RUPEE-DENOMINATED
EXTERNAL COMMERCIAL BORROWINGS
February 3, 2016
Mr. Rajesh Agarwal
Senior Vice President
SBI Capital Markets Limited (Complete Solutions in Investment Banking)
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AGENDA
RBI Revised Framework on ECBs
Rupee Denominated ECBs
Impact & Potential
Issues & Challenges
1 Introduction
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Incorporated in 1986; 100% subsidiary of SBI - India’s largest commercial bank
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Privatisation in the Country
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Auction of Coal Mines
Auction of 6 Mineral Blocks in India
Auction of RLNG for Stranded Gas Based
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SBICAP has syndicated over USD 27 bn foreign currency debt (ECB/FCL) in the last 4 years
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RBI REVISED FRAMEWORK ON ECBS – SALIENT FEATURES
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In November 2015, RBI came out with revised framework on External Commercial Borrowings
which is intended to:
liberalize the ECB regime, with fewer restrictions on end uses, higher all-in-cost ceiling,
etc. for long term foreign currency borrowings;
incentivize INR denominated ECBs so as to transfer the currency risk to the lender;
expand the list of overseas lenders to include long-term lenders/investors; and
align the list of infrastructure entities eligible for availing ECBs with the ‘Harmonized List’
of the Govt. of India
The ECBs have been classified under three tracks based on Minimum Average Maturity (MAM)
and currency denomination as given below:
Track I - Medium term foreign currency denominated ECB with MAM of 3 years for ECBs
upto USD 50 mn and 5 years for ECBs above USD 50 mn
Track II - Long term foreign currency denominated ECB with MAM of 10 years
Track III - Indian Rupee denominated ECB with MAM of 3/5 years
ECBs availed under any of the above tracks are under the automatic route provided such ECBs
are in compliance with the specified limits and parameters applicable for such track
RBI approval is required for availing ECBs beyond the borrowing limits specified
RBI REVISED FRAMEWORK ON ECBS – SALIENT FEATURES (CONT.)
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The list of Eligible Borrowers has been spread out under the three tracks:
Track I and Track II majorly include manufacturing and infrastructure companies while
Track III includes all entities listed under Track I and II along with NBFCs, NGOs, service
companies, logistics providers, etc.
The Revised Framework has segregated the permitted end-uses under the three tracks and
has included fewer restrictions on end-uses:
Proceeds can also be utilized for acquisition of land under Track II and Track III
Expansion of the list of overseas lenders to include long-term Investors (pension funds,
insurance companies, sovereign wealth funds, etc.)
All-in-Cost (AIC) for ECBs has been revised and lowered; guarantee fees and all other fees,
charges payable in INR are now included within the calculation of the AIC ceiling
Track Category Average Maturity Period All-in-Cost Ceiling over Benchmark
Track - I 3 - 5 years 300 bps
5 – 10 years 450 bps
Track - II Above 10 years 500 bps
Track - III 3 - 5 years
In line with market conditions 5 – 10 years
RUPEE-DENOMINATED ECBS - SPECIFICS
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Rupee-denominated ECBs is categorized as Track III under the revised ECB Framework
The Minimum Average Maturity for Rupee-denominated ECBs is 3 years for ECBs upto USD 50
mn and 5 years for ECBs beyond USD 50 mn
The All-in-Cost (AIC) should be in line with market conditions, i.e. there is no ceiling on AIC
The eligible borrowers under Track III comprise of:
Companies in manufacturing and software development sectors
Shipping and airlines companies
Units in SEZs
EXIM Bank of India, SIDBI
Companies in Infrastructure sector
Holding Companies, Core Investment Companies, REITs & INVITs
NBFCs, NBFCs-MFIs, Not for Profit Companies, Societies, Trusts & Co-operatives
NGOs engaged in micro-finance activities provided they have a:
Satisfactory borrowing relationship for at least 3 years with an AD Category I bank in India
Certificate of due-diligence on “fit and proper” status from the AD Category I bank
Companies engaged in miscellaneous services viz. R&D, training (other than educational inst.),
companies supporting infrastructure, companies providing logistics services
Developers of SEZs / National Manufacturing and Investment Zones (NMIZs)
Track I
Track II
Track III
RUPEE-DENOMINATED ECBS – SPECIFICS (CONT.)
