The Reserve Bank of India on Monday revamped the external commercial borrowing (ECB) regime and long-term foreign currency borrowing with “a more liberal approach, fewer restrictions on end uses and higher all-in-cost ceiling.” The RBI will allow offshore insurance companies, pension funds and sovereign wealth funds (SWFs) to lend to Indian companies for the long term in a bid to attract more inflows.
The central bank raised the limit for small value ECBs with minimum average maturity (MAM) of three years to $50 million from the existing $20 million and alignment of the list of infrastructure entities eligible for ECB with the harmonised list of the government.
The RBI had released draft norms for the revised external commercial borrowing policy in September. While the central bank said it would review the policy after a year, the latest initiative has come at a time when the rupee and capital flows are showing volatile movements. Entities raising ECB under the existing framework can raise the said loans by March 31, 2016 provided the agreement in respect of the loan is already signed by the date the new framework comes into effect.
According to the RBI, the overarching principles of the revised framework include a more liberal approach, with fewer restrictions on end uses and higher all-in-cost ceiling, for long term foreign currency borrowings “as the extended term makes repayments more sustainable and minimises roll-over risks for the borrower.” The RBI said a more liberal approach will be taken “for Indian rupee (INR) denominated ECBs where the currency risk is borne by the lender. It also announced expansion of the list of overseas lenders to include long term lenders like sovereign wealth funds, pension funds and insurance companies. It also proposed only a small negative list of end-use requirements applicable to long-term ECBs and rupee denominated ECBs.
According to the RBI, the framework for ECB as a means to attract funds from abroad will continue to be a major tool to calibrate the policy towards capital account management.
The revised ECB framework will comprise the three tracks:
Track I – medium term foreign currency denominated ECB with MAM of 3/5 years;
Track II – long term foreign currency denominated ECB with MAM of 10 years; and
Track III – rupee denominated ECB with MAM of 3/5 years.