With a view to attract further foreign investments into India, especially considering the slow-down in the Indian economy, the Reserve Bank of India (RBI) brought out certain relaxations on the end-use restrictions placed on External Commercial Borrowings[1] vide Circular RBI/2019-20/20 A.P. (DIR Series) Circular No. 04 dated 30^th July, 2019[2] (hereinafter ‘the Circular’). Transactions on account of External Commercial Borrowings (ECB) and Trade Credit (TC) are governed by Section 6(3)(d) of the Foreign Exchange Management Act, 1999 (FEMA). In furtherance thereto, the RBI had brought out the ‘Master Direction – External Commercial Borrowings, Trade Credits and Structured Obligations’[3] which encapsulates the detailed provisions and stipulations in relation to ECB.

Prior to the Circular, the RBI had placed certain restrictions on the end-use of an ECB. It may be noted that, until the changes brought-out by the Circular, the ECB proceeds were not allowed to be utilized towards working capital purposes, general corporate purposes and repayment of rupee loans, except in the case where the ECB was obtained from the foreign equity holder with a minimum average maturity period of five years. Further, there was a prohibition on onward lending of these proceeds. With the said Circular, the RBI has relaxed these end-use restrictions. Accordingly, eligible borrowers would now be allowed to raise ECBs for the following purposes from recognised lenders, except foreign branches/ overseas subsidiaries of Indian banks:

Working Capital & General Corporate Purposes

• Eligible borrowers are now permitted to raise ECBs with a minimum average maturity period of ten (10) years for working capital purposes and general corporate purposes, from recognised lenders.
• NBFCs are permitted to obtain ECBs with the above-said maturity period for on-lending for working capital purposes and general corporate purposes.

Repayment of Rupee Loans

• Eligible borrowers are permitted to raise ECBs with a minimum average maturity period of seven (7) years for repayment of Rupee loans availed domestically for capital expenditure. Similarly, NBFCs can also raise ECBs with the said maturity for on-lending for the same purpose.
• For repayment of Rupee loans availed domestically for purposes other than capital expenditure and for on-lending by NBFCs for the same, the minimum average maturity period of the ECB is required to be ten (10) years.
• For repayment of Rupee loans availed domestically for capital expenditure in the manufacturing and infrastructure sector if classified as SMA-2 or NPA[4], under any one-time settlement with lenders. Prior to the Circular, ECB proceeds could not be utilised for repayment of Rupee loans except from foreign equity holder.

Lender banks are also now permitted to sell, through assignment, such loans to eligible ECB lenders, except foreign branches/ overseas subsidiaries of Indian banks, provided, the resultant external commercial borrowing complies with all-in-cost, minimum average maturity period and other relevant norms of the ECB framework.

We note that, by giving greater flexibility to use the ECB for general corporate purposes and working capital requirement as well as repayment of rupee loan both by eligible borrowers including NBFCs, the RBI has taken a step to ease the process of in-flow of funds to Indian corporates. However, concerns that the spread of risk to offshore lenders might affect the exchange rate for future payments and the premium that borrowers might have to pay for long-term foreign currency funding due to the condition of having a weighted average tenure of 10 years continue to loom. The RBI has also allowed NBFCs to borrow from foreign sources and use it for its on-lending activities, which is a welcome step by the regulator to protect the financial institutions from the current crisis affecting the sector.