1. RBI revisits ECB provisions for infra- sector Customer Care No. 91-11-45562222 www.taxmann.com

2. Background The basic objective of the extant External Commercial Borrowings (ECB) policy is to supplement domestic capital for creation of capital assets in the country, limited by considerations for capital account management. The earlier ECB policy1 had gone through thorough revamping during the month of November, 20152 (Framework, 2015) based on the recommendations made by the Sahoo Committee, under the chairmanship of M.S Sahoo, in February, 20153. This framework brought in a host of changes in the ECB framework. Salient features of Framework, 2015 are as under:- 1. Inclusion of financial lease as a forms of borrowings 2. Relaxing rules for NBFCs but restricting it to INR denominated borrowings 3. Segmenting the Minimum Average Maturity (MAM) in three tracks - Track I, Track II, Track III 4. A more liberal approach, with fewer restrictions on end uses, higher all-in-cost ceiling, etc. for long term foreign currency borrowings as the extended term makes repayments more sustainable and also minimizes roll-over risks for the borrower; 5. A more liberal regime for INR denominated ECBs where the currency risk is borne by the lender; 6. Expansion of the list of overseas lenders to include long-term lenders, such as, Insurance Companies, Pension Funds, Sovereign Wealth Funds; 2 Customer Care No. 91-11-45562222 www.taxmann.com

3. 3 Customer Care No. 91-11-45562222 www.taxmann.com 7. Only a small negative list of end-use restrictions applicable in case of long-term ECB ( Track II) and INR denominated ECB ( Track III); But, some restrictive provisions of the Framework, 2015 were causing some bottle-necks in infusing external financials. Hence, considering the dire need of external funding sources, and to cater to the needs of the infrastructure sector, the extant ECB guidelines have been reviewed. The present amendment mainly seems to focus on the infrastructure sector amongst some more changes. The list of eligible borrowers in the Framework, 2015 seemed somewhat rigid and hence to overcome this issue the list has been enhanced by allowing more eligible borrowers. This move has been taken to allow more investments seep into the infrastructure sector. For better monitoring of the proceeds, the requirement of a new policy has also been inserted for Track-I borrowers. The present amendment 4 addresses some of the issues pertaining to Framework, 2015 which has been analyzed in this note. Also a comparative study has been made with regard to the changes brought. 4 1.1. Additional compliances for newly added sectors in track-I 1.The following sectors added via the present amendment under Track-I are to have a board approved risk management policy:- a. Infrastructure Sector b. NBFC-IFC

4. c. NBFC-AFC d. CICs e. Holding Companies 2. Moreover, the designated AD-Category I bank has the onus to verify with the compliance of the 100% hedging requirements by the entities. 3. The position is required to be communicated to RBI through ECB 2 return. This ensures further monitoring the proceeds as well as securing the fears of the lenders against any losses. 1.2. Infrastructure sector 1. In the Framework, 2015, infrastructure sector companies were allowed to borrow only under Track II and Track-III, to borrow for all purposes except for real-estate activities, investing in the capital market, equity investment in domestic market, on-lending to a company carrying out any of the mentioned activities and purchase of land. This meant that borrowing benefits of Track-I were not available. 4 www.taxmann.com Customer Care No. 91-11-45562222

5. 2. The present amendment, extending the Framework, 2015, brings infrastructure activities under Track-I, meaning they may raise ECB with MAM of 5 years too. The proceeds of ECB raised under this track, can be used only for the permitted end-use allowed under Track-I. The MAM of 5 years on infrastructure sector for borrowing under Track-I, is a new requirement. The ECB under this route would be subject to 100% hedging. This would attract more investors, in turn fueling the infrastructure sector. 1.3. NBFC-IFC and NBFC-HFC 1. In the Framework, 2015, though all NBFCs were made eligible to borrow under Track-III, their access was restricted to only INR denominated ECBs. The cap of 75% for automatic route, which was there in the earlier policy, was also removed via the Framework, 2015. 2. In the present amendment, NBFC-IFCs, NBFC-AFCs, have been made eligible to borrow also under Track-I, subject to 100% hedging; apart from their existing eligible tracks. We can also see that the maturity period has been made longer, i.e. 5 years, as before. Also, they can use the proceeds only for financing infrastructure if, the ECB is raised under Track- I. 1.4. CICs and Holding Companies 1. Under the Framework, 2015, CICs and Holding Companies could borrow under Track II and Track III, which meant that these entities could borrow long-term foreign currency denominated ECB with MAM of 10 years or Indian Rupee Denominate ECBs with MAM of 3/5 years. 5 Customer Care No. 91-11-45562222 www.taxmann.com

6. 2. Holding Companies and CICs have been made eligible borrowers under Track-I under the present amendment,subject to using those proceeds only inon-lending to infrastructure SPVs. 3. In the Old Policy, CICs and Holding Companies had similar end-use restrictions which were removed in the Framework, 2015, by widening the permitted end-use beyond on-lending to SPVs but, restricted to borrowing under Track-II only. 1.5. Enhanced limit of borrowing by the NBFC-IFCs, NBFC-AFCs, Holding Companies and CICs The limits to borrow by the aforementioned entities have been made akin to limits applicable to infrastructure sector (currently USD 750 million). In the Framework, 2015 these entities were allowed to borrow upto USD 500 million, which was applicable to entities which were not specifically provided any separate limit. This enhances the scope of amount that can be borrowed by these entities. 1.6. "Exploration, Mining and Refinery" sectors to be regarded as part of infrastructure sector 1. For the purpose of ECB, "Exploration, Mining and Refinery" sectors are to be regarded as part of infrastructure sector. 2. This has not been specified in the harmonized list but was previously covered under earlier framework for end-use purpose. Framework, 2015 had not included this segment. 3. Through present amendment this has been added back, hence allowing ECB to be used for exploration, mining and refinery. 6 Customer Care No. 91-11-45562222 www.taxmann.com

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