India: Legislative Updates

Francisco A. Laguna

 This week, TransLegal begins a series on recent legislative changes in India.  In the following posts, we will analyze some of the more significant ones for foreign investors.  Today, we focus on changes to India’s External Commercial Borrowing rules.

Symbol for Rupee (INR) Photo Credit: Wikimedia Commons

Symbol for Rupee (INR)
Photo Credit: Wikimedia Commons

The Reserve Bank of India (RBI) has substantially revised the rules governing external commercial borrowing (ECB) to allow Indian businesses to borrow monies from certain foreign banks.  The new rules are found in the External Commercial Borrowings (ECB) Policy – Revised Framework, RBI A.P. (DIR Series), Circular No. 32, 30 November 2015.  They enter into force once published in the Official Gazette.

The new ECB rules classify ECBs into three categories, broaden the list of eligible lenders and reduce the restrictions on how ECB monies may be used.


ECB will now fall into three “tracks”, depending on the term of the loan and the currency of the loan:

Track I ECBs are defined short- to medium-term (3 – 5 years / 5 – 10 years), foreign currency-denominated loans, with an all-in-cost ceiling, over a 6-month LIBOR, of 300 basis points and 450 basis points, respectively.

Track II ECBs are also foreign currency-denominated with a minimum maturity of 10 years and an all-in-cost ceiling of 500 basis points.

Track III ECBs are rupee-denominated loans, with all-in-cost ceilings determined by then-existing market conditions.

Presidential Standard of India Photo credit: Wikimedia Commons

Presidential Standard of India
Photo credit: Wikimedia Commons

Eligible Lenders / Investors

Regardless of the track, eligible lenders now include long-term investors, such as regulated financial entities, insurance funds, pension funds and sovereign wealth funds. In addition, foreign branches and subsidiaries of Indian banks qualify as eligible lenders for Track I.



End Use

Track I ECBs may be applied, among things, to: import capital goods; purchase capital goods domestically; finance new projects, or expand or update existing projects; invest in foreign subsidiaries or joint ventures; acquire shares of public sector projects under the disinvestment rules; refinance existing trade credits used to import capital goods; refinance existing ECBs; finance general corporate expenditures; and pay for capital goods already shipped / imported but as yet unpaid.

Flag of India Photo Credit: Wikimedia Commons

Flag of India
Photo Credit: Wikimedia Commons

Except for ECBs from non-banking finance companies, long-term ECBs, whether foreign currency or rupee-denominated, can be used for any purpose except: real estate purchases or speculation; investing in capital markets or domestic equities; or to lend monies to third parties involved in such activities.

Track III ECBs from non-banking finance companies can be used exclusively for: making loans to entities in the infrastructure or construction section; making secured loans to domestic entities to acquire capital goods and equipment; and to acquire capital goods and equipment that will be leased or leased-to-purchase by domestic entities.

Eligible Borrowers

As indicated above, the new ECB rules were adopted to increase foreign capital flows into India and provide companies with increased funding sources, especially in the infrastructure sector.  However, the class of eligible borrowers has been narrowed. Previously, all corporates entities were to take out ECBs, subject to end-use restrictions.  The new rules limit eligible borrowers to companies in the manufacturing, software development, shipping, airlines or infrastructure sectors.

TransLegal assists companies navigate the complexities of the Indian legal and financial system.  Call us with your questions.  Next week, we’ll explore developments in Indian labor and employment laws.