EY Regulatory Alert. Executive summary. ECB Policy- revised framework. 04 December 2015

Transcription

1 04 December 2015 EY Regulatory Alert ECB Policy- revised framework Executive summary Regulatory Alerts cover significant regulatory news, developments and changes in legislation that affect Indian businesses. They act as technical summaries to keep you on top of the latest regulatory issues. For more information, please contact your EY advisor. This Regulatory Alert summarizes the revised External Commercial Borrowing (ECB) framework announced by the Reserve Bank of India (RBI) vide A.P. (DIR Series) Circular No. 32 dated 30 November The new ECB framework will come into force from the date of publication, in the Official Gazette, of the concerned Regulations under Foreign Exchange Management Act, 1999 (FEMA). The key features of the revised ECB framework issued through the said circular are discussed in this alert.

2 Background In view of the macro-economic developments and the experience gained in administering ECBs regime over the last 10 years, the Reserve Bank of India (RBI), in consultation with the Government of India and after considering the responses received from public, has reviewed the extant ECB Policy. Accordingly, RBI has issued a Circular on 30 November 2015 revising the ECB framework in order to calibrate it to the financing needs of the Indian entities. The guidelines would be reviewed by RBI after one year based on the experience and evolving macro-economic situation. This alert highlights and summarizes the key changes and in the ECB policy. Applicability ECB facility for low cost affordable housing projects (low cost affordable housing projects as defined in the extant Foreign Direct Investment policy). Key changes and amendments in ECB framework The ECB framework has been revised and will now consist of the following three tracks of ECBs bifurcated according to the Minimum Average Maturity (MAM) and currency involved in borrowing: Track I Medium term foreign currency denominated ECB with MAM of 3 years or more for ECBs upto USD 50 million or its equivalent and of 5 years or more for ECBs beyond USD 50 million or its equivalent. RBI has issued the operational guidelines for the revised ECB framework which will come into force with effect from the date of publication of the relative Regulation framed under FEMA, 1999 in the official gazette, hereby suppressing / replacing all the extant ECB provisions as contained in the Master Circular on ECB and trade credits dated 01 July A transitional period upto 31 March 2016 has been allowed to ECBs contracted till commencement of the revised framework. Further, in respect of following special carve-out schemes, borrowers must sign the loan agreement and obtain Loan Registration Number ( LRN ) before 31 March 2016 from RBI: ECB facility for working capital by airlines companies; ECB facility for consistent foreign exchange earners under the USD 10 billion Scheme; and Track II Long term foreign currency denominated ECB with MAM of 10 years or more irrespective of the amount. Track III 1 Indian Rupee denominated ECB with MAM of 3 years or more for ECBs upto USD 50 million or its equivalent and of 5 years or more for ECBs beyond USD 50 million or its equivalent. Companies engaged in miscellaneous services, Non-Banking Financial Institutions (NBFCs), Developers of Special Economic Zones (SEZ) / National Manufacturing and Investment Zones (NMIZs), Not for Profit companies, NGOs, etc. can now only avail Indian Rupee denominated ECBs. 1 Guidelines on issue of INR denominated bonds vide A.P. (DIR Series) Circular No. 17 dated 29 September 2015 are separate and will continue to be in force.

3 Prepayment of ECBs, irrespective of the sum involved, eliminating the limit of USD 500 million, may be permitted by AD banks in India subject to compliance with the stipulated MAM as applicable to the contracted loan. The key changes under various parameters for ECB are as under: Minimum Average Maturity (MAM) Period: An additional category of MAM of 10 years or more irrespective of the amount of ECB has been introduced. Eligible Borrowers: The eligible borrowers for ECB have also been categorised track-wise. Shipping companies, Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) and companies providing logistics services have now been included as an eligible borrower. Alignment of the list of Infrastructure entities eligible for ECB with the Harmonized list of the Government of India, which also includes hotels (with project cost of more than INR 200 crores each) and hospitals (includes medical colleges, para medical training institutes and diagnostic centres) as eligible borrowers. Recognised lenders / investors: Indian Banks and their overseas branches / subsidiaries will not be recognised as lenders to avail ECBs under Track II and III categories. The list of recognised lenders has been expanded to include long term lenders like prudentially regulated financial entities, Sovereign Wealth Funds, Pension Funds, Insurance companies and financial institutions located in International Financial Services Centres in India. All-in-Cost ceilings Track I: For ECB with MAM of 3 to 5 years the spread over the applicable benchmark has been reduced to 300 from 350 basis points. For ECB with average maturity period of more than 5 years the spread over the applicable benchmark has been reduced to 450 from 500 basis points. Track II: Maximum spread over the bench mark will be 500 basis points per annum. Track III: All in cost should be commensurate with prevailing market conditions. Permitted End-uses Track I: ECBs for general corporate purposes (including working capital) can now also be availed from direct equity holder (25%)/ indirect equity holder (minimum 51%) or from a group company (having common overseas parent) for a MAM of 5 years. Further, the other conditions have been diluted. Shipping and Airline companies can raise ECBs only for import of vessels and aircraft, respectively ECBs will now also be permitted for import of second hand goods (as per DGFT guidelines) under the approval route. Track II & III The ECB proceeds can be used for all purposes (including general corporate

