India’s debt reforms delight borrowers

Asian Development Bank Special Report 2019
4 min read
Krishna Merchant

More Indian companies are heading overseas in search of funding after the country’s central bank relaxed its long-standing restrictions on offshore borrowing.

The Reserve Bank of India issued new rules on external commercial borrowing (ECB) in January, lowering minimum maturity requirements and scrapping previous sector-specific limits.

Bankers are expecting more Indian companies to issue offshore debt after a number of state-owned issuers moved quickly to take advantage of the new rules.

“We’re seeing a lot more conversations taking place with companies following the revised ECB rules,” said Gaurav Pradhan, co-head of India investment banking and capital markets at Credit Suisse.

“The pipeline includes companies from sectors such as renewables, metals & mining and non-banking financial companies.”

State-owned oil refiner Bharat Petroleum Corporation received a strong response in January to its US$500m three-year bond offering, allowing it to price the deal comfortably inside initial guidance.

This was the first deal after the RBI rule change, which allowed most companies to raise debt at tenors of three years compared with the previous five-year minimum.

Shriram Transport Finance, rated BB+ by S&P and Fitch, sold 3.5-year bonds in February, and bankers are predicting more deals, particularly from lower-rated companies.

“The companies in the Single B and Double B range stand to benefit the most with the revised ECB norms, as investors and lenders are more confident of taking a three-year view on high-yield credits,” said Shantanu Sahai, co-head of debt capital markets at Nomura.

Avinash Thakur, head of Asia Pacific debt origination at Barclays, echoed these sentiments.

“The minimum average maturity for all overseas borrowings at three years is helpful because there is good investor demand for shorter tenors and pricing tends to be better,” he said.


The RBI’s revised ECB framework introduces a more standardised approach, with one set of rules for all foreign currency borrowings and one for rupee-denominated ECBs. That replaces a regime that set different rules for different categories, or tracks, of issuance.

In addition to setting the minimum average maturity for all overseas borrowings at three years, the central bank also said that all eligible borrowers can raise up to US$750m from ECBs in a given financial year, replacing the previous sector-specific limits.

The all-in cost ceiling under the new ECB rules is unchanged at a spread of 450bp over the relevant benchmark rate.

The more streamlined approach comes as regulators aim to ensure that that the offshore liquidity tap is open for Indian companies to help take the pressure off the domestic market.

Starting April 1, large corporate borrowers now have to meet at least a quarter of their annual funding requirements through bonds.

Last year, a series of defaults by infrastructure financing company IL&FS triggered a liquidity crunch. In addition, analysts say the country’s power brokers have been seeking to prop up the rupee in the run-up to this year’s election. Other countries, most notably Indonesia, have previously encouraged state-owned issuers to raise dollar bonds to arrest the decline of their currencies.

Some market observers were sceptical though about whether the easing of the ECB rules would be enough to encourage more inflows.

“The government may be trying to open up capital markets and attract inflows, but revising the ECB framework alone is unlikely to be a big trigger,” said Jonny Chen, portfolio manager at NN Investment Partners.

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