New ECB norms allow foreign insurers, funds to finance cos

MUMBAI: In a move that will improve availability of cross-border funds for Indian businesses, the Reserve Bank of India (RBI) has revamped norms for external commercial borrowings (ECBs). The new norms allow long-term offshore lenders such as insurance companies, pension and sovereign wealth funds to lend to Indian companies. Under the new norms, it has also become easier to raise rupee-denominated foreign debt where the currency risk is borne by the investor.
In a circular issued on Monday, the RBI said that the norms have a more liberal approach, with fewer restrictions on end uses, higher cost ceilings and a very small negative list of end-use restrictions. Besides improving liquidity for Indian corporates, a liberal ECB policy is expected to ease pressure on the currency by encouraging flow of foreign funds.
The new framework introduces a three-track system under which external borrowings will be categorized. Track I comprises medium-term foreign currency-denominated ECBs with a minimum average maturity of 3-5 years. Track II comprises of long-term foreign currency-denominated ECB with maturity of 10 years. The third category is for rupee-denominated external debt with a minimum maturity ranging between three to five years.
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While the RBI will be more liberal in allowing long-term borrowing and rupee-denominated debt (under track II and track III), loans under these categories have to be raised without the support of the branches of Indian banks overseas.
"The primary responsibility for ensuring that the ECB is in compliance with the applicable guidelines is that of the borrower concerned. Any contravention of the applicable provisions of ECB guidelines will invite penal action under the Foreign Exchange Management Act 1999 (FEMA). The designated AD Cat I bank is also expected to ensure compliance with applicable ECB guidelines by their constituents," the RBI said in the circular.
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Airline companies and those providing affordable housing will have until March 2016 to raise funds under the sub-limits for these sectors under the earlier ECB framework. The move comes ahead of an expected interest rate hike by the US Federal Reserve this month. An interest rate hike will cause funds to move out of emerging markets into US treasuries.
While RBI has addressed the operational issues with respect to the borrowings, the government is expected to come out with measures to address some of the tax issues that hamper foreign lenders.