RBI proposes to open foreign borrowing floodgates for companies

MUMBAI: RBI has proposed a revamp of rules on external commercial borrowings. The draft guidelines for 2025, the most extensive rejig since a Dec 2018 framework, replace uniform caps with limits tied to a borrower’s financial strength. Companies may raise up to $1 billion or 300% of their net worth (whichever is higher), while financial sector firms regulated by RBI, Sebi, Irdai or PFRDA face no cap.The draft removes rigid borrowing costs and sets them according to market conditions under the oversight of authorised dealer banks. Earlier, companies could raise up to $750 million annually, with a temporary ceiling of $1.5 billion until Dec 2022.

Revamp of rules

The new rules extend eligibility beyond firms open to foreign direct investment. All resident entities incorporated under a Central or State Act, except individuals, can now tap the route. Firms under insolvency or restructuring, or even those under investigation, may borrow subject to disclosure to their banks. Lender eligibility has also widened to include any person residing abroad, along with offshore branches or IFSC units of Indian regulated lenders.Maturity rules remain unchanged at three years, though manufacturing companies may raise up to $50 million for tenors of one to three years. Waivers have been provided for equity conversion, mergers, resolution or liquidation. The earlier ceiling of 450 basis points over benchmark rates has been scrapped. Only short-term loans of less than three years must comply with trade credit cost caps.End-use rules have been consolidated. Borrowed funds cannot be used for chit funds, Nidhi companies, farmhouses, plantation activity unless permitted under FDI, transferable development rights or securities trading. But they may be deployed for industrial land linked to projects, group on-lending by regulated entities, overseas investment, mergers and acquisitions, and certain primary issuances by non-financial firms.The draft also tightens fund-flow rules. ECB proceeds must be repatriated to India immediately unless earmarked for foreign currency expenditure. Until deployment, funds can only be parked in fixed deposits with local banks, top-rated treasury bills, or deposits with highly rated foreign banks.