Recent regulatory and industry trends in India involving cross-border financings


Financier Worldwide Magazine

February 2014 Issue

February 2014 Issue

To deal with the slowdown of the Indian economy in recent times, the Reserve Bank of India (RBI), the country’s central bank, unleashed a flurry of measures to incentivise foreign investors by liberalising foreign currency debt investments into India. This was done by way of changes to the External Commercial Borrowing (ECB) policies and strict guidelines on overseas direct investment by Indian promoters to curb the flight of capital from India. This article aims to highlight and analyse the recent changes brought about by the RBI. 

On 8 July 2013, the RBI allowed non-banking finance companies(NBFCs) categorised as asset finance companies (NBFC-AFCs) to avail themselves of ECB under the automatic route subject to them complying with certain conditions. NBFCs were originally not regarded as eligible borrowers under the automatic route. This was done to help NBFC-AFCs gain access to ECB, which can in turn be used to provide cheaper loans to their Indian customers. As a pre-condition, the RBI prescribed that ECB can be utilised by NBFC-AFCsfor financing the import of equipment and not for sourcing equipment domestically.This will help to increase the import of infrastructure equipment into India. 

The RBI, on 30 September 2013, allowed existing ECBs to be refinanced at lower ceiling costs through further ECBs thereby providing a huge refinancing opportunity for foreign commercial banks. 

On 15 July 2013, the RBI extended the benefit of the US$10bn scheme to Indian companies in the manufacturing, infrastructure and hotel sectors, which are consistent foreign exchange earners, and have established joint ventures (JVs), wholly owned subsidiaries (WOSs) or have acquired assets overseas in compliance with certain applicable conditions. 

Pursuant to the above notification, domestic companies in the manufacturing, infrastructure and hotel sectors can refinance existing rupee loans used to establish JVs or WOSs abroad from ECB proceeds solely based on foreign exchange earnings over a stipulated time period. Fees for technical know-how and royalty payments to Indian parent companies from their overseas subsidiaries will now be considered part of foreign exchange earnings for the purpose of calculating foreign exchange earnings limits. 

The new policy will help companies in the stipulated sectors to utilise cheaper LIBOR linked foreign currency loans from abroad. This provides an enhanced opportunity for foreign banks to participate in the Indian refinancing market. Further, there is no additional credit risk for Indian promoters as their financial commitments will not exceed foreign exchange earning limits prescribed by the RBI. 

Further, repayments of such ECB is allowed only from the foreign exchange earnings of the Indian promoter, thereby limiting the foreign exchange repayment risk from within the country. Notably, as this money can be used for reinvestment purposes, this will reduce the extent of overall foreign exchange funding that will be required. 

As a huge relief to Indian companies, on 4 September 2013the RBI allowed eligible borrowers under the extant ECB policy to raise ECB for general corporate purposes under the approval route from their foreign equity holders subject to certain conditions.Previously, use of ECB for general corporate purposes and for working capital was prohibited. This particular policy change is aimed at easing capital raising initiatives by subsidiaries of foreign companies incorporated in India from their foreign equity holders to fund their general corporate expenses and also to facilitate foreign currency inflow in the country. However, the term ‘general corporate purposes’ has not been defined by the RBI. It is a generic definition which will be determined on a case by case basis. 

In order to boost the infrastructure sector which is struggling with a shortage of capital, on 18 September 2013, RBI re-considered the definition of the term ‘infrastructure sector’ and considerably liberalised the definition for the purpose of availing ECB. The sub-categories that can now attract investment under this term is now up to around 35. Previously, the definition of infrastructure sector for the purposes of utilising ECB was very limited. 

This is an important step by the RBI as the infrastructure sector is a capital intensive sector and has a huge appetite for foreign currency funds. Inclusion of more sub-sectors under the definition of infrastructure will help domestic borrowers to raise cheaper loans from overseas lenders and this will result in greater inflow of much needed foreign currency, providing a huge opportunity for foreign banks to participate in the Indian market. 

On 24 September 2013, the RBI re-jigged trade credit financing in India by allowing all companies to utilise trade credits for a period of five years for the import of capital goods as classified by the Director General of Foreign Trade. However, this step may not be too encouraging for smaller companies with less cashflow, as Indian banks are not allowed to issue letters of credit, guarantees, letters of undertaking or letters of comfort in favour of an overseas supplier, bank or financial institution for a period beyond three years. 

The RBI as a policy maker is well aware of the impending need to curb the flight of capital from India, particularly at a time when foreign investment is hard to come by. 

In a decisive action to curb capital outflow from Indian corporates, the RBI, on 14 August 2013, reduced the limit of total financial commitment by an Indian company (which includes inter alia share capital, corporate guarantees and loans) in its JVs and WOSs abroad under the automatic route from 400 percent of its total net worth to 100 percent of its total net worth. It is to be noted here that this change was made effective prospectively.

Further, to restrict the foreign exchange exposure of Indian parent companies as corporate guarantors for their subsidiaries abroad, the RBI prohibited the issuing of corporate guarantee on behalf of second generation or subsequent level step down operating subsidiaries, wherein the Indian company does not hold a 51 percent shareholding directly. Pursuant to this policy change, a corporate guarantee for foreign sbsidiaries will be allowed under the automatic route if the Indian company directly holds a 51 percent or greater shareholding in it. 

These policy changes initiated by the RBI in ECB and the overseas direct investment policies are a step in the right direction as they aim to maintain equilibrium between the inflow and outflow of foreign exchange. We will have to wait and see how the industry reacts to these changes as regulatory policies never work in isolation and their success, particularly for a developing country like India, always depends on the interplay between the sentiments of the domestic industry and the risk appetite of global financial investors.


Prashanth Sabeshan is a partner at Majmudar & Partners. He can be contacted on +91 80 4147 0001 or by email: The author wishes to thank the efforts of Mr D. Sarkar and Ms V. Bhatia, associates at Majmudar & Partners.

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Prashanth Sabeshan

Majmudar & Partners

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