Borrowing and Lending in Foreign Currency & Indian rupees Presenter: Sunil Kumar (Director, EY LLP) 20 December 2019
Contents 2 Evolution of ECB Framework 3 1 Case Studies Introduction: Funding in India 4 Practical Insights
Introduction
Introduction Funding Options Investment Instruments Partially/Option External Partially/Option Non- Equity ally Convertible commercial convertible ally Convertible Share Capital Preference borrowings Debentures debentures Shares Equity instruments Hybrid instruments* Debt No end use restrictions Specified end use restrictions *Government of India working on the policy
Debt Funding Forms On-shore Off-shore The offshore funding Onshore lending routes are generally generally does not highly regulated and require compliance need to comply with with FEMA, and is a number of 01 02 generally less conditions provided under Foreign regulated; Exchange Entities listed as Management Act, Recognized Lenders 1999 (“FEMA”); including lenders in Entities facilitating FATF compliant such funding countries, foreign includes, NBFC, AIF, equity holders, etc. ARC, etc.
Investment opportunity Significance of FDI India represents 1/6 th of the world population ► India needs to create job opportunities and play a significant role in global economy ► Investments will generate greater economic activity; and ► Create employment opportunities – direct and indirect ► Investment/ funding plays a significant role in the future : Identify next generation of technology and invest ► Digital, Internet of Things, Robotics will reset business ► Use talent pool to invest ahead in R&D and create technologies to drive global ► business
Top investing countries in India TOP INVESTING COMPANIES (CUMULATIVE INFLOWS TILL FY2009-10) TOP INVESTING COMPANIES IN FY2013-14 Others Switzerland 13% Others, 19% 2% France Mauritius 1% UAE, 1% 20% Japan France, 1% 7% Mauritius, 43% Japan, 3% Cyprus 2% Cyprus, 4% Germany 4% Germany, 3% U.S.A. Singapore 3% 24% U.S.A., 8% Netherlands 10% Netherlands, 4% U.K. U.K., 5% Singapore, 9% 14% TOP INVESTING COMPANIES IN FY2016-17 Others UAE 10% France 2% 1% Japan Mauritius 11% 36% Cyprus 1% Germany 2% U.S.A. 6% Netherlands 8% U.K. Singapore 3% 20%
FDI policy of India – Evolution Sources of FDI ► Pre-1975: Anti FDI ► Transnational corporations ► Political challenges & economic instability ► Capital providers - Private equity, SWF and Pension ► Suspended world financial aid Funds ► Import substitution strategy SECTOR WISE FDI ► Forced devaluation of currency ► 1976-1991: Selective FDI ► Not an open door policy ► Pressure of overseas loans ► FDI leads to outflows only after there is production and that too only when there is profit. Loans have [PERCENTAGE] to paid whether investments are productive or not ► FDI provides access to advanced technology [PERCENTAGE] [PERCENTAGE] ► 1991: Pro-FDI ► BoP crisis ► Consensus for economic reform [PERCENTAGE] ► Access to capital and technology to fuel growth [PERCENTAGE] ► Demand for level playing field, tariff protection and internal reforms [PERCENTAGE] [PERCENTAGE] ► 2000: Automatic route [PERCENTAGE] [PERCENTAGE] ► Removal of dividend balancing regulations [PERCENTAGE] [PERCENTAGE] ► FERA converted to FEMA ► Introduction of transfer pricing legislation Service Sector** Telecommunications ► Current account transactions relaxed Computer Software & hardware Construction Development ► 2014+: Decentralisation Automobile Industry Trading ► Focus on periodic review of policies Drugs & Pharmaceuticals Chemicals (Other than fertilizers) ► Ease of doing business in India Power Construction (Infrastructure) activities Miscellaneous **Services sector includes Financial, Banking, Insurance, Non-Financial / Business, Outsourcing, R&D, Courier, Tech. Testing Analysis
Evolution
Evolution over years Borrowing and Lending Norms in India Liberalization of ECB Framework Relaxation of Foreign Exchange end-use Management restrictions (Borrowing and External Lending) 2019 Commercial Regulations, 2018 Borrowings (ECB) Liberalization of Consolidated Policy – Borrowing and provisions for Liberalisation Lending Borrowing and lending in Foreign Integrated Regulations 2000 Lending Currency and INR township 2004 Regulations 2000 2009 Separate Regulations for lending in Foreign Currency 2000
