Remodelling Of Overseas Borrowings Framework – Finance and Banking

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Remodelling Of Overseas Borrowings Framework


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Post the enormous victory of the Bhartiya Janta Party and its
allies in the Centre in 2019, this year has been witnessing
substantial modifications in the existing laws of India. The Modi
government has been a constant advocate of own business and thus,
in the past few years, we have observed a sudden burst of start-ups
in the Indian market. In order to continue and encourage the Indian
start-ups further, the government and the Reserve Bank of India
(“RBI“) brought in extensive amendments
by the notifications dated January 16, 20191, February
08, 20192 and March 13, 2019 3and
subsequently amended Master Direction – External Commercial
Borrowings, Trade Credits and Structured Obligations dated March
26, 2019 (collectively referred as “Amended
Framework
“). External Commercial Borrowing
(“ECB“) are the debts availed by Indian
commercial entities from foreign lenders. We have enumerated below
the vital alternations:

  1. Consolidation of
    tracks:
    The earlier Master Director dated January 01, 2016
    (“Erstwhile Framework“) had 4 types of
    ECB under it, in which Track 1 and 2 were for medium-term and
    long-term foreign currency (“FCY“)
    denominated ECB. The Track 3 and Masala Bonds were medium-term and
    long-term Rupee (“INR“) denominated ECB.
    In the Amended Framework, the Track I and II have been merged as
    ‘FCY denominated ECB’ and further Track III and Masala
    Bonds have been merged as ‘INR denominated ECB’.

  2. Expansion of forms of
    ECB:
    The Amended Framework has expanded the forms by which
    ECB can be given for both the ECBs viz: inclusion of trade credits
    beyond 3 years. It further states that plain vanilla INR
    denominated ECB can either be placed privately or listed on
    exchanges as per host country regulations.

  3. Standardisation of Recognised
    Lenders:
    Unlike Erstwhile Framework, the Amended Framework
    has uniformed the criteria of lenders who can lend in India
    throughout all kind of ECBs. The lender has to be a member of FATF
    or International Organization of Securities Commissions
    (“IOSCO”) and also includes multilateral and regional
    financial institutions of which India is a member. Further, for
    both the denominations of ECB, foreign individuals will be only
    considered as a lender if the bond is listed in the host country.
    The foreign branches/subsidiaries of Indian banks can also be
    considered as an eligible lender, however, underwriting by such
    foreign branches/subsidiaries cannot be considered as eligible
    lender.

  4. Changes in the ‘Eligible
    Borrowers’:
    The Erstwhile Framework had a list of
    eligible borrowers for every track, however the same has been
    simplified in the Amended Framework. All entities who are eligible
    to raise Foreign Direct Investment
    (“FDI“) will be considered eligible
    under the current ECB norms, which includes port trusts, unit in
    Special Economic Zone, Small Industries Development Bank of India
    and Export-Import Bank of India while for INR denominated ECB,
    eligible lenders include all eligible lenders under FCY denominated
    ECB and registered entities engaged in micro-financing in
    India.

  5. Uniformity in Minimum Average
    Maturity Period (“MAMP”):
    The Amended Framework
    has uniformed the MAMP as 3 years for all ECBs, contrasting the
    Erstwhile Framework wherein every track had an individual
    MAMP.

    The exception to the above-mentioned standardised MAMP in the
    Amended Framework is that the manufacturing companies may raise
    ECBs with MAMP of 1 year for ECB up to USD 50,000,000 or its
    equivalent per financial year. Further, if the ECB is raised from
    foreign equity holder and utilized for working capital purposes,
    general corporate purposes or repayment of Rupee loans, MAMP will
    be 5 years. The call and put option, if any, shall not be
    exercisable prior to completion of MAMP.


  6. Consistency in the individual
    limits:
    The Amended Framework has created a uniform limit
    of USD 750,000,000 for both FCY and INR denominated ECB under the
    automatic route. However, the provision regarding raising ECB from
    direct foreign equity holder has been rephrased, not amended.

  7. Changes in exchange rates of
    ECB:
    As per the Erstwhile Framework, the exchange rate was
    the rate which was prevalent on the day of settlement, whereas in
    the Amended Framework, the exchange rate for FCY denominated ECB
    will be the rate prevailing on the date of agreement or any rate
    agreement by the lender and for INR denominated ECB, the exchange
    rate of the Erstwhile Framework will prevail.

  8. Variations in hedging
    provisions:
    The hedging provision of the Erstwhile
    Framework was optional and was permitted through derivative
    products with Authorized Dealer (“AD
    Bank
    “) Category I banks or through
    branches/subsidiaries of Indian banks abroad or branches of foreign
    banks with Indian presence on a back-to-back basis. According to
    the Amended Framework, 70% of the total borrowing has to be
    compulsorily hedged if the MAMP is less than 5 years for FCY
    denominated ECB. For the INR denominated ECB, the external lender
    is eligible to hedge their exposure in Rupee through permitted
    derivative products with AD Category I banks in India. The
    investors can also access the domestic market through
    branches/subsidiaries of Indian banks abroad or branches of foreign
    banks with Indian presence on a back to back basis.

  9. Deviation in
    reporting:
    In the Erstwhile Framework, the entities
    desirous to raise ECB under the automatic route had to approach an
    AD Bank with their proposal along with duly filled Form 83, however
    for approval route cases, the borrowers had to approach the RBI
    with an application in Form ECB for examination through their AD
    Bank. However, in the Amended Framework, Form 83 and ECB have been
    merged to Form ECB.

