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New ECB (External Commercial Borrowing) Norms By RBI

Economic Affairs Financial Markets
  • Published on: 27-Jan-16
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New ECB (External Commercial Borrowing) Norms By RBI

 

  • The Reserve Bank of India (RBI) has eased the norms for raising funds through external commercial borrowing (ECB) route.
  • At present, corporates can avail External Commercial Borrowings (ECB) up to USD 500 million during a financial year under Automatic Route with minimum average maturity period of 5 years.
  • With a view to liberalising the ECB guidelines, it has been decided that henceforth, corporates can avail ECB of an additional amount of USD 250 million with average maturity of more than 10 years under the approval route, over and above the existing limit of USD 500 million under the automatic route, during a financial year.
  • Prepayment and call/put options, however, would not be permissible for such ECB up to a period of 10 years.
  • Further, with a view to providing greater flexibility to the corporates in managing their liquidity and interest costs, prepayment of ECB up to USD 300 million, as against the existing limit of USD 200 million, will be allowed by AD Category - I banks without prior approval of the Reserve Bank subject to compliance with the minimum average maturity period as applicable to the loan.
External Commercial Borrowing:

  • External Commercial Borrowings (ECB) refer to commercial loans [in the form of bank loans, buyers’ credit, suppliers’ credit, securitised instruments (e.g. floating rate notes and fixed rate bonds)] availed from non-resident lenders with minimum average maturity of 3 years. ECB can be accessed under two routes, viz., (i) Automatic Route and (ii) Approval Route
  • The department of Economic Affairs, Ministry of Finance, Government of India with support of Reserve Bank of India, monitors and regulates Indian firms access to global capital markets
Analysis:

  • New ECB framework eases the process of raising global financing for infrastructure firms, real estate investment trusts and core investment companies.
  • The RBI has opened up the lender base abroad. India can now get access to funds from pension companies, insurance companies, wealth funds, etc, and the Indian market can tap that
  • These new norms  for external commercial borrowings (ECB) benefit global lenders rather than domestic borrowers.
  • But some sectors such as housing finance and infrastructure have been left high and dry. Almost nine months have gone and all the housing finance companies are waiting for ECB approvals. These issues needs a proper attentions from  RBI.
  • Limiting ECBs in the infrastructure sector in Track II and III could limit financing from international lenders who may not be comfortable with providing long-term borrowings to Indian companies in the infrastructure space.
  • True liberalisation will only be achieved if there is a very small negative list of eligible borrowers, and the restrictions on permitted uses are further whittled down.
  • New norms are  also unclear about the treatment of foreign currency convertible bonds (FCCB) and foreign currency exchangeable bonds (FCEB). FCCB is a permitted form of external commercial borrowing. FCEB can only be done through the approval route. FCEB is more akin to an equity instrument while FCCB is a form of debt, and so that’s why the RBI wants greater control over the former
  • The new rules have liberalised the lending side, while there has been no real change in the borrower base.

 

By: Vishal
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