ECA's And The ECB Policy

<p>Of late, RBI's policy on external commercial borrowings ("ECBs") has come under severe criticism from economists, practioniers and other stakeholders. The 'Report of the Committee to Review the Framework of Access to Domestic and Overseas Capital Markets (Phase II, Part II: Foreign Currency Borrowing) issued by the committee constituted by the Ministry of Finance, Government of India and headed by M. S. Sahoo in February 2015 ("Sahoo Committee report"), amply illustrates the policy infirmities pertaining to ECBs. The policy is complex and uncertain, and arguably, raises concerns about, engaging in ill-defined industrial policy, the scale of economic or commercial knowledge required to lay down the detailed prescriptive regulations, its impact upon the cost of business, and about rule of law.<br><br>A case in point to reinforce some of the above criticisms is the ambivalent treatment meted out by the ECB policy to indirect modes of financing, like credit insurances, which Indian eligible borrowers can avail from overseas export credit agencies ("ECAs"). While availing direct financing from ECAs is permitted, availing indirect financing from ECA - in the form credit insurances - seems fraught with many challenges and uncertainties. &nbsp;<br><br>ECAs, are government- backed institutions that provide loans, guarantees or insurance to banks or corporates that lend to borrowers/importers in developing countries and emerging markets, that are considered risky (commercially or politically) for conventional corporate financing. Credit insurances from ECA's can substantially lower the commercial or non - commercial risks faced by an overseas lender while lending to an Indian company, and thus can lower the cost of borrowing for the Indian company.&nbsp; &nbsp;<br><br>As part of a financing package, an offshore commercial bank, funding an Indian company's import of capital asset, often mandates the Indian borrower to avail of credit insurance from an ECA. It also agrees to fund the premium and other costs payable by the Borrower to the ECA. The amount of the premium and fees payable to the ECA, understandably, will have to be within the permissible all-in-cost ceilings. This financing package, despite being compliant in terms of the recognized lender and all - in - cost, cannot be availed by an Indian borrower under the automatic route. The ECB guidelines specifically set out what are, and what are not, permissible end uses. As is the problem with any prescriptive regulation, any end use, that does not fit the bill, is indiscriminately deemed to be prohibited. Accordingly, and in the absence of any clear economic or legal guiding principle, payment of premium and fees of an ECA, is treated as a non- permissible end use under the automatic route, although there are differing views which are also prevalent.&nbsp; &nbsp;<br><br>Financing costs for availing indirect financing (credit insurance) within the permissible amounts, from recognised lenders (being ECAs) and within the permissible all- in- cost limits, should not pose any additional or unforeseen foreign exchange risk, that the ECB regulations seek to protect the Indian borrower, or the financial system, against . The prohibition, therefore, appears to be illogical and counter -productive, as it denies Indian firms the ability to obtain cheaper debt capital available on a global scale. As the Sahoo Committee report notes, the policy on end-uses under the ECB guidelines do not seem to follow any economic rationale relevant today. If the RBI does wish to specifically outline the policy in absolute details, then it must accept such power with the added responsibility of drafting guidelines which are not reactionary but preempt all the commercial imperatives. This is indeed a tall order, and therefore, leaves all with the other workable alternative of making the regulations normative or principle based. The Handbook on Adoption of governance enhancing and non-legislative elements of the draft Indian Financial Code, issued in December 26, 2013 and put together by the Department of Economic Affairs, Ministry of Finance, Government of India does suggest a similar approach to be followed by the regulators for regulation framing. &nbsp;<br>&nbsp; &nbsp;<br>The Sahoo Committee Report also illustratively discusses the more nuanced and mature approaches adopted by other emerging market economies such as South Korea, Brazil, South Africa etc. in their regulation of external commercial borrowings.<br><br>Another criticism levelled against the ECB policy is that it is not neutral - in that the policy allows some sectors and not others, or some companies and not others, to access ECBs. Statistics proves that non- resident international banks have been the highest source of ECB facilities extended to Indian borrowers. As a mitigant for the counter party risk, it is natural that such foreign banks are likely to favour large, internationally active and low credit risk firms. This is likely to be compounded by the capital controls, where all in cost ceilings impose interest rate caps on returns on ECB's. Therefore, it hardly comes as a surprise (and probably as an unintended consequence) that only relatively larger Indian companies are able to access the cheaper bank credit through the ECB route. The ability to effectively use credit insurances from ECA's and use the ECB facility, within the permissible parameters, to pay for availing such insurance, would certainly go a long way to make the ECBs equally accessible to all Indian eligible borrowers - thus, making it a more neutral policy.&nbsp; &nbsp;<br>&nbsp;&nbsp;&nbsp; &nbsp;<br>Considering that the incumbent government has, over the past one year, laid much emphasis on the 'Make in India' project and more recently, the 'Digital India' project, which are aimed at boosting manufacturing in India across various sectors, extensive rethinking and policy liberalization regarding ECBs is the need of the hour. Along with foreign equity, easier access to foreign debt as a source of capital is also extremely vital for Indian companies.<br><br>Exchange control regulations must be shaped such that it permits maximum benefits to the Indian firms, without compromising the integrity of the financial system. As clear from the instances discussed above, the experience with the ECB Guidelines is often the opposite. Consistent with the shift from foreign exchange "regulation" to "management", the regulators should devise a policy framework that insulates the Indian system from macro- economic risks, and provides maximum flexibility to Indian businesses.&nbsp;&nbsp; &nbsp;<br>&nbsp;<br><em>The views expressed here are his own.<br><br>The author, Soumitra Majumdar, is a senior associate with J. Sagar Associates, Advocates and Solicitors. </em></p>