ECB Framework and hedging guideline
Written by QuantArt Market
The existing ECB guidelines can be seen as a rationalized and liberalized framework. RBI had started relaxing much-needed rules from 2018. The expanded list of eligible borrowers, Lower minimum average maturity period, relaxation in end-use, and relaxation in mandatory hedging are the characteristics of the current framework. A summarized table for ECB is pasted below.
The big question is – can we see some more relaxation in terms of hedging requirements and hedging instruments especially after the new hedging guidelines is in place from 1st September.
|Parameters||Direction of framework|
|Options of raising ECB||FCY denominated ECB||INR denominated ECB|
|Currency of borrowing||Any freely convertible Foreign Currency||Indian Rupee (INR)|
|Eligible borrowers||All entities are eligible to receive FDI.
Port trust, SIDBI, EXIM Bank of India, and units in SEZ.
(LLPs are not eligible)
|a. Registered microfinance companies and
b. All entities eligible to raise FCY ECB
|Recognized lenders||A resident of any FATF or IOSCO compliant country|
|Minimum Average Maturity Period||The minimum average maturity is 3 years barring a few specific categories mentioned below.
a) 1 year for manufacturing companies up to USD 50 million per FY
b) 5 years when raised for equity foreign equity holder for working capital/general corporate purpose or for repayment of rupee loan
c) 10 years for working capital purpose or general corporate purpose or for on lending for the same purpose by NBFCs
d) 7 years for repayment of Rupee loans availed domestically for capital expenditure or for on lending for the same purpose by NBFCs
e) 10 years for repayment of Rupee loans availed domestically for a purpose other than capital expenditure or for on lending for the same purpose by NBFCs
|All-in cost pricing||Benchmark rate plus 450 bps spread|
a) Real estate activities.
b) Investment in the capital market.
c) Equity investment.
d) Working capital purposes, except foreign equity holders.
e) General corporate purposes, except foreign equity holders.
f) Repayment of Rupee loans, except foreign equity holders.
g) On-lending to entities for the above activities, except in case of ECB raised by NBFCs for the same.
|Maximum amount||a) USD 750 million
b) specifically for manufacturing company USD 50 million with MAMP 1 year
|Hedging||a) 70% of P+I is the mandatory requirements for infrastructure space companies when average maturity is less than 5 years
b) not mandatory for any other category