India Inc could raise a cool $100 billion as RBI eases ECB norms

With RBI allowing higher borrowing, removing pricing restrictions and relaxing the end-use, some market participants said the volume could even double from the previous financial year if structured credit and acquisition-linked deals increasingly move overseas.

RBI has increased the per-borrower limit to $1 billion from $750 million. Eligible firms can now raise up to the higher of $1 billion or 300% of their net worth, creating additional headroom for large companies which had previously exhausted their limits.

Agencies

VOLUMES COULD EVEN DOUBLE Borrowers will get wider access to global liquidity, and be able to tap better spreads

“With the per-borrower limit raised to $1 billion, overall borrowing linked to 300% of net worth, removal of the pricing cap and wider end-use permissions, ECB volumes could even double from current levels over the next few years as both borrower and lender pools expand,” said Utsav Johri, partner at JSA Advocates & Solicitors.

RBI has scrapped the all-in-cost ceiling for ECBs with average maturity of three years and above. Earlier, the pricing was capped at 450 basis points over the secured overnight financing rate (SOFR). Fully-hedged ECBs currently cost about 9.5-10.5%, assuming a 3.5% SOFR base, a 450 basis point spread cap and an additional 2-3% hedging cost.

Live Events

A basis point is a hundredth of a percentage point.

In comparison, an AAA or AA-rated issuer can currently raise funds in the domestic market at roughly 7-8.5%, making onshore borrowing 100-300 basis points cheaper for top-rated names. With the ceiling removed, pricing is now market-linked, which would allow lenders and borrowers to negotiate spreads based on credit profile, structure and tenure.

“By broadening eligibility, relaxing end-use restrictions and removing pricing caps, the new guidelines increase access to global liquidity pools,” said Chetan Joshi, head of debt financing, HSBC India. “The enhanced flexibility around tenor, quantum, end-use, pricing and prepayment materially expands the sources of funding available to Indian corporates. This is likely to provide significant impetus to foreign currency borrowing out of India and the market is well-positioned for sustained growth.”

A large portion of incremental volume is expected from transactions that were earlier routed through foreign portfolio investor-non-convertible debenture (FPI-NCD) structures. Financing of foreign-owned and controlled companies for downstream investments can now be undertaken through the ECB route. Private credit funds, which relied heavily on domestic NCD issuances, may increasingly shift offshore.

RBI has also liberalised end-use norms. Companies can now use ECB proceeds for acquisition financing with control, refinancing of domestic loans and broader corporate purposes, beyond traditional capital expenditure. The reduction in minimum average maturity to three years from seven-ten years for several categories is expected to make refinancing of rupee loans more practical.

Acquisition finance, which is priced higher due to increased risk, is expected to see stronger demand. With no regulatory ceiling, pricing can now depend on the transaction structure, whether bullet, balloon or amortising and underlying credit profile, said Johri.

Borrowers could also use the Gujarat International Finance Tec-City route to bring down the cost, with no withholding tax which would lower the effective borrowing cost compared to onshore debt and NCDs issued to FPIs. RBI has extended the relaxations to real estate as well. ECBs are now permitted for construction and development activities in certain sectors where foreign direct investment is allowed, including industrial and commercial projects.

“While uptake will depend on pricing and hedging costs, this provides additional funding options for developers,” Johri said. For manufacturing companies, the borrowing limit for short-term trade credit has been raised to $150 million from $50 million for maturities of one-three years, with pricing aligned to trade credit norms currently capped at 350 basis points over the SOFR for foreign currency trade credit. ECB funds cannot be used for chit funds, Nidhi companies, farmhouses or general real estate, except approved development projects subject to infrastructure and industrial park conditions.

Use in agriculture and animal husbandry is largely restricted, barring controlled-environment cultivation, seed development, aquaculture and allied activities. The proceeds cannot be used for plantations either, except for tea, coffee, rubber, cardamom, palm oil and olive oil.