A stack of U.S. one dollar bills (Photographer: Stephen Hilger/Bloomberg News)

BQExplains: What RBI’s New Foreign Borrowing Rules Could Mean For India Inc. 

The Reserve Bank of India’s new external commercial borrowing rules have limited the pool of options available to Indian firms looking to refinance domestic borrowings with cheaper overseas finance. Released earlier this week, the new framework could impact firms that were hoping to raise dollar debt to repay domestic lenders at a time when lending capacity in the Indian banking system is constrained.

The norms widen both the pool of eligible borrowers and eligible lenders and create two broad categories of foreign currency debt and rupee debt raised overseas. However, they retain restrictions on the end use of such dollar debt, which shuts the window on dollar refinancing deals.

In December, the RBI disclosed a prudential limit for foreign borrowings and said that it would limit these to an aggregate level to 6.5 percent of GDP. The new framework follows from there.

Restrictions On Dollar Refinancing?

The risk to the dollar refinancing window emerges from two parts of the new framework. First, the RBI will no longer distinguish between short-term and long-term foreign currency borrowings. Earlier such borrowings were split into two categories—short-term borrowings up to five years (known as Track-I) and borrowings above five years (known as Track-2).

The new framework does away with this distinction and puts in a place a common set of "end use" restrictions which include:

  • Real-estate activities.
  • Investment in capital market.
  • Equity investment.
  • Working capital purposes except from foreign equity holder.
  • General corporate purposes except from foreign equity holder.
  • Repayment of rupee loans except from foreign equity holder.
  • On-lending to entities for the above activities.

In the earlier regime, while short-term foreign currency debt couldn't be used for refinancing rupee loans, longer term borrowings could be used for this purpose.

Earlier, companies could raise overseas long-term debt to refinance domestic rupee loans or for meeting their debt capital requirements for general corporate purposes but with these new guidelines, that option is no longer available, explained Pranav Sharma, partner at Cyril Amarchand Mangaldas.

At a time when onshore funding options for companies are limited, this could further limit the options for companies to refinance existing local debt. This could also become an issue for large corporates with substantial exposure to local banks given the upcoming implementation of RBI’s large exposures framework with effect from 1 April 2019.
Pranav Sharma, Partner, Cyril Amarchand Mangaldas.

Fitch Ratings, in a note on Friday, added that while the system wide impact would be limited, it does narrow refinancing options for firms. “The system-wide impact is likely to be limited, as there has been little recent issuance of Masala bonds or foreign-currency debt with a minimum average maturity of 10 years—which can no longer be used to refinance local-currency debt. Nevertheless, some companies may need to revise their funding plans,” said the rating agency.

Wider Pool Of Borrowers And Lenders

Apart from the spoiler on refinancing, the new framework could help expand the pool of borrowers and lenders.

All companies eligible to receive foreign direct investment will be able to raise overseas debt, ending the myriad set of rules that were currently applicable to borrowers across sectors. Some sectors that may benefit include retail non-bank lenders. Earlier only a sub-set of NBFCs, such as those in the business of infrastructure lending, were permitted to raise debt overseas.

The new policy expands the pool of borrowers considerably by allowing any entity eligible to raise FDI to raise overseas debt, said Sharma. “The pool of eligible lenders has now been expanded to include foreign companies, hedge funds, private equity funds etc.- beyond foreign banks, multilateral institutions and long term investors like pension funds etc.”

The expansion in the pool of lenders stems from the decision to allow all residents in FATF (Financial Action Task Force) or IOSCO ( International Organisation of Securities Commissions) compliant countries to be eligible for lending.

The RBI’s stated intention behind the new rules is to rationalise multiple regulations and make it easier for corporates to borrow overseas, and this may be the case for many companies....Eligible borrowers will now be allowed to raise up to $750 million per financial year without approval, with previous sector limits removed. The list of eligible borrowers and recognised lenders has also been expanded.
Fitch Ratings

Narrower Gap Between Companies And LLPs

Sharma of Cyril Amarchand Mangaldas points to another possible implication of the RBI’s new framework. Limited Liability Partnerships, or LLPs, which were earlier not allowed to raise foreign debt, could now be considered permissible borrowers.

“A consequence of the new policy could be that LLPs can now raise foreign debt since they are allowed to raise FDI. If this holds true, then the arbitrage between companies and LLPs as regards ability to raise offshore debt will be removed,” Sharma explained.