    Further, the borrower under the Erstwhile Framework has to file
    Form ECB-2 monthly with the Department of Statistics and
    Information Management (DSIM) and in case of failure to file the
    same, the Loan Registration Number
    (“LRN”) was being instantly cancelled.
    In the Amended Framework, the late submission of Form ECB-2/ECB can
    now be compounded by paying late fees of:

    1. INR 5,000 for delay of submission of
      30 days from the due date;

    2. INR 50,000 per year for delay up to 3
      years;

    3. INR 1,00,000 per year for delay
      beyond 3 years;


  10. Alternation in Trade Credit
    norms:
    Trade-credit limit for the automatic route for
    import of non-capital and capital goods has been increased from USD
    20,000,000 to USD 50,000,000 for import of non-capital and capital
    goods and for beyond USD 50,000,000, the RBI approval is required.
    Further, for oil/gas refining & marketing, airline and shipping
    companies, the limit is set up to USD 150,000,000 or equivalent per
    import transaction and beyond it, RBI approval is required. The
    MAMP for trade credits of capital goods has been reduced from 5
    years to 3 years. The all-in-cost ceiling per annum has been
    reduced from 350 basic points over 6 months LIBOR to 250 basic
    points over 6 months LIBOR.

  11. Other modifications:
    The other relevant modifications include the following:
    1. The Amended Framework introduced the
      ‘Standard operating procedure for untraceable entities’
      wherein if the AD Bank does not receive any response from any means
      of communication by a particular entity for more than two quarters
      or the entity has stopped operating in its registered office or the
      entity is not filing the statutory auditor’s report for than 2
      years, the AD Bank has to immediately file Form ECB/ECB-2 and mark
      it as ‘Untraceable entity’. The AD Bank should not further
      examine/process any fresh ECB application or any inward remittance
      and debt servicing will be permitted under the automatic
      route.

    2. The Amended Framework further states
      that an entity which is under restructuring scheme/ CIRP under
      Insolvency and Bankruptcy Code, 2016 can raise ECB only if
      specifically permitted under the resolution plan and they can raise
      ECBs from all recognized lenders, except foreign
      branches/subsidiaries of Indian banks, for repayment of Rupee term
      loans of the target company. Such ECBs will be considered under the
      approval route only.

    3. As per the Amended Framework, trade
      credit can henceforth be raised by a unit or a developer in
      SEZ4 including FTWZ5 for purchase of
      non-capital and capital goods within an SEZ including FTWZ or from
      a different SEZ including FTWZ subject to compliance with
      parameters of ordinary trade credit and provisions of SEZ Act,
      2005. Further, an entity in DTA is also allowed to raise trade
      credit for the purchase of capital / non-capital goods from a unit
      or a developer of an SEZ including FTWZ. For such trade credit
      transactions, the date of transfer of ownership of goods will be
      treated as trade credit date. As there will be no bill of entry for
      sale transactions within SEZ, the inter-unit receipt generated
      through National Securities Depository Limited can be treated as an
      import document.

    4. The Amended Framework allows bank
      guarantees to be given by the AD Bank, on behalf of the importer,
      in favour of overseas lender of trade credit not exceeding the
      amount of trade credit, within the maximum permissible period.
      Trade credit may also be secured by an overseas guarantee issued by
      foreign banks/overseas branches of Indian banks. The importer may
      also offer the security of movable assets (including financial
      assets) / immovable assets (excluding land in SEZs) / corporate or
      personal guarantee for raising trade credit, with prior scrutiny of
      the AD Bank.

    5. Part IV (Borrowing and Lending in
      foreign currency by an Authorised Dealer) and Part V (Borrowing and
      Lending in foreign currency by persons other than an authorised
      dealer) of the Erstwhile Framework has been removed in the Amended
      Framework.


  12. Amendment as per notification
    dated July 30, 2019
    6: The
    notification enables the eligible borrowers and NBFCs7
    with ECB of MAMP of 10 years for the purpose of working capital and
    general corporate purposes and for on-lending for the above
    purposes, respectively. Further, this notification enumerates that
    eligible borrowers with ECB of MAMP of 7 years can utilise the
    funds for repayment of rupee-denominated loans raised for capital
    expenditure and also NBFC can further lend for the same purpose if
    their ECB is with MAMP of 7 years.

    The notification also states that eligible borrowers in
    manufacturing & infrastructure sector which have been
    classified as ‘special mention account-2’8 can
    also repay their domestically availed rupee-denominated loans used
    for capital expenditure by their ECB loans through any one-time
    settlement arrangement with lenders.

    Domestic lenders have also been permitted to sell, through
    assignment, such loans to eligible ECB lenders, except foreign
    branches/ overseas subsidiaries of Indian banks, provided, the
    resultant ECB complies with all-in-cost, MAMP and other laws of the
    ECB framework.

CONCLUSION

On analysis of the above-cited amendments, we have observed that
the government is enabling Indian businesses to obtain capital in a
simpler form, with necessary compliances. The amendments have
liberalized the Indian borrowing market further with an aim to
devise easier capital access to the start-ups and the promoters,
who are not willing to dilute their shareholding in their
companies, however, had to take recourse of FDI, due to the
stringent policies in the Erstwhile Framework. Nevertheless, by
this policy, the government has opened the debt market of India
considerably and thus, the government needs to be stringent with
the compliances as in the absence of the same, India might drown in
the morass of debt in the foreign market. Such liberalisation of
the debt market is like a ‘two-edged sword’ which shall act
as a boon to the Indian market, if administered meticulously and as
an irrevocable bane, if not.

Footnotes

1. Bearing A. P. (DIR Series) Circular No. 17

2. Bearing A. P. (DIR Series) Circular No. 18

3. Bearing A. P. (DIR Series) Circular No. 23

4. Special Economic Zone

5. Free Trade and Warehousing Zone

6. Bearing A.P. (DIR Series) Circular No. 04

7. Non-banking Financial Company

8. where principal or interest payment is overdue between
61-90 days

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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