Changes to ECB Policy

The Reserve Bank of India (RBI) last week announced changes to the policy governing external commercial borrowings (ECBs). This represents a reversal on two counts:

1. The all-in-cost ceilings, which were withdrawn about a year ago, have been reintroduced “in view of the improvement in the credit market conditions and narrowing credit spreads in the international markets”.

2. The buyback facility for foreign currency convertible bonds (FCCBs), which was allowed over the last few months, has now been withdrawn “keeping in view the prevailing macroeconomic conditions and global developments, especially the improvements in the stock prices”. Readers will recollect that the buyback facility was earlier introduced because FCCBs went under water due to the global financial crisis, which made conversion of these instruments into underlying shares an unattractive option, thereby requiring RBI to allow companies to buyback the debts from the investors.

Both these changes would become effective January 1, 2010.

(UPDATE – December 22, 2009: It has been reported that several companies are in the process of buying back their FCCBs before the prohibition comes into force at the end of this month)

Other changes introduced in this round are as follows:

1. Companies engaged in the development of integrated townships may avail of ECBs under the approval route until a further period of one year, i.e. December 31, 2010.

2. Non-banking finance companies (NBFCs) exclusively involved in financing infrastructure projects may avail of ECB “from the recognized lender category including international banks under the approval route, subject to complying with the prudential standards prescribed by the Reserve Bank and the borrowing entities fully hedging their currency risk”.

3. Eligible borrowers in the telecommunication sector can avail of ECBs for purpose of payment for spectrum allocation.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.


  • There would be no immediate benefit due to the global financial market conditions. However, this offers an additional avenue for SEZ developers to get funding requirement at a lower cost, a senior Unitech offical said. Currently, Unitech has five IT-SEZs in the country. The Government on Tuesday modified its external commercial borrowing (ECB) policy to allow SEZ developers to avail ECBs for providing infrastructure facilities within the SEZ. The SEZ developers can avail themselves of ECBs only under the approval route, according to a Finance Ministry release. However, ECBs will not be permissible for development of integrated township and commercial real estate within the Special Economic Zones (SEZs).

  • Even with the tightening of the global credit markets, small and mid cap Indian corporates will find it very challenging to raise money in the overseas capital markets as credit stability and transparency is the major concern of international investors/banks. Sovereign Indian credit rating is BBB-. This implies that majority of Indian corporates would be rated as high yield (BB – CCC). Average global high yield spreads are 500bps+. Thus the small and mid cap corporates would either need to borrow on a secured basis or borrow domestically.

    Even with new sectors (such as SEZ development) being allowed to borrow, the all in cost ceiling restrictions will reduce access to ECBs in general.

  • You may also want to talk about the amendment in the ECB policy dated February 09, 2010 which delegates further powers to AD category-I banks in connection with requests of the borrowers to RBI for changes in the terms and conditions, such as, drawdown / repayment schedules, currency of borrowing and changes in designated AD bank, name of the borrowing company, etc.

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