Introduction:

ECBs are commercial loans obtained by eligible Indian entities (borrowers) from recognized foreign lenders. These loans come with specific requirements:

  • Minimum Maturity: The loan must have a minimum repayment period (maturity) depending on the track chosen (explained below).
  • Permitted Uses: The borrowed funds can only be used for purposes allowed by the RBI (restrictions apply).
  • Non-Permitted Uses: Certain uses of the funds are prohibited by the RBI.
  • Maximum Cost: The total cost of the loan (including interest and other fees) cannot exceed a pre-defined limit set by the RBI.

Legal Basis and Regulations:

Regulatory Framework References

Benefits:

Advantages of External Commercial Borrowing (ECB), here's a breakdown of the key benefits companies gain by raising funds through ECBs:

  • Cost Savings: Borrowing from external sources often translates to lower interest rates. Economies like the Eurozone and the United States frequently offer more competitive rates compared to the domestic market, allowing Indian companies to save on financing costs.
  • Increased Borrowing Capacity: ECBs tap into larger international financial markets. This provides access to a wider pool of lenders, enabling companies to raise larger sums of capital compared to what's available domestically.
  • Debt Financing: Unlike equity financing, ECBs are loans. Borrowers retain ownership and control of the company as lenders (debt holders) don't have voting rights.
  • Diversified Investor Base: ECBs help companies diversify their investor base by attracting international lenders alongside domestic ones. This reduces reliance on a single funding source and potentially provides access to new investment networks.
  • Global Exposure: By participating in the international capital market, companies gain exposure to global financial trends and opportunities, potentially enhancing their competitiveness.
  • Economic Growth: ECBs can benefit the Indian economy as well. The government can direct these inflows towards specific sectors like infrastructure or SMEs, fuelling overall economic growth. Increased funding availability in these crucial sectors can significantly contribute to national development.
  • Profitability Potential: By securing funds at potentially lower costs and accessing larger amounts, companies can leverage ECBs to improve their financial performance and profitability.

 

ECB Raising Routes:

Automatic Route vs. Approval Route:

ECBs can be raised under either the automatic route or the approval route within the ECB framework.

1.Automatic Route Process:

Cases under the automatic route are evaluated by the Authorised Dealer Category-I (AD Category-I) banks.

2.Approval Route Process:

Prospective borrowers seeking approval route ECBs must submit their requests to the RBI through their ADs for assessment.

Note- Special Case: FCEBs:

Foreign Currency Convertible Bonds (FCCBs) can only be issued under the approval route within the ECB framework

 

Recognized Lenders

Borrowings (ECB) in India. Here's a quick breakdown of the categories:

  • Multilateral and Regional Financial Institutions: This includes institutions like the International Finance Corporation (IFC), Asian Development Bank (ADB), and Commonwealth Development Corporation (CDC), provided India is a member country.
  • Individuals:
  1. Foreign equity holders can be lenders if they have a minimum equity holding in the borrowing company (specific percentage requirements apply).
  2. Individuals can also subscribe to bonds/debentures listed abroad.
  3. Foreign branches/subsidiaries of Indian banks: These can only provide FCY ECB (foreign currency denominated ECB) excluding FCCBs (Foreign Currency Convertible Bonds) and FCEBs (Fully Convertible Bonds).

Remember, the lender must also be a resident of a country that complies with FATF or IOSCO standards for ECB transactions
 

Eligible Borrowers

Eligible Borrowers for FCY (Foreign Currency) Denominated ECB:

  • Entities eligible to receive Foreign Direct Investment (FDI): This includes companies that can get investments from foreign entities.
  • Port trusts: These are bodies responsible for managing and developing major ports in India.
  • Units in Special Economic Zones (SEZ): Companies operating within these special economic zones can borrow through FCY ECB.
  • Small Industries Development Bank of India (SIDBI): This development financial institution can avail FCY ECB.
  • Export-Import Bank of India (EXIM Bank): Another key financial institution eligible for FCY ECB.

