RBI withdraws some ECB policy relaxations

The recent increase in liquidity and availability of capital in the economy has prompted the Reserve Bank of India (RBI) to change its policy on external commercial borrowings (ECBs), reverting to the pre-credit crunch regulatory framework. In its recent circular of 9 December the RBI has removed the relaxations on the ceilings of all-in-costs, which had earlier been extended to companies seeking loans from foreign lenders. The change was to effect on 1 January 2010. However, the RBI also announced that certain concessions to the telecommunication and infrastructure sector will be extended.

Earlier this year the RBI announced that, until June 2009, it would dispense with the ceilings on the all-in-costs for ECBs procured under the approval route. Thereafter, after considering the continuing pressure on credit in the international markets, the RBI decided to extend the relaxation until 31 December. Having possibly decided that the prevailing macroeconomic conditions are no longer inhibiting the ability of companies to access credit, the RBI has now reintroduced the ceilings on interest rates that can be charged by foreign lenders to Indian companies.

Hence the prescribed all-in-cost ceilings for ECBs under the approval route are 300 basis points over the six-month LIBOR for loans with an average maturity of three to five years, and 500 basis points over the six-month LIBOR for loans with an average maturity of more than five years. The circular however provides eligible borrowers an opportunity to enjoy the benefits of the previous regime, provided the loan agreement is signed on or before 31 December 2009. The RBI has affirmed that such proposals will continue to be considered under the approval route.

Parneeta Singh is a senior associate at Trilegal in Mumbai where Vardaan Ahluwalia is an associate. Trilegal is a full-service law firm that advises on corporate and commercial law in India and provides commercially oriented legal advice in relation to all sectors of the economy. The firm has offices in Delhi, Mumbai, Bangalore and Hyderabad and has over 100 lawyers, some with experience at law firms in the US, the UK and Japan.