Liberalisation of ECB Policy

Dear All,

The RBI came out with liberalization in ECB policy with specific reference to Infrastructure sector.

Find below the gist of amendments.

Statute
External Commercial Borrowings (ECB)
Circular No & Date.
APDIR Circulars No.26, 27 & 28 dated Sept 26, 2011
Effective DateImmediate effect

Subject MatterLiberalization in ECB policy with specific reference to infrastructure sector.
Amendments
Using ECB proceeds for repayment of rupee loan:
As per existing provisions, the Company cannot utilize ECB proceeds for repayment of existing rupee loans. However, in rare cases the RBI gives specific approval on its own discretion for repayment of rupee loans. Sometimes back Companies in Tata Group got approval for repaying rupee loans.Considering the specific needs of the infrastructure sector, the existing ECB policy has been reviewed and it has been decided to allow Indian companies which are in the infrastructure sector, to utilise 25 per cent of the fresh ECB raised by the Company towards refinancing of the Rupee loan/s availed by it from the domestic banking system subject to the following conditions:
Ø The Company should obtain prior approval from RBI.
Ø At least 75 per cent of the fresh ECB proposed to be raised should be utilised for capital expenditure towards a 'new infrastructure' project(s).
Ø In respect of remaining 25 per cent, the refinance shall only be utilized for repayment of the Rupee loan availed of for 'capital expenditure' of earlier completed infrastructure project(s).
Ø The refinance shall be utilized only for the Rupee loans which are outstanding in the books of the financing bank concerned.
Ø The Company should make application to RBI through AD with supporting documents for prior approval.
For this purpose infrastructure sector means (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) (viii) mining, exploration and refining and (ix) 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.
Bridge finance for infrastructure sector
Now, infrastructure Companies can avail short term credit (including buyers’ / suppliers’ credit) in the nature of 'bridge finance (which is normally with less than 3 years maturity) for import of capital goods subject to the following terms and conditions;
Ø Prior approval from RBI for availing bridge finance.
Ø The bridge finance shall be replaced with a long term ECB.
Ø The long term ECB shall comply with all the extant ECB norms and
Ø Also prior approval from RBI at the time of replacing the bridge finance with a long term ECB
Structured obligations for infrastructure sector;
Many of you may be aware that as per existing ECB Policy, credit enhancement is permitted to be provided by multilateral / regional financial institutions and Government owned development financial institutions for domestic debt raised through issue of capital market instruments, such as, debentures and bonds, by Indian companies engaged exclusively in the development of infrastructure and by the Infrastructure Finance Companies (IFCs), which have been classified as such by the Reserve Bank under the approval route.
On a review, it has been decided to further liberalise the policy relating to structured obligations to permit direct foreign equity holder(s) (minimum holding of 25 per cent of the paid up capital) and indirect foreign equity holder, holding atleast 51% of the paid-up capital, to provide credit enhancement to Indian companies engaged exclusively in the development of infrastructure.
Credit enhancement by all eligible non-resident entities will henceforth be permitted under the automatic route and no prior approval will be required from the Reserve Bank of India.






Statute
External Commercial Borrowings (ECB)
Circular No & Date.
APDIR Circular No.29 dated Sept 26, 2011
Effective DateImmediate effect

Subject MatterClarification on computing debt equity ratio for obtaining ECB from a foreign shareholder
Amendments
As per the existing ECB policy, a non-resident shareholder is eligible to lend ECB to Indian Company as detailed below;
i. for ECB up to USD 5 million – minimum paid-up equity of 25 per cent held directly by the lender,
ii. for ECB more than USD 5 million – minimum paid-up equity of 25 per cent held directly by the lender and debt-equity ratio not exceeding 4:1 (i.e. the proposed ECB by the shareholder does not exceeds four times the direct foreign equity holding)
From above it is clear that in the case of ECB above USD 5 million, it should not exceed 4 times of his equity contribution in the Company. However, in practice some cases total debt of the Company is considered to find out debt equity ratio.
For sake of clarity, RBI vide APDIR Circular No.29 clarified that debt – equity ratio means 'ECB liability' - equity contribution by such shareholder.

I hope it will be useful to you.

If you have any clarification on the captioned, please let us know.

Thanks & Regards
CS.M.Alagar, B.Com.,ACS.,LLB.
Team Genicon
Genicon Business Solutions Pvt.Ltd
Mylapore, Chennai - 600 004
Tel:044-4208 8484
Mobile: 91-9003199947
email:alagar@geniconsolutions.com
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