Revamping of ECB regulation by RBI

Introduction

In an ongoing effort by the Government in liberalizing Foreign Exchange Regulations, it’s for sometime now that the RBI/Govt. has also been constantly liberalizing/rationalizing, the foreign funding by way of External Commercial Borrowing as well, placing more and more confidence on the corporate prudence. With the notification dated 16th January, 2019, the ECB[1] policy have been totally revamped much to the cheers of the liquidity starved businesses.

The Reserve Bank, to rationalise the extant framework for ECB and Rupee Denominated Bonds in light of the experience gained to improve the ease of doing business vide RBI/2018-19/109 A.P. (DIR Series) Circular No. 17 (“Notification”) has issued new framework merging the Track 1 with Track 2 and Track 3 with Rupee Denominated Bonds.

The current methods of availing foreign loans by way of ECB structure runs into three tracks, which are now eased and converted into a two-tier structure.

  • The Track I (i.e. Medium-term foreign currency denominated ECB with minimum average maturity of 3/5 years)
  • Track II (i.e. Long-term foreign currency denominated ECB with minimum average maturity of 10 years) have now been merged as “Foreign Currency denominated ECB”.
  • Further the Track III (i.e. Indian Rupee (INR) denominated ECB with minimum average maturity of 3/5 years) & Rupee Denominated Bond have now been merged as “Rupee Denominated ECB”.

The borrowers have been expanded to include all entities eligible to receive FDI. Additionally, Port Trusts, Units in SEZ, SIDBI, EXIM Bank, registered entities engaged in micro-finance activities, viz., registered not for profit companies, registered societies/trusts/cooperatives and non-government organisations can also borrow under this framework.

The recognised lenders should be resident of Financial Action Task Force (FATF) or International Organization of Securities Commission’s (IOSCO) compliant country. Multilateral and Regional Financial Institutions, Individuals and Foreign branches / subsidiaries of Indian banks can also be lenders as detailed in Annex.

The minimum average maturity period (MAMP) has been revised to 3 years for all ECBs irrespective the track. However, for ECB raised from foreign equity holder and utilised for specific purposes, as detailed in the Annex to notification, the MAMP would be 5 years. Similarly, for ECB up to USD 50 million per financial year raised by manufacturing sector, which has been given a special dispensation, the MAMP would be 1 year.

Any borrower, who is otherwise in compliance of ECB guidelines, except for delay in reporting drawdown of ECB proceeds before obtaining LRN or Form ECB 2 returns, can regularize the delay by payment of Late Submission Fee (LSF).

The LSF is provided as per Slab Basis to include as under:

Form Period of delay LSF
Form ECB Upto 30 calendar days from due date of submission INR 5,000
Form ECB/ ECB-2 Up to three years from due date of submission/date of drawdown INR 50,000 per year
Form ECB/ ECB-2 Beyond 3 years INR 1,00,000 per year

An eligible borrower can now raise ECB up to USD 750 million or equivalent per financial year under Automatic Route not requiring prior approval of the Reserve Bank.

The amended policy will come into force with immediate effect.

Full circular for your reference: https://www.rbi.org.in/scripts/FS_Notification.aspx?Id=11456&fn=5&Mode=0#ANN

[1] ECBs are commercial loans raised by eligible resident entities from recognised non-resident entities and should conform to parameters such as minimum maturity, permitted and non-permitted end-uses, maximum all-in-cost ceiling, etc. The parameters apply in totality and not on a standalone basis.

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