pri RBI's bloom for HFCs- Rationalisation and Liberalisation of ECB Policy RBI’s bloom for HFCs- Rationalisation and Liberalisation of Economic Commercial Borrowing (ECB) Policy
Chahat Jain

Chahat Jain

Lack of domestic capital and deficit in the current account compelled the Government and Indian entities to go after foreign capital. ECBs and Masala bonds have emerged out as major form of foreign capital like FDI and FII. For the corporate, ECB is a dependable and easy to obtain fund and helps them to make business/investment expansion. Transaction on account of External Commercial Borrowings (ECB) and Trade Credit are governed by Foreign Exchange Management Act, 1999 (FEMA) and Master Direction – External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers (including amendments thereof).

To simplify the ECB guidelines, RBI vide notification no. RBI/2017-18/169 dated April 27, 2018 introduced a flat all-in-cost ceiling for ECBs uniform at 450 basis points over the benchmark London Interbank Offer Rate (LIBOR), doing away with different slabs for different maturities. It has also expanded the list of eligible borrowers to housing-finance companies and port trusts Companies in the maintenance, repair and overhaul in the freight forwarding sector have also been allowed to borrow foreign funds through the masala route — rupee denominated bonds (M asala Bonds) issued in overseas markets The RBI also increased the ECB liability-to-equity ratio for ECB raised from direct foreign equity holder under the automatic route to 7:1. This means, for every rupee of equity, companies can now borrow seven rupees through ECBs Provided this ratio will not be applicable if total of all ECBs raised by an entity is up to USD 5 million or equivalent.

Earlier, Housing finance companies were allowed to borrow in foreign currency, but only after RBI approval. The said notification will allow Housing Finance Companies, regulated by the National Housing Bank to avail of ECBs under all tracks. Such entities shall have a board approved risk management policy and shall keep their ECB exposure hedged 100 per cent at all times for ECBs raised under Track I.

To rationalise the end-use provisions for ECBs, RBI has now decided to have only a negative list for all tracks. The negative list for all Tracks would include the following:

a) Investment in real estate or purchase of land except when used for affordable housing as defined in Harmonised Master List of Infrastructure Sub-sectors notified by Government of India, construction and development of SEZ and industrial parks/integrated townships.

b) Investment in capital market.

c) Equity investment.

Additionally, for Tracks I and III, the following negative end uses will also apply except when raised from Direct and Indirect equity holders or from a Group company, and provided the loan is for a minimum average maturity of five years:

d) Working capital purposes.

e) General corporate purposes.

f) Repayment of Rupee loans.

Finally, for all Tracks, the following negative end use will also apply:

g) On-lending to entities for the above activities from (a) to (f).


This notification is a strong step to liberalise the ECB framework, recognising that companies require increased flexibility and access to various types of financing, including offshore financing. Bringing home fmance under the automatic route opens a new route of financing for the sector. For housing finance companies, this makes access to foreign funds simpler. They no longer have to wait for the RBI approval. It will definitely increase the prospects for a new round of overseas borrowings.

(Author is associated with Mamta Binani and Associates)


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July 2021