Miscellaneous

1.         Further Liberalization of ECB Policy

Given the ailments afflicting the civil aviation sector in India, the Reserve Bank of India (RBI) has allowedexternal commercial borrowings (ECBs) in that sector even where the end-use of funds is for working capital requirements. This is permissible under the approval route, and is subject to several conditions stipulated by the RBI.

Earlier, the RBI also announcedrelaxations in the ECB regulations governing certain infrastructure sectors such as power and toll roads and highways.

2.         Tax Treaties: Mauritius vs. Singapore

This reportin the Economic Times suggests that Singapore is becoming an increasingly attractive option for investment funds focusing on India, and that the importance of Mauritius is likely to wane in the future. India’s tax treaties with both Singapore and Mauritius provide substantially the same benefits as far as taxation with respect to Indian investments are concerned. While the advantage of Singapore is that it is an established financial centre with substantial presence requirements for investors, Mauritius has a first-mover advantage and the availability of treaty benefits has been tried and tested successfully before the Indian courts, including in the form of the Azadi Bachao Andolan case ([2003] 132 Taxman 373 (SC)).

3.         Breakout Nations

In the last decade or so, India has enjoyed the branding of an “emerging market” and has also been an integral part of the "BRIC" nations. However, a new book seeks to demystify some of these notions and challenges the continued relevance of these labels and branding. The book, Breakout Nations: In Pursuit of the Next Economic Miracles by Ruchir Sharma, has been reviewed in the Economist, with the following being some extracts from the review:

“EMERGING markets” is a useful term precisely because it is imprecise. Coined for the convenience of investors looking for somewhere exciting to put their money, it covers a bewildering range of economies with little in common, except that they are not too rich, not too poor and not too closed to foreign capital.

The invention of “emerging markets” as an asset class required the invention of experts to manage those assets; experts who could discourse confidently about places as far apart as South Korea and South Africa. It might seem impossible to say anything coherent about such an eclectic mix of places. But in fact emerging markets have shadowed each other surprisingly closely in recent years, as Ruchir Sharma of Morgan Stanley points out in his new book, “Breakout Nations”.

Mr Sharma argues that emerging-market funds have lost sight of local idiosyncrasies in their fixation with global macroeconomic forces. Because of this “macro mania”, funds make “little or no distinction between Poland and Peru, India and Indonesia”, which he suggests further synchronises these markets. Emerging markets may have little in common except the funds created to invest in them, but that in itself creates a powerful affinity between them. The term “emerging markets” has helped to create the world it named.

The review concludes with the following observations:

Mr Sharma does not believe the shared success of emerging economies can continue. Some countries will break out from the pack, others will disappoint. The very concept of emerging markets may lose its appeal, he writes, as investors discover they need to distinguish between them: “These economies are now too big to be lumped into one marginal class, and are better understood as individual nations.” …

Further Liberalisation of ECB Policy

In the last few days, the Reserve Bank of India (RBI) has issued a string of circulars to liberalise the policy on external commercial borrowings (ECB). The include the following:

- utilisation of 25 per cent of the fresh ECB raised by a company in the infrastructure sector towards refinancing of the Rupee loan/s availed by it from the domestic banking system, under the approval route;

- import of capital goods by companies in the infrastructure sector by availing of short-term credit (including buyers’ / suppliers’ credit) in the nature of 'bridge finance', under the approval route;

- general rationalisation and liberalisation, such as (i) enhancement of ECB limits under the automatic route for borrowers in the real sector-industrial sector-infrastructure sector, and in specified service sectors viz. hotel, hospital and software, (ii) designation of certain ECBs under Indian rupees, and (iii) the permissibility of using ECBs for meeting interest during construction (IDC) in the infrastructure sector;

- provision of credit enhancement by certain foreign equity holders to the Indian companies in the infrastructure sector; and

- clarification regarding ECBs by foreign equity holders.

These measures not only seek to encourage greater foreign lending to the infrastructure sector, which generates a great demand for financing, but it also helps Indian corporates borrow internationally on more favourable commercial terms given the constant enhancement of interest rates by the RBI that makes domestic borrowings quite expensive. At the same time, there are concerns that these changes may only cause minimal impact, and that more needs to be done, as discussed here and here.

