Decoding changes to India’s offshore borrowing laws

Under the Earlier Framework, only entities eligible to receive foreign direct investment (FDI) could raise ECBs. The New Framework broadens this and allows any person resident in India (other than an individual) established or registered under a Central or State Act to raise ECBs. Any person resident outside India may lend under the ECB route, although it remains to be seen whether the RBI will prescribe additional conditions or specifications in this regard.

Eligible borrowers may raise ECBs up to the higher of: (a) outstanding ECBs up to USD 1 billion; or (b) total outstanding borrowings (external and domestic) up to 300% of the borrower’s net worth (excluding non-fund based credit and convertible securities) based on the last audited standalone balance sheet.

This borrowing limit does not apply to entities regulated by financial sector regulators (SEBI, RBI, IRDAI and PFRDA), therefore providing greater operational flexibility to regulated entities, particularly NBFCs, which are frequent borrowers.

The New Framework proposes a more flexible, financial strength-based borrowing limit as opposed to a uniform cap under the automatic route. Borrowers will need to closely monitor leverage levels to ensure continued compliance with the net worth-linked ceiling.

The construct of all-in cost has been done away with, and the New Framework permits cost of borrowing to be aligned with “prevailing market conditions.” The removal of cost ceilings introduces pricing flexibility, enabling ECBs to be structured in line with market dynamics and credit profiles.

The New Framework prescribes a uniform minimum average maturity period (MAMP) of three years for all ECBs, with a one to three year window for manufacturing companies raising up to USD 150 million. This is in contrast to the Earlier Framework which prescribed different MAMPs for specific end-uses extending up to ten years, often making the ECB route unviable for offshore lenders.

The introduction of a uniform three-year MAMP represents a significant shift, particularly for end uses such as working capital, general corporate purposes, repayment of rupee loans and shareholder loans, for which longer MAMPs were previously prescribed.

One of the most significant changes in the New Framework is that proceeds can be used for domestic acquisitions, subject to such ECBs being for acquisition of controlling stakes and for “strategic purposes” and “creating long term value.”

The New Framework also replaces the definition of “real estate activities” with “real estate business”, and ECBs are now allowed to fund acquisition of land or immovable property for certain categories of real estate projects, and the construction and development of such projects.

These are significant changes as this enables offshore borrowings for strategic acquisitions and for land acquisition, subject to certain conditions.

A key procedural change under the New Framework is the transition from fixed periodic reporting to a more streamlined, event-based reporting. Borrowers will now be required to report only upon the occurrence of specific events, such as drawdown, change in terms, refinancing, conversion to equity or prepayment, through the authorised dealer Bank (AD Bank).

The New Framework does not specify the requirement to obtain approvals from the AD Bank for creation of security, changes in ECB terms or transfer of ECBs by lenders, which may expedite the funding timelines.