The Reserve Bank of India Introduces a Revised ECB Framework

Track I

(ECB in foreign currency)

Track II

(ECB in foreign currency)

Track III

(ECB denominated in INR)

Minimum Average Maturity ("MAM")

• ECBs of an amount up to USD 50 million are required to have a MAM of at least 3 years; and
• ECBs of an amount beyond USD 50 million are required to have a MAM of at least 5 years.

• To be categorised as a Track II ECB, the MAM should be at least 10 years (irrespective of the amount). 

• ECBs of an amount up to the INR equivalent of USD 50 million are required to have a MAM of at least 3 years; and
• ECBs of an amount beyond the INR equivalent of USD 50 million are required to have a MAM of at least 5 years.

Key Changes:

This is a new categorisation that has been introduced by the Revised Framework. The previous ECB regime did not categorise ECBs into different tracks, based on their MAM and currency denomination.

Eligible Borrowers

• Manufacturing, software development, airlines and shipping companies;
• Units of special economic zones;
• The Small Industries Development Bank of India ("SIDBI");
• The Export-Import Bank of India ("Exim Bank") (with prior approval of the RBI).

• All entities eligible under Track I;
• Infrastructure companies;
• Holding companies;
• Core investment companies; and
• Real estate investment trusts and infrastructure investment trusts registered with the Securities and Exchange Board of India.

• All entities under Track I and Track II;
• Non-banking financial companies;
• Microfinance institutions categorised as non-banking financial companies, not-for profit companies, societies, NGOs and co-operatives.
• Companies, institutions,  and not-for-profit companies in the micro-finance sector (subject to certain restrictions);
• Companies in the research and development, training, logistic services and infrastructure support sectors; and
• Developers of special economic zones and national manufacturing investment zones.

Key Changes:

• Real estate investment trusts and infrastructure investment trusts registered with the Securities and Exchange Board of India have been included as eligible borrowers for ECBs under the Track II and Track III categories.
• Non-banking financial companies, developers of special economic zones and developers of national manufacturing and investment zones have been included as eligible borrowers for ECBs under the Track III category.
• Infrastructure companies are now not permitted to raise short term ECBs in foreign currency (i.e., under the Track I category) and can only raise ECBs under the Track II category (i.e., with a MAM of at least 10 years) and under the Track III category (i.e., INR denominated ECBs).

All-in Cost

• Average maturity of 3-5 years: 300 basis points over the 6-month LIBOR;
• Average maturity of above 5 years: 450 basis points over the 6 month LIBOR;
• Penal interest: Maximum 2% over and above the contracted interest rate.

• 500 basis points per annum over the applicable benchmark.

• In line with market conditions.

Key Changes:

• All-in costs, which are the maximum costs that an eligible borrower can pay a recognised lender pursuant to an ECB, now include guarantee fees. 
• All-in costs have been reduced by 50 basis points for ECBs under the Track I category.
• All-in costs for INR denominated ECBs are to be determined by market conditions. This gives flexibility to lenders to determine all-in costs taking into account currency fluctuation risks undertaken by such lenders.

Use of Proceeds (permitted end-uses)

• Capital expenditure in the form of:
  • Import of capital goods (including for services, technical know-how and license fees, provided they are part of these capital goods);
  • Local sourcing of capital goods;
  • New projects;
  • Modernization/expansion of existing units;
  • Investment in joint ventures / wholly owned subsidiaries overseas;
  • Acquisition of shares of public sector undertakings under the disinvestment program of Government of India;
  • Refinancing of existing trade credit raised for import of capital goods;
  • Payment of capital goods already shipped/ imported but unpaid;
  • Refinancing of existing ECB, provided residual maturity is not reduced;
• General corporate purpose (including working capital), provided the ECB is raised from direct/ indirect equity holder, or from a group company, for a MAM of 5 years;
• SIDBI can use ECB proceeds only for the purpose of on-lending to micro, small and medium enterprises;
• Units of special economic zones can use ECB proceeds only for their own requirements; and
• Shipping and airlines companies can use ECB proceeds only for import of vessels and aircrafts respectively.
• RBI approval required for the ECBs for the following purposes:
  • Import of second-hand goods as per guidelines issued by the Directorate General of Foreign Trade;
  • On-lending by Exim Bank.

• Any use of the proceeds other than the following:
  • Real estate activities;
  • Investing in capital markets;
  • Using proceeds for equity investment domestically;
  • On-lending to other entities with any of the above objectives; and
  • Purchase of land.

• The negative list under Track II is applicable to ECBs under Track III;
• Developers of special economic zones and national manufacturing investment zones can use ECB proceeds only for providing infrastructure facilities;
• Non-banking financial companies can use ECB proceeds for:
  • On-lending to infrastructure sector;
  • Hypothecated loans to domestic entities for acquisition of capital goods/equipment;
  • Providing capital goods/equipment to domestic entities by way of lease / hire-purchase;
• Entities in micro-finance sector can use ECB proceeds for on-lending to self-help groups or for microcredit or for bona-fide microfinance activity including capacity building.

Key Changes:

• The MAM for ECBs raised for general corporate purposes (including working capital requirements) has now been reduced to 5 years (from 7 years under the previous ECB Regime).
   
• The Revised Framework only prescribes a negative list for ECBs under Track II and Track III (with only some additional restrictions in Track III). This allows eligible Indian borrowers to raise funds for a larger variety of purposes than previously permitted.
• Financial lease is now expressly covered as a mode of ECB under the new framework.
• The previous ECB regime permitted airline companies to avail of ECBs only for the purposes of working capital. The Revised Framework now permits airline and shipping companies to raise funds through ECBs only for acquisition of aircrafts and vessels respectively under all three Tracks.

Recognized Lenders/Investors

• International banks;
• International capital markets;
• Multilateral/regional/sovereign financial institutions;
• Export credit agencies;
• Suppliers of equipment;
• Foreign equity holders;
• Overseas long term investors such as:
  • Prudentially regulated financial entities;
  • Pension funds;
  • Insurance companies;
  • Sovereign wealth funds; and
  • Financial institutions located in international financial services centres in India;
• Overseas branches/ subsidiaries of Indian banks are permitted to be lenders only for ECBs under Track I; and
• Overseas organisations and individuals are permitted to be lenders only for Indian denominated ECBs availed by microfinance institutions categorised as non-banking financial companies, not-for profit companies, societies, NGOs and co-operatives under Track III, subject to certain conditions.

Key Changes:

• Overseas long-term investors (i.e., prudentially regulated financial entities, pension funds, insurance companies, sovereign wealth funds and financial institutions located in international financial services centres in India) have been included as recognised lenders.
• The definition of ‘foreign equity holder’ has been simplified and it now means (a) a direct foreign equity holder with a minimum direct equity shareholding of 25% in the borrower (b) an indirect equity holder with a minimum indirect equity shareholding of 51% in the borrower or (c) a group company with a common overseas parent.