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March 19, 2010 Liberalization of External Commercial Borrowing policy: Infrastructure sector The global financial crisis in 2008-09 has to a great extent rendered Indian firms’ access to External Commercial Borrowing (“ECB”) and trade credits very difficult. The net ECB inflow during April-September 2009 was US$ 0.7 billion, whereas during April-September 2008, the net ECB inflow was US $ 3.2 billion.1 Indian corporates involved in Infrastructure sector raised USD 10,158.30 million during 2007-08, as ECB. Taking into account the infrastructural needs of the country, the Reserve Bank of India (“RBI”) has brought in a series of changes to the existing policy governing ECB. In December, 2009 RBI permitted corporates to avail of ECB for the development of integrated townships, until December 31, 2010. Further, it also permitted on December 09, 2009, Non-Banking Financial Companies (“NBFC”) exclusively involve in financing infrastructure sector, to raise ECB from any eligible lender under the approval route.2 In January 2010, RBI relaxed the ECB policy with respect to payment for spectrum allocation in the telecommunication sector3 and also introduced Infrastructure NBFCs called Infrastructure Finance Companies, in February, 2010.4 Further, to provide a boost to Infrastructure sector and help Indian companies avail ECB, RBI has amended the existing ECB policy vide circulars RBI/2009-10/333 A.P. (DIR Series) Circular No.38 (“Circular 38”), RBI/2009-10/334 A.P. (DIR Series) Circular No.39 (“Circular 39”) and RBI/2009-10/335 A.P. (DIR Series) Circular No. 40 (“Circular 40”) all dated March 02, 2010. This hotline covers the changes brought about by way of the circulars abovementioned and the implications of the same. Expanding the definition of ‘Infrastructure sector’: Earlier (i.e. prior to Circular 38 coming into effect), the ECB policy permitted Indian corporates to raise ECB for investment into Infrastructure sector. For the purpose of raising ECB, Infrastructure sector was defined as (i) power, (ii) telecommunication, (iii) railways, (iv) roads including bridges, (v) sea port and airport, (vi) industrial parks, (vii) urban infrastructure (water supply, sanitation and sewage projects) and (viii) mining, exploration and refining. Recognizing the need to develop the storage facilities for agricultural produce and food products, the definition of Infrastructure has been amended to include ‘cold storage or cold room facility, including for farm level pre-cooling, for preservation or storage of agricultural and allied produce, marine products and meat’.5 Infrastructure Finance Companies and ECB: The ECB policy permits NBFCs involved exclusively in infrastructure sector to borrow from any eligible overseas lender under the approval route. However, the borrowing NBFC must comply with the prudential standards applicable and also fully hedge the currency risk with respect to the funds borrowed.6 Recently, RBI has introduced a new category of NBFC i.e. IFC7 in order to provide necessary impetus to infrastructure sector.8 Taking it a step further, RBI vide Circular 39, has permitted IFCs to raise ECB for on-lending to Infrastructure sector under the approval route subject to: 9 1. Satisfying all the norms applicable to IFC;10 2. Hedging of the currency risk in full; and 3. The total outstanding ECBs including the proposed ECB not exceeding 50 percent of the owned funds of the IFC. Structured obligations and ECB: The current ECB policy enables corporates to raise resources domestically and hedge exchange rate risk. Domestic Rupee denominated structured obligations are permitted to be credit enhanced by international banks/international financial institutions/joint venture partners under the approval route.11 RBI has laid down a comprehensive policy on credit enhancement with respect to domestic debt vide Circular 40. Credit enhancement is a process in which a business entity would require a collateralized instrument (such as guarantee), insurance, or other agreements to provide a potential lending institution some reassurance that they would be compensated if a borrowing entity defaulted. Credit enhancement devices, in a nutshell, are mechanisms to improve the creditor's risk of non-collection in whole or in part12 and also increase the credit worthiness of the borrower. Circular 40 permits credit enhancement by eligible non-resident entities with respect to domestic debt raised through issue of capital market instruments such as debentures and bonds. This facility of credit enhancement is available only to Indian companies engaged exclusively in the development of infrastructure and to IFCs. The IFCs and Indian companies engaged exclusively in the development of infrastructure can avail the facility of credit enhancement subject certain conditions13, such as credit enhancement will be permitted to be provided by multilateral / regional financial institutions and Government owned development financial institutions only, the underlying debt instrument should have a minimum average maturity of 7 years, restriction on prepayment and call/put options, guarantee fee and other costs are restricted to a maximum of 2% of the principal amount etc. Implications: The liberalized ECB policy definitely facilitates a focus on infrastructure. Further, it provides a tremendous opportunity for the development of agricultural sector with the inclusion of “cold storage or cold room facility, including for farm level pre-cooling, for preservation or storage of agricultural and allied produce, marine products and meat” in the ‘Infrastructure sector’. In light of the global downturn, ECBs raised for the development of Infrastructure sector reduced to half in 2008-09 when compared to the ECB raised during 2007-08. The liberalization above mentioned may provide some respite to the Infrastructure sector. Also, the introduction of comprehensive credit enhancement policy for the domestic loans availed by issue of capital market instruments, such as bonds and debentures would provide necessary impetus to the ailing Infrastructure sector. This would permit eligible non-resident entities to provide guarantee on behalf of Indian companies against the funds raised by them through issue of capital market instruments such as bonds and debentures. The credit enhancement provided by non-resident entities will increase the creditworthiness of the Indian companies, as it increases the credit rating of the bonds and debentures to be issued, thus making it easy for Indian companies to raise debt domestically. ______________________ 1 Para 6.34, Chapter 6, Energy, Infrastructure and Communications, Economic Survey of India 2009-2010, available at http://indiabudget.nic.in/, last visited March 07, 2010, at 11:10 am. 2 For further details, please refer to our earlier hotline “External Commercial Borrowing Policy Amended” dated December 16, 2009 available at http://www.nishithdesai.com/New_Hotline/CorpSec/CORPSEC%20HOTLINE_Dec1709.htm 3 Please refer to RBI circular, RBI/2009-10/292 A.P. (DIR Series) Circular No. 28 dated January 25, 2010. 4 For further details on IFCs, please refer to out earlier hotline “Infrastructure NBFCs – A new chapter written by the RBI” dated February 20, 2010. 5 Please refer to Para 3, Circular 38. 6 Please refer to RBI Circular RBI/2009-10/252 A.P. (DIR Series) Circular No.19, dated December 9, 2009 and for further analysis please refer to our earlier hotline “External Commercial Borrowing Policy Amended” dated December 17, 2009. 7 For further details on IFCs, please refer to out earlier hotline “Infrastructure NBFCs – A new chapter written by the RBI” dated February 20, 2010. 8 id. 9 Para 3, Circular 39. 10 id. 11 Please refer to Master Circular on External Commercial Borrowings and Trade Credits, RBI/2009-10/27 Master Circular No. 07/2009-10, dated July 1, 2009. 12 Neil B. Cohen, “New Developments in the Law of Credit Enhancement: Domestic and International Credit Enhancement in Domestic Transactions: Conceptualizing the Devices and Reinventing the Law”, Brooklyn Journal of International Law, 22 Brook. J. Int'l L. 21, 1996, available at www.westlaw.com, last visited March 10, 2010 at 11:15 am. 13 Para 4, Circular 40.
- P. Basava Rao & Kishore Joshi
You may direct your comments to Ramya Krishnan-AniL +91 900465 0363 |
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