External Commercial Borrowings Policy Revised framework

Transcription

1 KPMG FLASH NEWS 4 December 2015 KPMG in India External Commercial Borrowings Policy Revised framework Background The Reserve Bank of India (RBI) has revised the framework for overseas borrowing. The framework has been amended over the years to keep pace with the changing regulatory and commercial landscape. The revised framework, released vide RBI circular 1 dated 30 November 2015 (Revised Framework), bifurcates External Commercial Borrowings (ECB) based on foreign currency (FCY) risk profile of each type of ECB i.e. short term ECB, long term ECB and ECB denominated in Indian Rupee (INR) into Track I, and I. The revised framework also liberalises end-use restrictions and expands the list of overseas lenders, and more interestingly has brought most ECBs under the automatic route. Key parameters of the revised framework Track I Forms of ECB I i. Bank loans ii. Securitised instruments (e.g. floating rate notes and fixed rate bonds, non-convertible, optionally convertible or partially convertible preference shares/debentures) iii. Buyers credit iv. Suppliers credit v. Foreign Currency Convertible Bonds (FCCBs) vi. Financial lease; and vii. Foreign Currency Exchangeable Bonds (FCEBs) [only under approval route] Minimum average maturity ECB up to USD50 million: Three years ECB beyond USD50 million : Five years 10 years Same as under Track I. 1 A.P. (DIR Series) Circular No.32

2 Track I I Eligible borrowers Companies in: - manufacturing - software development sectors - shipping and airlines companies Small Industries Development Bank of India (SIDBI) Units in Special Economic Zones (SEZs) Export import bank of India (Exim Bank) (only under approval route). Track I companies Plus Companies in the infrastructure sector (as per Harmonised list of Government of India 2 ) Holding companies Core Investment Companies (CICs). Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) registered with Securities and Exchange Board of India (SEBI). companies Plus Non-Banking Financial Companies (NBFCs). Specified entities engaged in micro finance activities Companies engaged in miscellaneous services viz. - research and development (R&D) - training (other than educational institutes) - companies supporting infrastructure - logistics services Special Economic Zones (SEZs)/National Manufacturing and Investment Zones (NMIZs) developers Financial leases are now explicitly covered as a form of ECB Infrastructure companies and CIC/holding Companies to now mandatorily comply with minimum average maturity of 10 years Allowing REITs and InvITs to raise long term ECB (Track I and ) is a positive step and would help the cash starved construction sector in India LLPs still kept out of the list of eligible borrowers Recognised lenders International banks International capital markets Multilateral financial institutions/regional financial institutions and government owned 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 - Financial institutions All entities listed under Track I but for overseas branches/subsidiaries of Indian banks. All entities listed under Track I but for overseas branches/subsidiaries of Indian banks In case of NBFCs-MFIs, other eligible MFIs, not for profit companies and NGOs, ECB can also be availed from overseas organisations and individuals satisfying prescribed conditions. 2 Notification F. No. 13/06/2009-INF dated 27 March 2012

3 Track I located in International Financial Services Centres in India Overseas branches/subsidiaries of Indian banks I Overseas long-term investors constitutes a new category of lenders No changes in definition and conditions laid down for borrowing from foreign equity holders All in cost ceiling Minimum average maturity of three to five years: 300 bps per annum over six months LIBOR Average maturity period of more than five years: 450 bps per annum over six months LIBOR. The maximum spread over the benchmark will be 500 bps per annum. Remaining conditions will be as given under Track I. The all-in-cost should be in line with the market conditions Penal interest: Up to two per cent over and above the contracted rate of interest Spread of 500 bps over benchmark for long term ECB retained for more than five year ECB as per extant ECB policy. Spread reduced (compared to extant ECB policy) by 50 bps in case of ECB with average maturity of three to five years and more than five years All in cost ceiling includes guarantee fees, whether paid in FCY or INR Permitted end uses Capital expenditure in the form of: - Import of capital goods - Local sourcing of capital goods - New project - Modernisation/expansi on of existing units - Overseas direct investment - Acquisition of shares of public sector undertakings at any stage of disinvestment - Refinancing of existing trade credit raised for import of capital goods - Payment of capital goods already shipped/imported but unpaid - Refinancing of existing All purposes excluding: - Real estate activities - Investing in capital market - Using the proceeds for equity investment domestically - On-lending to other entities with any of the above objectives - Purchase of land. Holding companies can also use ECB proceeds for providing loans to their infrastructure SPVs. NBFCs: - On-lending to the infrastructure sector - Providing hypothecated loans to domestic entities for acquisition of capital goods/equipments - Providing capital goods/equipment to domestic entities by way of lease and hirepurchases Developers of SEZs/NMIZs: Providing infrastructure facilities within SEZ/NMIZ Micro finance entities: On-lending to self-help groups or for micro-credit or for bonafide micro finance activity including capacity building. All purposes excluding the following: - Real estate activities - Investing in capital market - Using the proceeds for equity

