Reserve Bank proposes easier ECB norms

Draft paper allows wider set of investors, higher limits

Hours after Economic Affairs Secretary Shaktikanta Das said in New Delhi that the government was in discussions with the Reserve Bank of India (RBI) to ease some of the rules for external commercial borrowings (ECBs), the central bank came out with a draft paper that allowed Indian companies to raise funds from a wider class of lenders.

The RBI said companies would now be able to borrow up to $50 million in ECBs with three-year maturities and more than $50 million for five-year maturities, from the earlier $20 million.

According to the proposal, companies can now take the ECB route for raising 10-year funds which is capped at five years now. Overseas regulated financial entities, pension funds, insurance funds, sovereign wealth funds and similar other long-term investors are included in the list of recognised lenders for long-term funding into India.

The draft paper also said the central bank would now allow real estate investment trusts and infrastructure investment trusts to raise rupee-denominated funds offshore, a step likely to provide some relief to the cash-strapped real estate sector in India.

"An attempt has now been made to replace the ECB policy with a more rational and liberal framework, keeping in view the evolving domestic as well as global macro-economic and financial conditions," the RBI said in a statement.

As part of the proposals, the RBI also said it would allow funds raised from ECBs to be directed to additional purposes, including certain infrastructure lending and some overseas direct investments.

However, the RBI also proposed tightening how much companies can pay to borrow via ECBs, saying it would lower by 50 basis points (bps) the current all-in-cost ceiling of 350 bps over six-month Libor for three-five-year loans and 500 bps over Libor for above five-year maturities.

The central bank has also proposed wider range for end-use of proceeds raised via ECB. Apart from capital expenditure, modernisation of projects and working capital loans, companies can now raise funds to repay trade credit taken up to three years for capital expenditure, for payments towards capital goods already shipped, purchase of second-hand domestic capital goods, plants and machinery, among others. ECB can also be raised for overseas direct investment in joint venture and wholly-owned subsidiaries by core investment companies.

"A framework for issuance of rupee denominated bonds overseas will be announced separately," RBI said. The RBI asked market participants to provide feedback by October 11.
KEY TAKEAWAYS

• Sovereign wealth fund, insurance & pension funds can lend under ECB norms
• Ambit of end-use for ECBs expanded to include on-lending to infra-SPV
• The cap for raising 3-year ECB funds hiked to $50 mn from $20 mn
• All-in-cost ceiling for 3-yr ECB at 300 bps plus the London Interbank rate as compared to 350 bps
• Minimum average maturity for long-term loans/bonds of 10 years