Eligible Borrowers for INR (Indian Rupee) Denominated ECB:

  • Entities eligible to raise Foreign Currency (FCY) ECB: This essentially means any entity on the FCY borrower list can also borrow in INR through ECB.
  • Registered entities engaged in micro-finance activities: This broadens the scope of INR ECB to include not-for-profit organizations, registered societies/trusts/cooperatives, and non-government organizations involved in micro-finance activities.

 

Forms of Borrowing:

Foreign Currency (FCY) Denominated ECBs:

  • Loans: This includes traditional bank loans from foreign lenders denominated in a foreign currency.
  • Floating/fixed-rate notes/bonds/debentures: These are debt instruments issued by the borrower in the international capital market. They can have fixed or floating interest rates depending on the agreement. (Important Note: Fully and compulsorily convertible instruments are not included in this category.)
  • Trade credits exceeding 3 years: This refers to supplier credit extended by a foreign supplier for a period exceeding 3 years. It's essentially a financing arrangement for international trade transactions.
  • Foreign Currency Convertible Bonds (FCCBs): These are bonds issued in a foreign currency that can be converted into equity (shares) of the borrowing company at a predetermined price and time.
  • Foreign Currency Exchangeable Bonds (FCEBs): Similar to FCCBs, but these bonds can be exchanged for the shares of another company, not necessarily the issuer.
  • Financial Leases: This involves leasing equipment or machinery from a foreign lessor with a purchase option at the end of the lease term. The lease payments are effectively a form of borrowing.

Indian Rupee (INR) Denominated ECBs:

  • In addition to the FCY options above, companies can also raise ECBs in Indian Rupees (INR). This includes:
  • Plain vanilla Rupee-denominated bonds issued overseas: These are standard rupee-denominated bonds issued in the international market. They can be privately placed with specific investors or listed on foreign stock exchanges.

ECB Framework/Forms of ECB on the basis of maturity:

The RBI offers three tracks for ECBs, each with distinct maturity requirements:

Track I- Medium-Term Foreign Currency ECB:

Minimum average maturity: 3 years (or 5 years depending on the notification)

Exception: Manufacturing companies can avail loans with a minimum maturity of 1 year.

Track II-Long-Term Foreign Currency ECBs:

Minimum average maturity: 10 years

Track III-Indian Rupee (INR) Denominated ECBs

Minimum average maturity: 3 years (or 5 years depending on the notification)

Exception: Manufacturing companies can avail loans with a minimum maturity of 1 year.

 

Procedure for applying ECB:

Automatic Route

Step1: Contact the Authorized Dealer (AD) Bank: The applicant seeking an ECB should contact their designated AD bank.

Step 2: Submit Form 83- The borrower must submit Form 83 in duplicate along with all necessary supporting documents to the AD bank.

Step 3: Form Certification- The Form 83 needs to be certified by a Chartered Accountant or Company Secretary.

Step 4: Forwarding the Application- The AD bank will forward one copy of the application to the Reserve Bank of India (RBI).

Step 5: Loan Registration Number (LRN)- After scrutinizing the application, the RBI will grant permission and provide a Loan Registration Number (LRN) to the borrower.

Monthly Reporting: Borrowers are required to submit a monthly ECB-2 Return certified by their AD bank to the RBI within seven working days from the close of the month

Approval Method

While the Automatic Route offers a simpler process, some borrowers may need to seek approval from the Reserve Bank of India (RBI) for their ECB. Here's a breakdown of the typical application process for the Approval Route

Step 1 : Consult your AD Bank-  Discuss your specific borrowing needs with your designated Authorized Dealer (AD) bank. They can guide you on the eligibility criteria and documentation required for an approval route application.

Step 2: Prepare the Application Package- In collaboration with your AD bank, assemble the necessary documents. 

Step 3: Loan Agreement- A detailed document outlining the loan amount, interest rate, tenure, repayment schedule, and other terms between the borrower and lender.

Step 4: ECB Application Forms- These forms will be provided by your AD Bank and may include specific details for the approval route.

Step 5: Authorization Documents- Resolutions or other documents from both the borrower and lender officially authorizing the ECB transaction.