More Hurdles for LLPs

As we have previously noted on this Blog, the popularity of limited liability partnerships (LLPs) has not met with expectations since introduction of that business vehicle in April 2009. While the Government has taken certain steps to boost the utility of LLPs, such as by considering the possibility of foreign investment into LLPs discussed in this paper issued by the Department of Industrial Policy & Promotion, more recent steps taken and views adopted by the regulatory may amount to a retrograde step.

First, as the Economic Times reports, it is currently not possible for various corporate groups to restructure their holding companies so as to convert them into LLPs. The reasoning is as follows:

But, corporates planning to convert their holding companies into LLPs have been told by the registrar of companies (ROC) to get a no-objection certificate (NOC) from RBI; and the central bank is unwilling to give one. "There is a concern that the moment a company becomes LLP, it will be out of the RBI radar. These companies are core investment companies and under new rules they will be monitored, like non-banking finance companies (NBFCs), by the regulator," said an RBI official.
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Currently, the definition of NBFC under the RBI Act does not specifically cover LLPs. Only companies registered under the Companies Act can form NBFCs. "We have told RBI that the law has to be changed to enable recognition of LLPs as core investment companies under the NBFC format," said an official in the registrar of LLPs in Delhi. An RBI spokesperson confirmed that the central bank is in discussion with the ministry of corporate affairs on the subject.

The LLP structure was introduced primarily keeping in mind operating companies, and not holding and investment companies.

Although there is no restriction under the LLP Act as to the activities that an LLP can carry out, the lack of acceptance of the new business vehicle under other legislation such as the RBI Act has given rise to such ambiguities, thereby curtailing the utility of the LLP and its benefits.

Second, although FDI into LLPs is being actively considered, it has been reported that there is no momentum to permit LLPs to raise overseas debt in the form of external commercial borrowings:

The finance ministry and the Reserve Bank of India have opposed changes in the external commercial borrowings (ECB) policy to allow overseas borrowings by LLPs, while responding to a discussion paper on this form of business put out by the department of industrial policy and planning (DIPP), the policymaking body on foreign investment.

The ECB regime should be identical to the one applicable for partnerships, the finance ministry said in response to the paper. The finance ministry is of the view that while FDI can be allowed in this form of business entities, but not overseas debt, said a government official privy to the discussions.
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The current policy allows companies to raise ECBs, but sole proprietorship firms and partnerships are prohibited from accessing such debt. Though, LLPs combine features of the corporate form of business and partnerships, they are closer to partnerships. …

Further Measures to Boost Infrastructure Financing

In continuation of previous measures, the Reserve Bank of India (RBI) has taken additional steps to enable financing in the infrastructure sector.

First, the proposed introduction of credit default swaps on corporate bonds (discussed here) covers corporate bonds issued by Special Purpose Vehicles (SPV) of rated infrastructure companies “keeping in view the need for development of the infrastructure sector”.

Second, the RBI has earlier announced definitive measures to permit take-out financing through external commercial borrowings (ECBs) in the infrastructure sector. As RBI observes in its notification of July 22, 2010:

As per the extant norms, refinancing of domestic Rupee loans with ECB is not permitted. However, keeping in view the special funding needs of the infrastructure sector, it has been decided to review the ECB policy and put in place a scheme of take-out finance. Accordingly, it has been decided to permit take-out financing arrangement through ECB, under the approval route, for refinancing of Rupee loans availed of from the domestic banks by eligible borrowers in the sea port and airport, roads including bridges and power sectors for the development of new projects …

The take-out financing is subject, however, to several conditions including a minimum average maturity period of 7 years, fees to overseas lenders not to exceed 100 bps per annum and that the borrowing will not be under the automatic route (thereby requiring prior approval of the RBI).

Although this is a welcome development, it remains to be seen whether the imposition of stringent conditions will thwart the growth of financing in this sector. For a further analysis of these measures, please see this article on Mondaq and this discussion on CNBC.