Restrictions on refinancing eased for select borrowers

In a move that few noticed, the Reserve Bank of India (RBI) in its statement on developmental and regulatory policies of December announced that overseas branches of Indian banks would soon be permitted to refinance external commercial borrowings (ECBs). Such refinancing would be limited to Indian bodies corporate rated “AAA” and public sector undertakings (PSUs) that are classified as “Navratna” and “Maharatna”.

The Department of Public Enterprises’ Maharatna PSU classification is limited to fewer than 10 entities, and includes Coal India, Indian Oil Corporation, Oil and Natural Gas Corporation, and Steel Authority of India. The Navratna PSU classification is limited to fewer than 20 entities and includes Oil India, Power Grid Corporation of India, Hindustan Petroleum Corporation, and Hindustan Aeronautics. These entities are prominently associated with the Indian economy and are often considered to be a “safe credit” due to a purported implicit sovereign guarantee.

By way of brief background, until the recasting of the RBI’s prescriptions on ECBs by Indian borrowers circa November 2015, overseas branches of Indian banks were not specifically prohibited from refinancing ECBs. The revised ECB framework contained a provision that specifically omitted overseas branches of Indian banks as “eligible lenders” for the purposes of refinancing ECBs.

Sawant Singh and Aditya Bhargava are partners at the Mumbai office of Phoenix Legal.