Step 6: End-Use Declarations- Clearly state the intended purpose for which the ECB funds will be used.

Step 7: Chartered Accountant Certificate- This verifies your financial health and strengthens your application.

Step 8: Supporting Documents- Depending on your specific case, your AD Bank might advise including additional documents to support your application for approval.

Step 9: Submit Application Through AD Bank-  Your AD Bank will act as an intermediary, submitting the complete application package to the RBI for their review and consideration.

Step 10: RBI Approval- The RBI will analyse your application based on various factors, including the macroeconomic situation, your company's financial standing, and the merits of your proposed ECB. You may need to provide additional information or clarifications if requested by the RBI during this process.

Step 11: RBI Decision-  The RBI will communicate their decision regarding your application. If approved, they will issue a Loan Registration Number (LRN).

Step 12: Fund Utilization-  Only after receiving the LRN can you proceed with finalizing the loan agreement with your lender and receiving the ECB funds. Ensure the funds are used strictly for the approved purpose as declared in your application.

 

Late Submission Fees:

Form ECB,FormEcb-2,Revised Form ECB=Rs.7500+(0.025%*A*n)

Where:

  • The variable 'A' denotes the monetary value associated with delayed reporting.
  • In the context of any ECB-2 return, 'A' shall be determined as the greater of the total inflow or outflow, inclusive of interest and other applicable charges.
  • 'n' represents the rounded-up number of years of delay in submission, approximated to the nearest month with precision to two decimal places.

Provisions:

ECB Limitations under Automatic Route

  • All eligible borrowers have the authority to raise ECBs up to USD 750 million or equivalent per fiscal year under the automatic route.
  • For FCY-denominated ECBs sourced from direct foreign equity holders, the ECB liability equity ratio under the automatic route should not exceed 7:1.
    • However, this ratio does not apply if the total outstanding amount of all ECBs, including the proposed one, is up to USD 5 million or its equivalent.
  • Borrowing entities are also subject to the guidelines on debt-equity ratio, if any, issued by the relevant sectoral or prudential regulator.

Hedging Provision

For Foreign Currency (FCY) Denominated ECB:

Entities raising External Commercial Borrowings (ECB) must adhere to any guidelines for hedging provided by the relevant sectoral or prudential regulator regarding foreign currency exposure.

For Indian Rupee (INR) Denominated ECB:

Overseas investors can hedge their Rupee exposure using approved derivative products through authorised dealer Category I banks in India.

 

Minimum Average Maturity Period (MAMP) :

The Minimum Average Maturity Period (MAMP) represents the minimum duration for which the borrowed funds through External Commercial Borrowings (ECB) must remain outstanding before they are eligible for repayment. This period is calculated from the ECB disbursement date. The MAMP for ECB is set at 3 years. Any call and put options, if present, cannot be exercised before the completion of the minimum average maturity. However, specific categories have their prescribed MAMP as outlined below:

Sr. No.

Category

MAMP

(a)

(a) ECBs raised by manufacturing firms not exceeding USD 50 million or its equivalent per fiscal year.

1 year

(b)

ECB raised from foreign equity holder* for working capital purposes, general corporate purposes, or for repayment of Rupee loans. *25% direct holding/ 51% indirect holding/ group company with common overseas parent

5 years

(c)

ECBs for (i) working capital or general corporate purposes, and (ii) on-lending by NBFCs for the same purposes.

10 years

(d)

ECB raised for (i) repaying domestic Rupee loans utilized for capital expenditure and (ii) on-lending by NBFCs for the identical objective

7 years

(e)

ECB raised for (i) repaying Rupee loans obtained domestically for purposes other than capital expenditure and (ii) on-lending by NBFCs for the same objective

10 years

-categories mentioned at (b) to (e):

  • ECB cannot be sourced from foreign branches/subsidiaries of Indian banks.
  • The prescribed MAMP must be strictly adhered to under all circumstances.

 

Currency Conversion of Borrowing

For Foreign Currency (FCY) Denominated ECB:

The conversion of ECB currency from one freely convertible foreign currency to any other freely convertible foreign currency, as well as to Indian Rupees (INR), is fully permissible.

