Will the Gates Open? Liberalised End Use of Proceeds for Indian Companies Raising Foreign Debt

Introduction

As we are midway through 2019, the Indian economy despite landslide election victory by the National Democratic Alliance has challenges. Banks have had to restructure various loan assets, non-banking financial companies are facing a severe liquidity crunch, the domestic corporate debt market is shallow and consumer numbers across various industry sectors have slowed. The Reserve Bank of India on Tuesday 30 July has by way of External Commercial Borrowings (ECB) Policy – Rationalisation of End-use Provisions (RBI/2019-20/20 A.P. (DIR Series) Circular No. 04) liberalised the end use of proceeds for external commercial borrowings (“ECB”) raised by Indian companies from offshore lenders whether by way of loans or bonds. This liberalisation may pave the way for foreign debt capital to be a source available to Indian companies to restructure their debt.

The Change

Based on the feedback from stakeholders and market participants and based on the current needs of India which is to obtain a more diverse range of capital sources for Indian companies, the end-use restrictions have been liberalised. This has been a historical constraint since if companies are not able to apply to proceeds to optimise their capital structure, they do not access foreign currency debt. At a time when companies are looking at deleveraging their debt or reducing cost of capital by refinancing and when there is much less new capital expenditure investment, the RBI’s pro-active changes show that it is a regulator that adapts to needs of the Indian economy. External commercial borrowing can now be used as follows:

• Corporates can raise ECBs with a minimum average maturity period of: (i) 7 years for repayment of Rupee loans availed domestically for capital expenditure; and (ii) 10 years for working capital purposes and general corporate purposes.
• NBFCs can raise ECBs with a minimum average maturity period of: (i) 7 years for on-lending to corporates for repayment of Rupee loans availed domestically for capital expenditure; and (ii) 10 years for on-lending to companies for working capital purposes and general corporate purposes.
• For repayment of Rupee loans for any other purpose, the minimum average maturity period of the ECB is 10 years.
• Indian companies can utilise ECB for repayment of Rupee loans utilised domestically for capital expenditure in the manufacturing and infrastructure sectors if the relevant Rupee loan is classified as SMA-2 (which is a loan which has defaulted in payment of principal or interest and is between 61-90 days overdue) or a non-performing asset, under any one time settlement with lenders.
• ECB lenders (excluding foreign branches/overseas subsidiaries of Indian banks) can purchase Rupee loans from domestic Indian banks, provided, the resulting ECB complies with all-in-cost, minimum average maturity period and other relevant norms of the ECB framework.

Conclusion

Whilst not stated, it seems that new uses now permitted by the RBI are intended in different ways, to ultimately lead to more money coming into Indian banks and domestic lenders and to reduce the stress on the balance sheet of the Indian lending community. It remains to be seen whether foreign lenders will want to acquire non-performing loans or defaulted loans with an interest rate that is capped at LIBOR plus 450 basis points. The circular is also silent as to whether loans can be purchased at a discount to the par value. We believe that these changes will be well received and enable each company to determine the best funding structure without being driven by regulatory constraints. This also opens the door for other types of offshore lenders.