funds in the New Regulations. The end-uses in which ECB proceeds cannot be utilized under the extant regulations are majorly limited to the sectors/ activities in which FDI is not permitted, i.e. chit funds, agricultural, plantation, real estate activities, trading in TDRs, etc.
- Provisions governing trade credit
The all-in-cost ceiling for raising trade credit has been reduced to 250 basis points from 350 basis points over six months LIBOR or applicable benchmark.
The limit of borrowing under trade credit has been raised to USD 50 million or its equivalent from USD 20 million or its equivalent per import transaction.
Further, for import of capital goods, the maturity period has been reduced to three years from up to five years from the date of shipment under the New Regulations.
- Hybrid Instruments
Certain hybrid instruments such as optionally convertible debentures, covered under the previous regime, shall now be governed by the specific regulations to be issued in this respect.
Last Updated: 29th January 2019
This article is contributed by:
Luv Malhotra
Director, Legal
Puneet Bhatia
Corporate Lawyer Tag: Foreign Exchange
