Hitesh Sanghvi discusses the safeguards that need to be followed to preserve subrogation rights of Export Credit Agencies (ECA) in External Commercial Borrowing (ECBs) transactions.

An Overview

External Commercial Borrowing (ECB) is one of the important methods used in India by Indian companies to access foreign funds. ECBs refer to commercial loans in the form of bank loans, buyers’ credit, suppliers’ credit, securitised instruments from foreign lenders (offshore lenders) with a minimum average maturity of three years.

ECBs are governed by Section 6(3) (d) of the Foreign Exchange Management Act, 1999 read with the Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations 2000. Further, the master circular that consolidates all existing instructions on ECB at one place is issued by the Reserve Bank of India (RBI) every year and may be further amended by the RBI from time to time. The current master circular bearing number 08/2010-11 was issued by the RBI on 1 July 2010 and has been further amended after its issuance (together “the ECB Guidelines”).

ECA Subrogation rights

Export Credit Agency (ECA) has not been defined under the ECB Guidelines. However, broadly, an ECA is a private or quasi-goverrnmental institution that acts as an intermediary between national governments and exporters to issue export financing. The financing can be in the form of credits (financial support) or credit insurance and guarantees (pure cover) or both, depending on the mandate the ECA has been given by its government.

In a default scenario of ECA-covered ECB loans where payment has been made by ECA under the ECA cover, the loan agreement (governed by the English laws) provides for an automatic subrogation of foreign lender’s rights in favour of ECA as per the finance documents executed including the security documents. In other words, if default occurs, the ECA would pay-off the foreign lender and step into its shoes so as to have the benefit of the foreign lender’s rights and remedies against the defaulting Indian borrower company. However, it is pertinent to evaluate this clause in light of the ECB Guidelines.

It would be relevant to mention that there is no express provision in the ECB Guidelines that provides for the ECA subrogation rights. As a result, many a times the Indian borrower company is asked to obtain a clarification/approval of the RBI as a condition precedent to the draw-down,

Also, the ECA’s automatic subrogation to the foreign lenders’ rights under the finance documents as aforesaid would not get hit by the ECB Guidelines since ECA has been included as a “Recognised Lender” under the guidelines.

However, the same may not hold good to the extent of specific securities like mortgage, guarantee or pledge created in favour of the foreign lender wherein the Indian borrower would have to first obtain a no-objection (approval) of the designated authority (AD Category- I bank) created by the RBI in relation to this. The reason being under the ECB Guidelines such no-objection of the designated authority are granted for the security to be specifically created in favour of the foreign lender(s) or security trustee or supplier alone, as the case may be and would not automatically be available to or for the benefit of the ECA.

Therefore, because of the reasons stated above it becomes important that the relevant application to the designated authority is appropriately drafted. It must be ensured that such no-objection (approval) in respect of mortgage, pledge or guarantee would operate to cover the ECA also in order to give full effect to the subrogation rights provisions of the English-law governed loan agreement.

Further, the Indian borrower would not need to unnecessarily go back to the RBI for a separate clarification or approval in this regard.

Hitesh Sanghvi is a corporate lawyer and founder of Hitesh Sanghvi Law Offices in Mumbai.