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The recognised list of lenders and investors for Track III are:
International Banks
International Capital Markets
Multilateral / Regional / Govt. owned Financial Institutions
Export Credit Agencies
Suppliers of Equipment
Foreign Equity Holders
Overseas long-term Investors such as prudentially regulated financial entities, pension funds, insurance companies, sovereign wealth funds and financial institutions located in
‘Institutional Financial Services Centres’ in India
Overseas branches / subsidiaries of Indian banks are not permitted to provide INR-denominated ECBs
Further, the non-resident lender, other than foreign equity holders, should mobilize INR through swaps/outright sale undertaken through an AD Category I bank in India
In case of NBFCs-MFIs, other eligible MFIs, not for profit companies and NGOs, ECB can also be availed from overseas organizations and individuals
Overseas organizations / Individual lender would have to furnish a certificate of due diligence from an overseas bank which is subject to regulation of host-country regulators and adherence of such host country to FATF guidelines on AML / CFT
RUPEE-DENOMINATED ECBS – SPECIFICS (CONT.)
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The permitted end-uses for various categories of eligible borrowers under Track III are:
NBFCs can use ECB proceeds for:
On-lending to the infrastructure sector;
providing hypothecated loans to domestic entities for acquisition of capital goods/
equipment; and
providing capital goods/equipment to domestic entities by way of lease and hire-
purchases
Developers of SEZs/NMIZs can use ECB proceeds only for providing infrastructure facilities
within SEZ/NMIZ
NBFCs-MFI, other eligible MFIs, NGOs and not for profit companies can raise ECB only for
on-lending to self-help groups or for micro-credit or for bonafide micro finance activity
including capacity building
For other eligible entities under this track, the ECB proceeds can be used for all purposes
excluding real estate activities, investing in capital market, domestic equity investment,
on-lending to other entities for any of the exclusions mentioned herein, and purchase of
land
LIKELY IMPACT OF RUPEE-DENOMINATED ECBS
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Rupee-denominated ECBs shall act as an additional source of funding apart from domestic
loans/ bonds
Services sector which has been fully left out in Track I and Track II; are covered in Track III and
can avail this product
Companies in Infrastructure sector, though covered in Track II, are likely to emerge as the major
borrowers of INR-denominated ECBs
Infrastructure companies predominantly have rupee revenues
Track II mandates minimum average maturity (MAM) of 10 years for which there is very
limited appetite / market
This instrument shall attract banks and corporates as pricing is open-ended / market-
determined with no ceiling for All-in-cost
This instrument will act as a good pricing mechanism and a reference for fully hedged dollar
borrowings
This instrument provides the borrowing & hedging contract under one wrap vis-à-vis
conventional ECBs wherein the Borrower may have to enter into separate contracts for ECB
borrowing and for hedging in case of no natural hedge
No mark-to-market requirement as the instrument is denominated in INR and is a fixed rate
borrowing
POTENTIAL OF RUPEE-DENOMINATED ECBS
Potential of INR-denominated ECBs is dependent on the interest of foreign lenders to take
exposure in Rupees to Indian borrowers
Rupee-denominated ECBs are likely to have less potential compared to the Rupee Loans /
Domestic Bonds or fully hedged ECBs unless they are really economical
Masala Bonds (Rupee-denominated bonds issued overseas) are getting popular and are likely to
give stiff competition to Rupee-denominated ECBs
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ISSUES AND CHALLENGES FOR RUPEE-DENOMINATED ECBS
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Overseas branches / subsidiaries of Indian banks are not permitted to provide Rupee-
denominated ECBs
Appetite of Foreign banks is limited and their lending has been primarily restricted to PSUs
and high-rated corporates
Multilateral institutions like IFC and ADB have been providing rupee-denominated foreign
currency funds in the past
Pricing of Rupee-denominated ECB has to be cost effective vis-à-vis rupee loans so as to attract
the investors considering limited flexibility
Prepayment options for INR-denominated ECBs may be limited and shall come with significant
costs as the lender will have to unwind the hedge
Rupee-denominated ECBs will have to compete with Masala Bonds and investors are likely to
find Masala Bonds more attractive
Rupee-denominated ECBs is a good borrowing option with no ceiling on All-in-cost; however it
needs to be seen how this product will take up
KEY OBSERVATIONS ON THE REVISED FRAMEWORK
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Alignment of the list of infrastructure entities eligible for ECB borrowing with the ‘Harmonized
List’ of the Govt. of India has resulted in leaving out certain sectors like Exploration &
Production, Mining, etc. which were earlier eligible to raise ECB and largely relied on ECBs for
their capital expenditure requirements
Track II ECB stipulates minimum average maturity requirement of 10 years for which there is no
market as Indian banks are not permitted to participate in Track II and foreign banks are
generally more inclined for lending in the 3-5 year maturity
Overseas branches / subsidiaries of Indian banks are not permitted to participate in refinancing
of existing ECBs
Refinancing mostly happens when the initial project risk (often financed by Indian banks) is
over; thereby depriving Indian banks of excellent business opportunities even after
carrying significant risks at various stages of the project/business life cycle and causing
huge business loss
Participation of Indian banks in refinance doesn’t increase the risk and will ensure real
benefits to Indian corporates and a fair opportunity to Indian banks
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