The Reserve Bank of India (RBI) last week announced changes to the policy governing external commercial borrowings (ECBs). This represents a reversal on two counts:
1. The all-in-cost ceilings, which were withdrawn about a year ago, have been reintroduced “in view of the improvement in the credit market conditions and narrowing credit spreads in the international markets”.
2. The buyback facility for foreign currency convertible bonds (FCCBs), which was allowed over the last few months, has now been withdrawn “keeping in view the prevailing macroeconomic conditions and global developments, especially the improvements in the stock prices”. Readers will recollect that the buyback facility was earlier introduced because FCCBs went under water due to the global financial crisis, which made conversion of these instruments into underlying shares an unattractive option, thereby requiring RBI to allow companies to buyback the debts from the investors.
Both these changes would become effective January 1, 2010.
(UPDATE – December 22, 2009: It has been reported that several companies are in the process of buying back their FCCBs before the prohibition comes into force at the end of this month)
Other changes introduced in this round are as follows:
1. Companies engaged in the development of integrated townships may avail of ECBs under the approval route until a further period of one year, i.e. December 31, 2010.
2. Non-banking finance companies (NBFCs) exclusively involved in financing infrastructure projects may avail of ECB “from the recognized lender category including international banks under the approval route, subject to complying with the prudential standards prescribed by the Reserve Bank and the borrowing entities fully hedging their currency risk”.
3. Eligible borrowers in the telecommunication sector can avail of ECBs for purpose of payment for spectrum allocation.