4 purposes and repayment of rupee loans) except for real estate activities, investing in capital market, domestic equity investment, on-lending to other entities with any of the above objectives and purchase of land. Individual limits of ECBs Under Automatic route: While limits remain unchanged for companies in infrastructure and manufacturing sector (upto USD 750 million or its equivalent) and companies in software sector (upto USD 200 million or its equivalent), the limit for all other remaining eligible borrowers (except entities engaged in micro-finance activities) can avail ECBs upto USD 500 million or its equivalent. Companies in micro-finance activities can avail ECBs upto USD 100 million or its equivalent. Under Approval route: ECBs beyond the above limits can be availed under the approval route. The limit of ECB allowed (up to USD USD 750 million) under the framework for issuance of Rupee denominated bonds shall continue separately. Other key changes: ECB borrowers are allowed to park ECB proceeds in term deposits with AD Category I banks in India for a maximum period of twelve months increasing the existing period of six months. well as to INR is freely permitted. However, change of currency from INR to any foreign currency is not permitted. ECB by entities under Joint Lender Forum (JLF) or Corporate Debt Restructuring (CDR) are permitted under approval route (explicit permission of JLF/CDR Empowered Committee). In addition to the above, RBI has maintained the stipulations in respect of other parameters of ECB like hedging, security for raising ECBs, temporary parking of ECB proceeds, conversion of ECB into equity, reporting requirements, powers delegated to AD banks, etc. Comments These revised guidelines on ECB have been announced by RBI in order to attract overseas flow of funds with fewer end-use restrictions. RBI has promoted long term foreign currency borrowings to make repayments more sustainable minimizing roll-over risks for the borrower. One of the major advantages is given to Indian entities availing ECB through INR denominated bonds, where the currency risk is borne by the lender. While the broader intention appears to be to simplify the overseas borrowings, RBI has actually cut the cost at which shortterm overseas borrowings can be raised, suggesting that it only wants higher quality issuers to go to the foreign market. Change of currency of ECB from one convertible foreign currency to any other convertible foreign currency as

5 Our offices Ahmedabad 2nd floor, Shivalik Ishaan Near. C.N Vidhyalaya Ambawadi, Ahmedabad Tel: Fax: Bengaluru 6th, 12th & 13th floor U B City Canberra Block No.24, Vittal Mallya Road Bengaluru Tel: Fax: Prestige Emerald, No. 4, 1st Floor, Madras Bank Road, Lavelle Road Junction, Bangalore Chandigarh 1st Floor SCO: Sectr 9-C, Madhya Marg Chandigarh Tel: Fax: Chennai Tidel Park, 6th & 7th Floor A Block (Module 601, ) No.4, Rajiv Gandhi Salai Taramani Chennai Tel: Fax: Hyderabad Oval Office 18, ilabs Centre, Hitech City, Madhapur, Hyderabad Tel: Fax: Kochi 9th Floor ABAD Nucleus NH-49, Maradu PO, Kochi Tel: Fax: Mumbai 14th Floor, The Ruby 29 Senapati Bapat Marg Dadar (west) Mumbai Tel Fax th Floor Block B-2, Nirlon Knowledge Park Off. Western Express Highway Goregaon (E) Mumbai Tel: Fax: NCR Golf View Corporate Tower B Near DLF Golf Course, Sector 42 Gurgaon Tel: Fax: th floor, HT House Kasturba Gandhi Marg New Delhi Tel: Fax: th & 5th Floor, Plot No 2B, Tower 2, Sector 126, Noida Gautam Budh Nagar, U.P. India Tel: Fax: Pune C 401, 4th floor Panchshil Tech Park Yerwada (Near Don Bosco School) Pune Tel: Fax: Ernst & Young LLP EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization and may refer to one or more of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Ernst & Young LLP is one of the Indian client serving member firms of EYGM Limited. For more information about our organization, please visit Ernst & Young LLP is a Limited Liability Partnership, registered under the Limited Liability Partnership Act, 2008 in India, having its registered office at 22 Camac Street, 3rd Floor, Block C, Kolkata Ernst & Young LLP. Published in India. All Rights Reserved. ED None This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither Ernst & Young LLP nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor. Kolkata 22, Camac Street 3rd Floor, Block C Kolkata Tel: Fax: EY refers to global organization, and/or one or more of the independent member firms of Ernst & Young Global Limited Join India Tax Insights from EY on