On September 25, 2011, (a Sunday evening!), the Reserve Bank of India (RBI) notified three sets of changes affecting foreign borrowing constraints that apply to Indian companies. While these changes will, to a limited extent, provide Indian companies with limited access to cheaper funding abroad, most of the changes will only benefit companies engaged in the infrastructure sector.*
Under the first set of changes, Indian companies in the infrastructure sector will be allowed, with prior RBI approval, to use up to 25 per cent of their fresh external commercial borrowings (ECBs) to refinance domestic (rupee) borrowings, provided the domestic borrowings were obtained for capital expenditure of earlier completed infrastructure projects. The remaining 75 per cent of the fresh ECBs have to be used for capital expenditure in new infrastructure projects. All the prior restrictions that applied to ECBs will continue to apply to these new loans (including restrictions that regulate average maturity, all-in cost caps and end-use of the ECBs).
Under the second set of changes, companies in the infrastructure sector will be allowed, again with prior RBI approval, to import capital goods using short-term credits as bridge financing. However, the bridge financing will have to be replaced with longer term ECBs that comply with all other ECB regulations. Moreover, the RBI's prior approval will be needed again when replacing the bridge financing with ECBs.
Finally, under the third set of changes, the RBI has made three modifications to the existing ECB rules—these modifications will have a slightly broader application.
1. The RBI has raised the prior caps that applied to the amount of ECBs Indian companies could raise without having to obtain RBI approval. Companies engaged in the real sector (i.e., manufacturing companies and infrastructure companies) can now raise up to USD 750 million per financial year without RBI approval (up from the previous limit of USD 500 million). On the other hand companies engaged in providing specified services, i.e., hotels, hospitals and software companies, have been allowed to raise up to USD 200 million per financial year without RBI approval (up from the previous cap of USD 100 million)—but, the enhanced ECBs raised by these services companies cannot be used to acquire land.
2. The RBI has also now allowed Indian companies to raise ECBs that are designated in Indian rupees from their foreign equity holders. These ECBs may or may not require prior RBI approval depending on the amount being borrowed and the level of the foreign lender's equity stake in the Indian company.
3. The RBI has now allowed Indian companies engaged in the infrastructure sector to use ECB funds to meet "interest during construction" costs, provided such interest is capitalized and included as part of the project cost.
* For purpose of these ECB rules, a company will only be regarded as engaged in the infrastructure sector if is engaged in any one of the following nine specific fields of activity: (i) power, (ii) telecommunication, (iii) railways, (iv) roads and bridges, (v) sea ports and airports, (vi) industrial parks, (vii) urban infrastructure (water supply, sanitation and sewage projects), (viii) mining, exploration and refining, and (ix) cold storage or cold room facilities (including for preservation or storage of agricultural and allied produce, marine products and meat).