RBI Liberalises ECB Norms for NBFCs, Housing Finance, and Prepayment

RBI/2005-06/87 A.P. (DIR Series) Circular No. 5 August 1, 2005 To All banks authorised to deal in foreign exchange Madam/Sirs, External Commercial Borrowings (ECB) Attention of Authorised Dealers is invited to the A.P. (DIR Series) Circular No.40 dated April 25, 2005 and A.P. (DIR Series) Circular No.60 dated January 31, 2004 in connection with External Commercial Borrowings (ECB). A review of the ECB guidelines has been undertaken keeping in view the current macroeconomic situation, the experience gained so far by the Reserve Bank in administering the ECB policy and requests received from certain sectors. 2. Accordingly, it has been decided to liberalise/modify the ECB policy as indicated below: i) ECB with minimum average maturity of 5 years by non-banking financial companies (NBFCs) from multilateral financial institutions, reputable regional financial institutions, official export credit agencies and international banks to finance import of infrastructure equipment for leasing to infrastructure projects would be considered by the Reserve Bank under the Approval Route; ii) Foreign Currency Convertible Bonds (FCCB) by housing finance companies satisfying specific criteria would be considered by the Reserve Bank under the Approval Route; iii) Minimum holding of equity by the foreign equity holder in the borrower’s company (which would qualify the foreign equity holder as a recognised lender for ECB) has been clarified; iv) Prepayment of ECB up to USD 200 million (as against the existing limit up to USD 100 million) may be allowed by Authorised Dealers without prior approval of RBI subject to compliance of applicable minimum average maturity period for the loan. Pre-payment of ECB for amounts exceeding USD 200 million would be considered by the Reserve Bank under the Approval Route. v) Currently, domestic rupee denominated structured obligations are permitted by the Government of India to be credit enhanced by international banks/international financial institutions/joint venture partners. Such applications would henceforth be considered by the Reserve Bank under the Approval Route. 3. The amended ECB policy will come into force with immediate effect and is subject to review. 4. Comprehensive and revised ECB guidelines are set out in the Annex to this circular. 5. Necessary amendments to the Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000 dated May 3, 2000 are being issued separately. 6. Authorised Dealer banks may bring the contents of this circular to the notice of their constituents and customers. 7. The direction contained in this circular has been issued under sections 10(4) and 11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999) and is without prejudice to permissions / approvals, if any, required under any other law. Yours faithfully, ( Vinay Baijal ) Chief General Manager Annex toA.P. (DIR Series) Circular No. 5 dated August 1, 2005 External Commercial Borrowings (ECB) 1. ECB refer to commercial loans [in the form of bank loans, buyers’ credit, suppliers’ credit, securitised instruments (e.g. floating rate notes and fixed rate bonds)] availed from non-resident lenders with minimum average maturity of 3 years. ECB can be accessed under two routes, viz., (i) Automatic Route outlined in paragraph 1(A) and (ii) Approval Route indicated in paragraph 1(B). (A) AUTOMATIC ROUTE Under the extant policy, ECB for investment in real sector -industrial sector, especially infrastructure sector-in India, are under Automatic Route, i.e. do not require RBI/Government approval. In case of doubt as regards eligibility to access Automatic Route, applicants may take recourse to the Approval Route. i. Eligible borrowers (a) Corporates registered under the Companies Act except financial intermediaries (such as banks, financial institutions (FIs), housing finance companies and NBFCs) are eligible. Individuals, Trusts and Non-Profit making Organisations are not eligible to raise ECB. (b) Non-Government Organisations (NGOs) engaged in micro finance activities are eligible to avail ECB. Such NGO (i) should have a satisfactory borrowing relationship for at least 3 years with a scheduled commercial bank authorised to deal in foreign exchange and (ii) would require a certificate of due diligence on `fit and proper’ status of the board/committee of management of the borrowing entity from the designated Authorised Dealer (AD). ii. Recognised Lenders (a) Borrowers can raise ECB from internationally recognised sources such as (i) international banks, (ii) international capital markets, (iii) multilateral financial institutions (such as IFC, ADB, CDC etc.,), (iv) export credit agencies, (v) suppliers of equipment, (vi) foreign collaborators and (vii) foreign equity holders. Furthermore, overseas organisations and individuals complying with following safeguards may provide ECB to NGOs engaged in micro finance activities. (b) Overseas organisations planning to extend ECB would have to furnish a certificate of due diligence from an overseas bank which in turn is subject to regulation of host-country regulator and adheres to Financial Action Task Force (FATF) guidelines to the designated AD. The certificate of due diligence should comprise the following (i) that the lender maintains an account with the bank for at least a period of two years, (ii) that the lending entity is organised as per the local law and held in good esteem by the business/local community and (iii) that there is no criminal action pending against it. (c) Individual Lender has to obtain a certificate of due diligence from an overseas bank indicating that the lender maintains an account with the bank for at least a period of two years. Other evidence /documents such as audited statement of account and income tax return which the overseas lender may furnish need to be certified and forwarded by the overseas bank. Individual lenders from countries wherein banks are not required to adhere to Know Your Customer (KYC) guidelines are not permitted to extend ECB. (d) The key operative part in the credential of the overseas lender is that ECB should be availed from an internationally recognised source and one of the recognized categories is 'foreign equity holder' as indicated above. It is clarified that for a 'foreign equity holder' to be eligible as 'recognized lender' under the automatic route would require minimum holding of equity in the borrower’s company as under: (d. i) ECB up to USD 5 million – minimum equity of 25 per cent held directly by the lender, (d. ii) ECB more than USD 5 million – minimum equity of 25 per cent held directly by the lender and debt-equity ratio not exceeding 4:1(i.e. the proposed ECB not exceeding four times the direct foreign equity holding). iii. Amount and Maturity a) ECB up to USD 20 million or equivalent with minimum average maturity of three years b) ECB above USD 20 million and up to USD 500 million or equivalent with minimum average maturity of five years c) The maximum amount of ECB which can be raised by a corporate is USD 500 million during a financial year. d) NGOs engaged in micro finance activities can raise ECB up to USD 5 million during a financial year. e) ECB up to USD 20 million can have call/put option provided the minimum average maturity of 3 years is complied before exercising call/put option. iv. All-in-cost ceilings All-in-cost includes rate of interest, other fees and expenses in foreign currency except commitment fee, pre-payment fee, and fees payable in Indian Rupees. Moreover, the payment of withholding tax in Indian Rupees is excluded for calculating the all-in-cost. The all-in-cost ceilings for ECB are indicated from time to time. The following ceilings are valid till reviewed. Average Maturity Period

Reproduced for reference with acknowledgment — Source: Reserve Bank of India · RBI/2005-06/87 · issued 01 Aug 2005. The plain-English explanation above is BankPulse’s own independent summary.

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