RBI Notifies New Framework Policy for External Commercial Borrowings

[Nidhisha Garg is a 3rd year B.A., LL.B (Hons.) student at the National Law Institute University, Bhopal]

On 16 January 2019, the Reserve Bank of India (RBI) notified the new policy for External Commercial Borrowings (ECB). It seeks to revise the policy that was earlier in place by virtue of the Master Direction on External Commercial Borrowings dated 1 January 2016, as updated from time to time, and shall be implemented with immediate effect. The last revision that was made to the 2016 policy framework was on 22 November 2018.

Significant changes brought about by the new policy  

The major changes that have been brought about by the new policy are enumerated as under:

1. The four-tiered structure that was in place previously has been done away with after the merger of Track I with Track II ECBs (which dealt with Foreign Currency Denominated Bonds with a maturity of three to five years and ten years respectively) and that of Track III (Indian Rupee Denominated Bonds with an average maturity period of three to five years) with Rupee Denominated Bonds (more commonly known as Masala Bonds).

2. Now that Masala Bonds have been merged with Indian Rupee Denominated Bonds, the list of ‘Forms’ in which the ECB could be raised has been modified to include “plain-vanilla” bonds under the head of INR denominated ECB.

3. Under the previous policy, draw-down in respect of ECB as well as payment of charges/fees could occur only after obtaining the Loan Registration Number (LRN) from the RBI. Under the new policy, the phrase, “as well as payment of charges or fees in respect of ECB” is lacking and all it mentions is that draw-down in respect of the ECB should occur only after obtaining LRN from the Reserve Bank.

4. The definition of “all-in-cost” has undergone the following changes:

(i) The scope of all-in-cost has been expanded to include Export Credit Agency (ECA) charges within its purview, which was lacking under the previous policy framework.

(ii) From the negative part of the old definition, “pre-payment fees and charge” has been removed. This, however, does not of itself imply that pre-payment fees and charges have now been included under the definition of ‘all-in-cost’ because the Circular mentions elsewhere under the head, ‘Other Costs’ that the same shall be outside the purview of ‘all-in-cost’.

(iii) Whereas under the 2016 policy, in case of fixed rate loans, the swap cost plus spread was to be equivalent to the floating rate, under the new policy the only condition imposed is that swap cost plus spread cannot be more than the floating rate.

(iv) The clause that provided that penal interest for breach of covenant should not be more than 2% under the head, ‘All-in-cost requirement for the three tracks’ is missing under the new policy.

Despite these changes, the ceiling of 450 basis point on all-in-costs has, however, remained unchanged.

5. The list of eligible borrowers has been expanded in that all entities which are eligible for receiving Foreign Direct Investment (FDI) are now eligible for ECB. In addition, certain other commercial entities have been added by way of express mention. These are Post Trusts, Units in Special Economic Zones (SEZ), the Small Industries Development Bank of India and the Export Import Bank of India. Other than these, the scope of eligible borrowers has been further expanded to generally include all entities engaged in micro-finance activities like not for profit companies registered under Section 8 of the Companies Act, 2013, registered societies, trusts, co-operatives and non-government organizations.

6. Even the ambit of Recognized Lenders has been broadened immensely to include all countries which are FATF (Financial Action Task Force) and IOSCO (International Organization for Securities Commissions) compliant.

7. The Minimum Average Maturity Period (MAMP) has been fixed at three years barring two exceptions:

(i) Companies in the manufacturing sector who raise and amount of $ 50 Million or its equivalent per financial year may have a minimum maturity period of one year.

(ii) MAMP will be 5 years if the ECB is raised through a foreign equity holder and the proceeds thereof are utilized for working capital purposes, general corporate purposes, or repayment of rupee loans.

8. The Government has introduced the concept of Late Submission Fee (LSF) which was previously unknown to ECBs. As a general rule, draw down under ECB is permitted only after having obtained a LRN and receipt of any proceeds under the ECB prior to the attainment of LRN must be reported. Also, there is a mandatory requirement of monthly reporting of all transactions taking place under the ECB by filing of Form ECB 2. If there is a delay in the filing of the above-mentioned forms, the same can be regularized by furnishing the LSF, the amount of which has been settled based on the period of delay. Delays up to 30 calendar days, require payment of INR 5000. Further delay up to three years shall invite a LSF of INR 50,000 for each year and any delay beyond three years shall be accompanied with a penalty of INR 1,00,000 for every year. Contraventions in the nature of non-payment of LSF shall be governed by the Foreign Exchange Management Act, 1999 (FEMA) and the regulations formulated thereunder.

9. The individual limits on the amount that could be raised through ECB that existed under the 2016 framework based on the sector in which the borrower operated has been replaced by a common upper limit of $ 750 million under the automatic route.

10. Under the End-Uses list (purposes for which the proceeds under the ECB cannot be used), even though ‘Real Estate Activities’ is part of both the policies, an exemption was made for integrated townships and affordable housing projects under the old policy which is lacking under the 2019 policy.

11. The revised framework also contains a list under both the policies, a novel Standard Operating Procedure (SOP) for Authorized Dealer Category -1 Banks to be applied for untraceable entities.

12. Other than these substantial changes, the revised policy framework consists of certain other routine changes, for example, removal of redundant provisions (like the carve-out made for ECB by airline companies, low-cost affordable housing projects etc. if the ECB agreement was entered into before 1 March 2016, etc.) which were part of the previous framework.

Most of the other provisions relating to debt-equity ratio for ECB with foreign direct equity holders under the automatic route, security for ECB, parking of proceeds, ECB for oil marketing companies, ECB for start-ups, powers delegated to AD Category -1 banks to deal with ECB cases, etc. remain the same.

Implications of the 2019 Framework

A paradigm shift that has occurred with respect to Eligible Borrowers, Recognized Lenders and MAMP is that the track-wise segregation that existed under the previous policy is no longer relevant. Considering the fact that the above three factors are the most essential ingredients for an ECB, their shift to universality is indicative of the intention of the Government to ease out the ECB norms. Also, the expansion of the scope of ‘eligible borrowers’ is an appreciable step as it indicates the inclination of the Government to enable even those entities to receive ECB that are not commercial in the conventional sense in that their sole aim is not to earn profits. As far as merging of Track III ECBs with Rupee Denominated Bonds is concerned, the step is novel in the sense that Masala Bonds, which earlier had a separate set of regulations governing them, shall also now come within the purview of ECBs and shall also be governed accordingly.


Commentators have considered the policy to be salutary in respect of liberalization of the ECB regime. The change that they have welcomed the most is the fact that the ambit of eligible borrowers has been expanded to a considerable extent. The press release by the RBI on the matter terms the new policy as “instrument-neutral”. This is probably because of the fact that where, under the previous policy separate conditions, prescriptions and restrictions were enlisted for ECBs under all the three separate tracks, the current policy has sought to generalize many aspects by enshrining a common clause for both, foreign currency denominated, as well as, Indian Rupee denominated ECBs.

This is indeed the right time for a revised policy considering that, despite continuous efforts on the part of the Government to update norms for ECB, the previous policy was incompatible with the other recent changes that have been incorporated in India’s foreign investment policy in general. It was felt that substantial and categorical changes need to be incorporated in the existing policy if the same had to be in consonance with the other contemporaneous changes taking place in regulations governing various aspects of the economy.

Nidhisha Garg

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