Currency entrances need open doors, not small windows

OOn July 6, 2022, the Reserve Bank of India (RBI) issued a press release outlining the measures it proposed to introduce to “mitigate volatility and mitigate global fallout” caused by “high risk aversion which is raging on the financial markets in a context of “risks of recession”. This press release follows months of sisyphean efforts by the RBI to defend the currency amid tighter policy rates and rising inflation.

Sawant Sing
Legal Phoenix

The measures proposed in the press release aim to further diversify and broaden sources of foreign currency funding. Among other measures, the press release proposes a number of relaxations of the regulatory framework for a limited period for borrowers who take on debt with offshore lenders through external commercial borrowings (ECBs) or through the issuance of corporate debt instruments to foreign portfolio investors (REITs). .

Currently, under the “general track” for REITs, REITs are only permitted to invest in corporate debt securities with a residual maturity of at least one year. Further, no more than 30 percent of a REIT’s investments may have a residual maturity of less than one year. The press release proposes to exempt from these limits investments by REITs in corporate debt securities made until October 31, 2022. These investments will not be taken into account for the calculation of the 30% limit until upon maturity of such investments or their disposal by the REIT. The news release also proposes to allow REITs to invest in commercial paper and non-convertible debentures with original maturities of up to one year.

Currency entrances need open doors, not small windows
Aditya Bhargava
Legal Phoenix

Such investments will also not be taken into account for the calculation of the thresholds. Issuance of commercial paper and non-convertible bonds with an original maturity of one year or less is also subject to additional RBI regulations such as minimum net worth and tangible net worth of the issuer , minimum instrument rating, and certain other disclosure and documentation requirements. In order to fully implement the proposed easings for REIT investments in instruments with an original maturity of one year or less, further regulatory changes will need to be made, none of which appear to have been contemplated in the press release.

The press release further proposes to increase certain limits and caps under the ECB, again for a limited window of time. Under the current ECB framework, all eligible borrowers can raise ECB up to a total of $750 million or its equivalent during each fiscal year under the automatic route. The press release proposes to increase this limit from $750 million to $1.5 billion for BCEs raised until December 31, 2022. The current ECB framework prescribes an overall cost cap for BCEs, which the press release proposes raising by 100 basis points. until December 31, 2022, provided that the borrower has an Investment Grade rating.

However, the press release ultimately only sets the stage for the changes to be introduced and does not make the changes itself. These changes will have to be implemented through specific instructions issued by the RBI in the exercise of its supervisory powers. To implement the relaxations and exemptions for REITs set out in the press release, the RBI issued a standalone circular on July 7, 2022, which clarified that the window for the relaxations for REITs will commence on July 8, 2022 and expire. October 31, 2022. , both dates inclusive. While other measures proposed by the press release have been implemented by various separate circulars issued by the RBI, it is somewhat odd that the relaxations of limits on ECBs have not yet been implemented by the RBI. through a circular.

The changes proposed by the press release provide temporary relief but do not lead to long-term structural changes and are not expected to increase foreign exchange flows to India beyond the windows prescribed in the press release. It is hoped that the RBI will come up with new measures that will bring about the necessary structural changes to provide stable sources of foreign exchange flows to India in the long run.

Sawant Singh and Aditya Bhargava are partners at Phoenix Legal. Sristi Yadav, is a senior partner.

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