RBI Notification of 7th August 2007: Review of ECB Policy

Latest restrictions on ECB apply only if the foreign currency funds are required to meet Rupee expenditure - ECB for this purpose is now restricted to USD 20 mn and requires prior approval from RBI.

There is no change in the regulations for ECB with end use in foreign currency - except that FC funds so mobilised would continue to be parked off-shore till they are utilised.

We do not think that the change in ECB guidelines will have major impact on exchange rates. A significant portion of capital inflows is in the form of FDI (equity / quasi-equity e g fully convertible preference shares / debentures, in addition to ADR /' GDR / New Issues) which will continue to flow into Indian Markets - the only variables being stock markets and real estate prices.

The RBI Notification is attached for your reference.

Updated as of 7 Augustr, 2007 

A review of the ECB guidelines has been undertaken keeping in view the current macroeconomic situation and the experience gained so far by the Reserve Bank in administering the ECB policy.

2. Based on the review, it has been decided to modify the ECB policy until further review as indicated below:

(i) Henceforth, ECB more than USD 20 million per borrower company per financial year would be permitted only for foreign currency expenditure for permissible end-uses of ECB. Accordingly, borrowers raising ECB more than USD 20 million shall park the ECB proceeds overseas for use as foreign currency expenditures for permissible end-uses and shall not remit the funds to India. The above modifications would be applicable to ECB exceeding USD 20 million per financial year both under the Automatic Route and under the Approval Route.

(ii) ECB up to USD 20 million per borrowing company per financial year would be permitted for foreign currency expenditures for permissible end-uses under the Automatic Route and these funds shall be parked overseas and not be remitted to India. Borrowers proposing to avail ECB up to USD 20 million for Rupee expenditure for permissible end-uses would require prior approval of the Reserve Bank under the Approval Route. However, such funds shall be continued to be parked overseas until actual requirement in India.

(iii) All other aspects of ECB policy such as eligible borrower, USD 500 million limit per borrower company per financial year under the Automatic route, recognised lender, average maturity period, all-in-cost-ceiling, prepayment, refinancing of existing ECB and reporting arrangements remain unchanged.

(iv) These conditions will not apply to borrowers who have already entered into loan agreement and obtained loan registration numbers from the Reserve Bank. Borrowers who have taken verifiable and effective steps wherein the loan agreement has been entered into to avail of ECB under the previous dispensation, and not obtained the loan registration number, may apply to the Reserve Bank through their Authorised Dealer.

3. The above changes will come into force with immediate effect.

4. Necessary amendments to the Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000 dated May 3, 2000 are being issued separately.

5. AD Category - I banks may bring the contents of this circular to the notice of their constituents and customers concerned.

6. The directions contained in this circular have been issued under sections 10(4) and 11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999) and is without prejudice to permissions / approvals, if any, required under any other law.