Although the ECB regulations have seen relaxations over the years, the ECB route continued to be subject to regulatory controls on maturity, pricing and end-use of funds which forced borrowers to explore alternative funding structures. The Amended Regulations provide significant opportunities for the leveraged finance market and offshore to onshore structures. Aside from offering a broader borrower and lender base, some key changes introduced by the new regulations include:
- allowing Indian borrowers to use ECB proceeds for the acquisition of listed and unlisted companies where control is being acquired;
- removing the all-in cost ceiling of benchmark rate + 500 basis points and allowing pricing to be driven by prevailing market conditions; and
- reducing the minimum average maturity period (MAM) for ECBs to three years, irrespective of the end-use (reduced from existing MAM which could extend up to ten years).
The RBI has removed all ECB-related provisions from the former ECB master directions, retaining only those concerning trade credits. No replacement master directions or circulars have been issued to date. Consequently, the Amended Regulations now constitute the complete regulatory framework for ECBs. Whether the RBI will subsequently publish a master direction or supplementary guidance, or whether the Amended Regulations will remain the sole governing instrument for ECBs, is yet to be determined.
Changes to India’s ECB framework
1. Borrowing costs
The cost of borrowing has now been linked to prevailing market conditions instead of an all-in cost. Similarly, prepayment charges or penal interest for breach of covenants are to be in line with prevailing market conditions. This is a significant liberalization over the previous ceiling of benchmark rate (such as SOFR) plus 500 basis points for foreign currency ECBs.
This relaxation opens new avenues allowing market participants to borrow and lend at a market-determined rate which was not available previously due to the existing all in cost-ceiling.
2. Maturity period
The MAM for ECBs is now proposed to be three years, irrespective of the end-use*, providing a simpler and market-aligned approach.
MAM requirements will not apply if:
- an ECB is being converted into a non-debt instrument under the Foreign Exchange Management Act, 1999;
- an ECB is being repaid from proceeding of issue of non-debt instruments (on a repatriation-basis) received after the drawdown of the ECB;
- an ECB is being refinanced;
- there is a waiver of the debt by an ECB lender; or
- an ECB is being repaid for undertaking a closure, merger, demerger, arrangement, acquisition of control, amalgamation, resolution, or liquidation by the lender or borrower.
*Companies in the manufacturing sector can avail an ECB of up to USD 150m with a MAM of one to three years.
These changes to the ECB Framework provide a much-needed relief as under the existing framework MAM could extend from three years up to ten years, often making ECBs untenable for offshore lenders.
Entities can now avail debt for working capital, general corporate purposes, and refinancing with only a three-year MAM. Further, MAM not being required for the events mentioned above is a welcome change and also provides a route for raising ECB as a bridge to foreign equity and will provide greater flexibility in structuring transactions.
3. End-use
One of the other key changes to the ECB framework is the further liberalization of the end-use. Most significantly, in contrast to the restrictions on use towards investment in capital markets and equity investments, ECBs can now be utilized to fund acquisitions where control is being acquired (provided the acquisition is for strategic purposes only, i.e. those driven by the core objective of creating long-term value rather than for short-term gains).
This opens new avenues to offshore lenders (including credit funds) to provide offshore debt to Indian borrowers to fund the acquisition of unlisted and listed entities.
Other relaxations to the end-use include:
- financing a broader spectrum of real-estate transactions (including the purchase of immovable properties, developing residential or commercial premises, building hotels, resorts, hospitals and roads, etc.); and
- repayment of INR loans if the end-use of the INR loans is consistent with the current ECB framework.
The end-use however, does not permit raising ECBs for the purpose of minority acquisitions or provide for the ability to fund incremental stakes.
4. Borrowing limit
The borrowing limit has been increased from an existing limit of USD750 million to the higher of (a) outstanding ECB of USD1 billion or (b) total outstanding borrowing (external and domestic) up to 300% of the net worth of the Indian entity. The net worth calculation is based on the last audited balance sheet.
The borrowing limits are not applicable to borrowers regulated by the financial sector. NBFC's, fintech companies and other entities regulated by the RBI or other financial sector regulators (such as the securities regulator and insurance regulator) can borrow uncapped amounts under the new framework.
5. Hedging
The existing ECB framework previously imposed detailed requirements for hedging foreign currency exposure. These requirements have now been removed, enabling borrowers to assess their hedging needs from a purely commercial perspective.
6. Security
The scope of assets over which security may be created has been broadened under the new framework. Third party security can be created even in the case of immovable and movable assets (and not just financial securities). Further, the requirement to obtain Authorized Dealer (AD) Bank permission for creation of security has been removed.
Any person outside India may now provide a guarantee for an ECB, provided that such guarantee complies with the FEMA Guarantees Regulations.
7. Some other changes
- Eligible lenders: Any non-resident person (including credit funds, non-bank lenders and entities registered in GIFT City), offshore branch of Indian banks or any financial institution (including branches) established in the International Financial Services Centre qualifies as a recognized lender and can lend an ECB.
- Eligible borrowers: Any person (other than an individual) in India established, incorporated, or registered under any Central or State Act can raise an ECB as long as it is permitted to borrow under applicable law. The earlier framework only permitted entities eligible to raise foreign direct investment (FDI) and certain other specified entities to raise an ECB.
- Currency: Currency of ECB may now be changed from one FCY to another FCY, an FCY to INR and INR to an FCY.
- Refinancing: The requirement that an ECB refinancing must be at a lower all-in-cost than the original ECB has been removed. This change will enable borrowers facing liquidity constraints to refinance an existing ECB with a new ECB at equivalent or higher rates. The average maturity of the refinancing ECB should be at least equal to the outstanding average maturity of the existing ECB (and can be less than the standard average maturity of 3 years).
- Conversion of ECB into non-debt instrument: An ECB (including those which is matured but unpaid) may be converted into a non-debt instrument, subject to compliance with the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 and subject to certain additional terms and conditions prescribed in the ECB framework.
Impact and opportunities
For lenders: The removal of pricing constraints means that a broader range of lenders, including credit funds, will now be able to utilize the ECB route. Pricing will instead be determined on a commercial basis, taking into account factors such as the borrower's profile, sector, credit rating, and other customary considerations.
For borrowers: The decision between domestic funding and ECBs will primarily depend on which option offers the most favorable commercial outcome for the borrower.
End-use: The ECB route will now be available for a significantly wider range of purposes, including acquisition financing. That said, for certain transactions—such as minority stake acquisitions—overseas lenders will still need to rely on the FPI route or offshore structures as the only viable options.
