Mumbai: Indian companies will now be able to access international markets freely for raising working capital loans or for refinancing. The Reserve Bank of India on Monday introduced long-term foreign currency denominated external commercial borrowings (ECB) with minimum average maturity (MAM) of 10 years and Indian rupee denominated ECB (also referred to as masala bonds) with MAM of 3 to 5 years.
The apex bank also introduced a small negative list of end-use restrictions that would be applicable on such long-term ECB and INR denominated ECB unlike in the case of regular ECBs. While the detailed guidelines are yet awaited, the end use related stipulations are likely to be similar to those applicable for masala bonds which have been recently introduced by the RBI.
Investment bankers said with the relaxed end use of ECBs, they are more akin to domestic bank loans.
Deven Shah, senior VP, debt capital markets at Kotak Bank, said, “RBI has allowed structuring flexibility and ability to companies to access offshore funds. This will allow easy access for better rated and well accepted firms to structure their borrowing programme better from international lenders.”
“But there is one issue. RBI does not allow Indian banks and their overseas subsidiaries to participate in these new structures (i.e. masala bonds, long-term foreign currency denominated ECB, Indian rupee denominated ECB). Finding pure foreign lenders to participate in these facilities could be a challenge. However, the established Indian corporates, PSUs and other high rated companies could lead the way. While these are early days, the experience of Indian companies with masala bonds has not been very encouraging yet.”
While revising the guidelines for ECB loans, RBI said the overarching principles of the revised norms follow 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 minimises roll-over risks for the borrower.
RBI said Indian companies could raise foreign currency loans from long-term lenders, such as insurance companies, pension funds and sovereign wealth funds. It reduced the negative list of end-use restrictions applicable in case of long-term ECB and rupee-denominated ECBs. It raised the limit for small value ECBs with minimum average maturity of three years to $50 million from $20 million; and alignment the list of infrastructure entities eligible for ECB with the harmonised list of the government of India.
Entities raising ECB under extant framework can raise the said loans by March 31, 2016 provided the pact in respect of the loan is signed by the date the new framework comes into effect, said RBI.
The revised ECB framework will comprise of three tracks – track I medium-term foreign currency denominated ECB with minimum average maturity (MAM) of three-five years; track II for long-term foreign currency denominated ECB with MAM of 10 years; and track III for Indian rupee-denominated ECB with MAM of three-five years.
The Fed rate hike fear and turmoil in China’s market hit Indian firms’ plans to raise funds through foreign currency loans last month. More firms are accessing the bond market to raise money.
RBI said as sufficient time has passed since the extant ECB framework was operationalised, a need was felt to undertake a review baÂsÂed on the experience gaiÂned in administering the ECB regime and the current financing ecosystem which, inter alia, allows issuance of Indian rupee-denominated bonds overseas.
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