In the background of developments in recent months, Government has decided to further revise the policy on External Commercial Borrowings (ECB). ECB can now be accessed under two routes, namely, (i) Automatic Route and (ii) Approval Route. ECB for investment in the real sector - industrial sector, especially infrastructure sector in India – is under the Automatic Route, i.e. will not require RBI/Government approval. The maximum amount of ECB which can be raised by an eligible borrower under the Automatic Route is USD 500 million during a financial year. The following is permissible under the Automatic route:
ECB up to USD 20 million or equivalent with minimum average maturity of 3 years ECB above USD 20 million and up to USD 500 million or equivalent with minimum average maturity of 5 yearsAll cases, which fall outside the purview of the Automatic Route, will be decided by an Empowered Committee of RBI.
Eligible borrowers
Under the extant policy, corporates registered under the Companies Act, 1956, except financial intermediaries such as banks, financial institutions (FIs), housing finance companies and Non-Banking Finance Companies (NBFCs), are eligible. Subsequently, NGOs engaged in micro-finance activities have been permitted to raise ECB up to USD 5 million during a financial year for permitted end-use, under the automatic route. Detailed guidelines have been issued by RBI. It has now been decided to further expand the eligibility/end-use as follows:
ECB by NBFCs will be permitted under the Approval Route from multilateral financial institutions, reputed regional financial institutions, official export agencies and international banks towards import of infrastructure equipment for leasing to infrastructure projects with a minimum average maturity of 5 years.
Foreign Currency Convertible Bonds (FCCBs) by Housing Finance Companies with strong financials satisfying criteria to be notified by RBI, will be permitted under the Approval Route.
Individuals, Trusts and non-profit making organizations, except NGOs as mentioned in paragraph 4 above, are not eligible to raise ECB.
Financial institutions dealing exclusively with infrastructure or export finance such as IDFC, IL&FS, Power Finance Corporation, Power Trading Corporation, IRCON and EXIM Bank are considered on a case-by-case basis i.e. through the approval route.
Banks and financial institutions which had participated in the textile or steel sector restructuring package as approved by the Government are permitted to the extent of their investment in the package and assessment by RBI based on prudential norms. Any ECB availed for this purpose so far is deducted from their entitlement.
Recognised Lenders
Borrowers can raise ECB from internationally recognised sources such as (i) international banks, international capital markets, multilateral financial institutions (such as IFC, ADB, CDC etc.) (ii) export credit agencies and (iii) suppliers of equipment, foreign collaborators and foreign equity holders.
Interest Rate Spreads
All ECBs are subject to the following maximum spreads over six month LIBOR, for the respective currency of borrowing or the applicable benchmark(s) as the case may be:
| MINIMUM Average Maturity PERIOD | All-in-cost ceilings OVER SIX MONTHS LIBOR* |
| 3 years and up to 5 years | 200 basis points |
| More than 5 years | 350 basis points |
* All-in-cost ceilings includes rate of interest, other fees and expenses in foreign currency except commitment fee, pre-payment fee and fees payable in Indian rupees. Moreover, the payment of withholding tax in Indian rupees is excluded for calculating the all-in-cost.
End-use
Permissible end-use/restrictions are explained below:
ECB can be raised only for investment (such as import of capital goods, new projects, modernisation/expansion of existing production units) in real sector - industrial sector including small and medium enterprises (SME) and infrastructure sector - in India. Infrastructure sector is defined as (i) power, (ii) telecommunication, (iii) railways, (iv) roads including bridges, (v) ports, (vi) industrial parks and (vii) urban infrastructure (water supply, sanitation and sewage projects);
ECB proceeds can be utilised for overseas direct investment in Joint Ventures (JV)/Wholly Owned Subsidiaries (WOS) subject to the existing guidelines on Indian Direct Investment in JV/WOS abroad;
Utilisation of ECB proceeds is permitted in the first stage acquisition of shares in the disinvestment process and also in the mandatory second stage offer to the public under the Government’s disinvestment programme of PSU shares;
Utilisation of ECB proceeds is not permitted for investment in capital markets by corporates or for on-lending, except for cases mentioned in paragraphs 4, 6 and 7 above;
Utilisation of ECB proceeds is not permitted in real estate. The term ‘real estate’ excludes development of townships, housing, built-up infrastructure and construction-development projects as defined by Ministry of Commerce and Industry, Department of Industrial Policy and Promotion, SIA (FC Division), Press Note 2 (2005 Series) dated 3rd March 2005;
End-uses of ECB for working capital, general corporate purpose and repayment of existing Rupee loans are not permitted.
Guarantees
Issuance of guarantee, standby letter of credit, letter of undertaking or letter of comfort by banks, financial institutions and NBFCs relating to ECB is not normally permitted. Applications for providing guarantee/standby letter of credit or letter of comfort by banks, financial institutions relating to ECB in the case of SME will be considered on merit subject to prudential norms.
Parking of ECB proceeds overseas
ECB proceeds should be parked overseas until actual requirement in India.
Prepayment
Under the earlier guidelines, prepayment of ECB up to USD 100 million was permitted without prior approval of RBI, subject to compliance with the stipulated minimum average maturity period as applicable for the loan. It has now been decided to revise this upward to USD 200 million, subject to minimum average maturity of 5 years. Pre-payment of ECB for amounts exceeding USD 200 million or prepayment of ECBs with minimum average maturity of 3-5 years would be on the Approval Route.
Refinance of existing ECB
Refinancing of existing ECB by raising fresh ECBs at lower cost is permitted subject to the condition that the outstanding maturity of the original loan is maintained.
Foreign Currency Convertible Bonds (FCCBs)
The policy for ECB is also applicable to FCCBs in all respects, except in the case of Housing Finance Companies for which criteria will be notified by RBI.
The Government last amended the ECB Policy in January 2004. It is regularly reviewed in consultation with the Reserve Bank of India keeping in view the current macroeconomic situation, challenges faced in external sector management and the experience gained so far in administering ECB policy.
The amendments to the ECB guidelines will come into force from the date of notification of regulations/directions by RBI under the Foreign Exchange Management Act, 1999.
BSC/BY/CS-232/05