12 August 2019

LEGAL UPDATE | RBI RELAXES END-USE RESTRICTIONS IN ECB POLICY

 The Reserve Bank of India (RBI) on 30 July 2019 issued a circular rationalising the end-use restrictions in the External Commercial Borrowings (ECB) Policy. This move is expected to make capital available to corporates from the offshore market at cheaper rates than the onshore market. This update briefly summarises the changes made by the RBI Circular.

Eligible borrowers are now permitted to raise ECBs from recognised lenders, except foreign branches / overseas subsidiaries of Indian banks, for the following purposes:

·                     ECBs with a minimum average maturity of 10 (ten) years are permitted to be raised for working capital purposes and general corporate purposes. Non-Banking Financial Companies (NBFCs) are also allowed to borrow subject to the same maturity requirement for on-lending.

·                     ECBs with a minimum average maturity of 7 (seven) years can be availed for repayment of rupee loans borrowed in the domestic market for capital expenditure. NBFCs are also allowed to avail such loans for on-lending for the same purpose. For repayment of rupee loans availed domestically for purposes other than capital expenditure and for on-lending by NBFCs for the same purpose, the minimum average maturity of the ECB is required to be 10 (ten) years.

·                     Eligible corporate borrowers may avail ECB for repayment of rupee loans availed domestically for capital expenditure in manufacturing and infrastructure sector if classified as SMA-2 or NPA under any one time settlement with the lenders. Lender banks are also permitted to sell, through assignment, such loans to eligible ECB lenders provided the resultant ECB complies with all-in cost, minimum average maturity and other relevant norms of the ECB framework.

MHCO Comment: This move by the RBI brings much needed relief to corporates who are struggling to raise finance as banks tighten liquidity and NBFCs find credit hard to come by. Now corporates can raise capital from overseas markets for working capital requirements and general corporate purposes. Refinancing of rupee loans at cheaper rates from overseas markets has also been made possible. The most significant change is the permission granted to corporates to avail distress financing and for eligible banks to assign sub-standard loans to foreign lenders. This would certainly help improve the balance sheet of banks and bring relief to corporates who are under stress.

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 legalupdates@mhcolaw.comfor any assistance.