28 May 2014

RBI SIMPLIFIES THE PROCEDURE FOR ECB FROM FOREIGN EQUITY HOLDERS

Reserve Bank of India (RBI) though its recent circular has simplified the process under the  External Commercial Borrowings (ECB) guidelines and provided more flexibility to Indian companies for borrowing from its foreign equity holders (FEH). ECBs from direct FEH under the existing ECB guidelines may be acquired under either the automatic or the approval routes, as the circumstances may warrant. If the ECB was to be acquired for general corporate purposes, then it had to be considered under the approval route. Now, however, companies belonging to manufacturing, infrastructure, hotels, hospitals and software sectors may obtain ECBs for general corporate purposes (including working capital financing) from direct equity holders under the automatic route. It is pertinent to note that this does not extend to indirect equity holders. However, indirect FEH may extend ECB loans to companies belonging to the same sectors as mentioned above (i.e. manufacturing, infrastructure, hotels, hospitals and software sectors) for end-uses permitted as per RBI. This was not the case earlier, where companies had to undertake the approval route for ECBs from indirect FEH. Further, automatic route under the ECB guidelines has even been enlarged to incorporate procurement of ECBs from group companies and direct and indirect FEH for companies in miscellaneous services. For the purpose of clarity, RBI has notified companies which will fall within the meaning ‘miscellaneous service’ which includes ‘Companies engaged in training activities (but not educational institutes), research and development activities and companies supporting infrastructure sector. Companies doing trading business, companies providing logistics services, financial services and consultancy services are, however, not covered under the facility.’ Finally, any request for change of the ECB lender in case of FEH (direct or indirect) and group companies have also now been liberalized to fall within the automatic route. MHCO COMMENTS: This simplification in the ECB guidelines by RBI shall increase the foreign exchange in the Indian market and shall provide liquidity to the much required manufacturing, infrastructure, hotels, hospitals and software companies. (The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or contact@mhcolaw.com for any assistance.)