With the objective of promoting ease of doing business in India, the Reserve Bank of India (“RBI”) has simplified and liberalised the erstwhile framework on external commercial borrowings/foreign currency denominated loans and the rupee denominated loans by notifying the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 (“ECB Regulations”) issued vide Notification No. FEMA 3 (R)/2018-RB dated December 17, 2018. The ECB Regulations have repealed the Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000, and the Foreign Exchange Management (Borrowing or Lending in Rupees) Regulations, 2000 (collectively the “Erstwhile Framework”)

The ECB Regulations together with the RBI circulars dated January 16, 2019 and February 7, 2019, and the Master Directions on External Commercial Borrowings, Trade Credits and Structured Obligations dated March 26, 2019, issued by RBI constitute the new framework on ECBs and the rupee denominated loans (“New ECB Framework/Master Direction No. 5 dated March 26, 2019“) and has been made effective from January 16, 2019.

The RBI has vide A.P. (DIR Series) Circular No. 04 dated 30 July 2019, relaxed the ECB end-use restrictions for all eligible borrowers including non-banking financial companies (NBFC) and companies having stressed loans. It is pertinent to mention that paragraphs 2.1.(v) and 2.1.(viii) of Master Direction No.5 dated March 26, 2019 on the above subject in terms of which, inter alia, ECB proceeds cannot be utilised for working capital purposes, general corporate purposes and repayment of Rupee loans except when the ECB is availed from foreign equity holder for a minimum average maturity period of 5 years. Further, on-lending for these activities out of ECB proceeds is also prohibited.

Paragraph 2.1.(v) and 2.1.(viii) of Master Direction No. 5 dated March 26, 2019 is reproduced as under:-

Based on the feedback from stakeholders and with a view to further liberalise the ECB framework, it has been decided, in consultation with the Government of India, to relax the end-use restrictions. Accordingly, eligible borrowers will now be permitted to raise ECBs for the following purposes from recognised lenders, except foreign branches/ overseas subsidiaries of Indian banks, subject to paragraph 2.2 of the direction ibid:

• ECBs with a minimum average maturity period of 10 years for working capital purposes and general corporate purposes. Borrowing by NBFCs for the above maturity for on lending for the above purposes is also
• ECBs with a minimum average maturity period of 7 years can be availed by eligible borrowers for repayment of Rupee loans availed domestically for capital expenditure as also by NBFCs for on-lending for the same For repayment of Rupee loans availed domestically for purposes other than capital expenditure and for on-lending by NBFCs for the same, the minimum average maturity period of the ECB is required to be 10 years.
• It has been decided to permit eligible corporate borrowers to avail ECB for repayment of Rupee loans availed domestically for capital expenditure in manufacturing and infrastructure sector if classified as SMA-2 or NPA, under any one time settlement with lenders. Lender banks are also permitted to sell, through assignment, such loans to eligible ECB lenders, except foreign branches/ overseas subsidiaries of Indian banks, provided, the resultant external commercial borrowing complies with all-in-cost, minimum average maturity period and other relevant norms of the ECB

The prescribed minimum average maturity provision, as above, for the aforesaid end-uses will have to be strictly complied with under all circumstances.

Master Direction No.5 dated March 26, 2019 updated to reflect the above changes are as under:

Note: Foreign Equity Holder: means (a) direct foreign equity holder with minimum 25% direct equity holding in the borrowing entity, (b) indirect equity holder with minimum indirect equity holding of 51%, or (c) group company with common overseas parent.

Calculation of Average Maturity -An Illustration

Loan Amount = USD 2 Million

 *Calculated by 360 days.

Average Maturity = 3.2851

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