RBI revisits ECB provisions for infra-sector

Background

The basic objective of the extant External Commercial Borrowings (ECB) policy is to supplement domestic capital for creation of capital assets in the country, limited by considerations for capital account management. The earlier ECB policy¹ had gone through thorough revamping during the month of November, 2015² (Framework, 2015) based on the recommendations made by the Sahoo Committee, under the chairmanship of M.S Sahoo, in February, 2015³. This framework brought in a host of changes in the ECB framework.

Salient features of Framework, 2015 are as under:-

1.		Inclusion of financial lease as a forms of borrowings
2.		Relaxing rules for NBFCs but restricting it to INR denominated borrowings
3.		Segmenting the Minimum Average Maturity (MAM) in three tracks - Track I, Track II, Track III
4.		A more liberal approach, with fewer restrictions on end uses, higher all-in-cost ceiling, etc. for long term foreign currency borrowings as the extended term makes repayments more sustainable and also minimizes roll-over risks for the borrower;
5.		A more liberal regime for INR denominated ECBs where the currency risk is borne by the lender;
6.		Expansion of the list of overseas lenders to include long-term lenders, such as, Insurance Companies, Pension Funds, Sovereign Wealth Funds;
7.		Only a small negative list of end-use restrictions applicable in case of long-term ECB ( Track II) and INR denominated ECB ( Track III);

But, some restrictive provisions of the Framework, 2015 were causing some bottle-necks in infusing external financials. Hence, considering the dire need of external funding sources, and to cater to the needs of the infrastructure sector, the extant ECB guidelines have been reviewed. The present amendment mainly seems to focus on the infrastructure sector amongst some more changes. The list of eligible borrowers in the Framework, 2015 seemed somewhat rigid and hence to overcome this issue the list has been enhanced by allowing more eligible borrowers. This move has been taken to allow more investments seep into the infrastructure sector. For better monitoring of the proceeds, the requirement of a new policy has also been inserted for Track-I borrowers.

The present amendment⁴ addresses some of the issues pertaining to Framework, 2015 which has been analyzed in this note. Also a comparative study has been made with regard to the changes brought.

1.1. Additional compliances for newly added sectors in track-I

1.

The following sectors added via the present amendment under Track-I are to have a board approved risk management policy:-

a.		Infrastructure Sector
b.		NBFC-IFC
c.		NBFC-AFC
d.		CICs
e.		Holding Companies

2.		Moreover, the designated AD-Category I bank has the onus to verify with the compliance of the 100% hedging requirements by the entities.
3.		The position is required to be communicated to RBI through ECB 2 return. This ensures further monitoring the proceeds as well as securing the fears of the lenders against any losses.

1.2. Infrastructure sector

1.		In the Framework, 2015, infrastructure sector companies were allowed to borrow only under Track II and Track-III, to borrow for all purposes except for real-estate activities, investing in the capital market, equity investment in domestic market, on-lending to a company carrying out any of the mentioned activities and purchase of land. This meant that borrowing benefits of Track-I were not available.
2.		The present amendment, extending the Framework, 2015, brings infrastructure activities under Track-I, meaning they may raise ECB with MAM of 5 years too. The proceeds of ECB raised under this track, can be used only for the permitted end-use allowed under Track-I. The MAM of 5 years on infrastructure sector for borrowing under Track-I, is a new requirement. The ECB under this route would be subject to 100% hedging. This would attract more investors, in turn fueling the infrastructure sector.