Evolution – Recent Changes Borrowing and Lending Norms in India ► RBI vide Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 ( FEMA 3(R) ) combined regulations in relation to borrowing or lending in foreign exchange/ INR and regulations in relation to dealing with issuance of FCCB ► To rationalise and provide operational framework for ECB and Rupee denominated bonds , on 16 January 2019 the RBI, announced the New External Commercial Borrowing Framework (New ECB Framework) which was later compiled in the Master Direction - External Commercial Borrowings, Trade Credits and Structured Obligations dated 26 th January 2019 (as amended from time to time) ► ECB Framework was further liberalised vide RBI Circular “ External Commercial Borrowings (ECB) Policy – Rationalisation of End-use Provisions ” dated 30 July 2019
Eligible Borrowers Track I – List of Eligible Borrowers All entities eligible to Merged receive FDI in Track II – List of terms of FDI Eligible Borrowers Policy would be eligible to raise ECB Track III – List of Eligible Borrowers
Eligible Lenders • Resident of Financial Action Task Force (FATF) or International organization Track I – List of of Securities commissions Eligible Lenders compliant country; • Multilateral and regional financial institution where Merged Track II – List of India is a member country; Eligible Lenders • Individuals if they are foreign equity holders or for Track III – List of subscription to Eligible Lenders bond/debentures listed abroad • Foreign branches / subsidiaries of Indian Banks Lending and borrowing under the ECB framework by Indian banks and their – only for FCY ECB except branches/subsidiaries outside India will be subject to prudential guidelines issued by the FCCBs and FCEBs Department of Banking Regulation of the Reserve Bank. Further, other entities raising ECB are required to follow the guidelines issued, if any, by the concerned sectoral or prudential regulator.
Real Estate Activities – Defined Long awaited? Buying, selling and renting Real Estate Activity 1. Commercial and Activities of Residential real estate Properties, agents or 2. Land However, this would not include development of integrated township, purchase/ long term leasing of industrial land as part of new project/modernization or expansion of existing units or any activity under ‘infrastructure sub - sectors’ as given in the Harmonized Master List of Infrastructure sub -sectors approved by the GOI
Merging of Tracks Forms of ECB Foreign INR Currency Denominated Denominated ECB ECB Track II Track I Long Term Track III Medium term FCY FCY INR denominated denominated denominate with MAM of Rupee with MAM of 10 years denominated d with MAM 3/5 years, bonds of 3 /5 manufacturin framework g 1yr . years.
End-use Restrictions Liberalisation The end use restrictions for ECB Investment in real estate or purchase of land except activities in the Harmonised Master List of Infrastructure proceeds are: Sub-sectors notified by GOI, construction and a. Real estate activities; development of SEZ and industrial parks/integrated townships b. Investment in capital market; c. Equity investment; Investment in capital market d. Working capital purposes from foreign branches/ subsidiaries of Indian banks; e. Equity investment General corporate purposes from foreign branches/ Working capital purposes only from foreign equity holder subsidiaries of Indian banks; f. Repayment of Rupee loans from foreign branches/ General corporate purposes only from foreign equity holder subsidiaries of Indian banks; g. On-lending to entities for the above activities, except in case Repayment of Rupee loans only from foreign equity holder of ECB raised by NBFCs for the purpose stipulated at (d), (e) On-lending to entities for the above activities and (f).
Minimum Average Maturity Period Minimum • 3 years for all ECB’s irrespective of the amount (except specifically provided) • 1 year in case of ECB up to 50 million in the manufacturing sector Average • 5 years in case ECB is raised from foreign equity holders for working capital, general corporate Maturity purposes and repayment of rupee loan Period • 7 years in case ECB raised from other than foreign equity holder for working capital purposes or general corporate purposes or on-lending by NBFCs for working capital Not purposes or general corporate purposes foreign branches • 10 years in case ECB raised from other than foreign equity holder for repayment of Rupee / subsidiari loans availed domestically for capital expenditure and on-lending by NBFCs for the same es of Indian purpose banks • 10 years for ECB raised from other than foreign equity holder for repayment of Rupee loans availed domestically for purposes other than capital expenditure and on-lending by NBFCs for the same purpose Liberalised*
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