4 Track I ECB provided the residual maturity is not reduced. SIDBI can raise ECB only for the purpose of on lending to the borrowers MSME sector Units of SEZs can raise ECB only for their own requirements Shipping and airlines companies for import of vessels and aircrafts respectively General corporate purpose (including working capital) provided ECB is raised from direct/indirect equity holder or group company for minimum average maturity of five years. Approval route: i. Import of second hand goods ii. On-lending by exim bank I investment domestically - On-lending to other entities with any of the above objectives - Purchase of land. Minimum average maturity for general corporate purpose reduced from seven years to five years. This is a welcome step since most of the ECB under this route was to fund short term working capital requirement. Broad banding of end-uses under Track I Eligible borrowers permitted to raise ECB under I for all purposes, excluding a specific list of exclusions NBFCs and micro finance entities falling under I ECB route subject to end-use conditions SEZ and NMIZ developers can raise ECB under I for development of infrastructure in their respective zones. Other key conditions Individual limits Sector Route Automatic Approval Infrastructure and manufacturing Upto USD750 million USD750 million and above Software development sector Upto USD200 million USD200 million and above Micro finance activities Upto USD100 million USD100 million and above

5 Others Upto USD500 million USD500 million and above Above-mentioned limits are separate from the limits allowed under the framework for issuance of rupee denominated bonds overseas For computation of individual limits under I, exchange rate prevailing on the date of agreement should be taken into account. Currency of borrowing Change of currency of ECB into INR can be at the exchange rate prevailing on the date of the agreement between the parties concerned for such change or at an exchange rate which is less than the rate prevailing on the date of agreement if consented to by the ECB lender. ECB can be taken in any currency, however, conversion from INR to foreign currency is not permitted. Hedging requirements The entities raising ECB under the provisions of tracks I and II are required to follow the guidelines issued, if any, by the concerned sectoral or prudential regulator. Security for raising ECB Creation of charge on immovable assets (movable assets, financial securities and issue of corporate and/or personal guarantees in favour of overseas lender/security trustee, to secure the ECB to be raised/raised by the borrower) permissible subject to: Underlying ECB is in compliance with the extant ECB guidelines Existence of a security clause in the loan agreement No objection certificate from existing domestic lenders, as applicable. Issuance of guarantee, etc. by Indian banks and financial institutions Issuance of guarantee, standby letter of credit, letter of undertaking or letter of comfort by Indian banks, All India financial institutions and NBFCs relating to ECB is not permitted Financial intermediaries shall not be permitted to invest in FCCBs. Debt equity ratio The borrowing entities will be governed by the leverage ratio prescribed, if any, by the sectorial or prudential regulator concerned Explicit thin capitalisation norms not provided under the revised ECB framework. ECB liability: Equity ratio Liability to equity ratio under the extant ECB framework has been retained for raising ECB from direct/indirect equity holder. Parking of ECB proceeds

6 ECB proceeds, pending utilisation, meant for FCY expenditure can be retained in specified securities ECB proceeds for INR expenditure can be parked with AD Category I banks for a period of 12 months (earlier 6 months). Conversion of ECB into equity Conversion of ECB into equity permitted subject to FDI Policy guidelines and as per extant ECB Guidelines. Prepayment of ECB Prepayment of ECB may be allowed by AD Cat I banks subject to compliance with the stipulated minimum average maturity. Way Forward The revised framework would come into effect once it is published in the Official Gazette of Foreign Exchange Management (Borrowing or lending in foreign exchange) Regulations, Entities raising ECB under the extant framework can raise the said loans by 31 March 2016, provided the agreement in respect of the loan is already signed by the date the new framework comes into effect. The revised framework will be reviewed after one year, based on experience and the evolving macro-economic situation. In the following cases, ECB can be raised under the existing framework subject to signing of the loan agreement and obtaining LRN by 31 March 2016: ECB for working capital by airline companies ECB for consistent foreign exchange earners under the USD10 billion scheme ECB for low cost housing projects.

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