For Indian Rupee (INR) Denominated ECB:

Converting from Indian Rupees (INR) to any freely convertible foreign currency is prohibited.

 

Bottom of FormAnnual All-in-cost Ceiling :

The 'All-in-cost' refers to the comprehensive expense associated with the External Commercial Borrowing (ECB), encompassing interest, fees, and any additional charges payable to the lender or third party. It is determined as a spread over the benchmark rate.

For Foreign Currency (FCY) Denominated ECB:

Benchmark Rate plus 550 basis points (bps) spread applies to existing External Commercial Borrowings (ECBs) previously linked to LIBOR, now transitioned to Alternative Reference Rates (ARR). For new ECBs, the Benchmark Rate plus 500 bps spread is applicable. In the case of Foreign Currency (FCY) denominated ECBs, the Benchmark Rate refers to any widely accepted interbank rate or ARR with a 6-month tenor, relevant to the borrowing currency. For instance, the SONIA rate for GBP.

Note-

The Benchmark rate refers to any widely accepted interbank rate or Alternative Reference Rate (ARR) with a 6-month tenor, relevant to the borrowing currency.

For Indian Rupee (INR) Denominated ECB:

Benchmark Rate plus 450 basis points (bps) spread applies. In the case of Indian Rupee (INR) denominated External Commercial Borrowings (ECBs), the Benchmark Rate will be the prevailing yield of the Government of India securities with corresponding maturity.

Note-
The Benchmark rate refers to the prevailing yield of the Government of India securities with corresponding maturity.

 

Other Cost:

This fee is called a prepayment charge or penal interest. It cannot be more than 2% on top of the normal interest rate you're already paying on the remaining loan amount. This extra fee is separate from the overall limit on your borrowing costs (the all-in-cost ceiling).

Exchange Rate:

For Foreign Currency (FCY) Denominated ECB:

The conversion of Foreign Currency (FCY) ECB into Indian Rupee (INR) ECB can occur at the exchange rate prevailing on the date of agreement or at a rate that is lower than the prevailing rate on the date of agreement.

For Indian Rupee (INR) Denominated ECB:

The exchange rate for conversion to Indian Rupees shall be determined based on the prevailing rate at the date of settlement.

Conversion of ECB into Equity:

Conditions for the conversion of ECB, including matured but unpaid ones, into equity:

  1. The borrowing company's activity falls under the automatic route or requires approval for Foreign Direct Investment (FDI).
  2. Conversion should not breach the applicable sectoral cap under the FDI policy and must be with the lender's consent.
  3. Compliance with pricing guidelines (Fair Value on the date of conversion).
  4. Consent of other lenders, if any, should be obtained.
  5. Conversion can occur at the exchange rate on the date of agreement or any lesser rate with mutual consent.
  6. Fulfilment of filing requirements in Form FC-GPR and ECB 2 in case of partial conversion or phased conversion. Compliance with such conversions must be done via the AD banker by submitting a detailed application and providing the required documents to the AD Banker.

Restrictions on End Use:

ECB funds cannot be used for the following purposes:

  • Real Estate Activities:
    • Real estate activities involving own or leased property, including buying, selling, and renting of commercial and residential properties or land. This also encompasses activities conducted on a fee or contract basis, such as engaging real estate agents for intermediating in buying, selling, letting, or managing real estate.
  • Exclusions:
    • Construction/development of industrial parks/integrated townships/Special Economic Zones (SEZ).
    • Purchase/long-term leasing of industrial land as part of new projects/modernization of expansion of existing units.
    • Any activity falling under the definition of the 'infrastructure sector'.
  • Investment in Capital Markets, Equity Investment:
    • Utilization for working capital purposes and general corporate purposes, except where raised for said purposes or from foreign equity holders.
  • Repayment of Rupee Loans:
    • Exceptions apply only where the ECB is raised for this specific purpose.
  • On-lending for Aforesaid Purpose:
    • Exceptions are allowed in the case of ECBs raised by Non-Banking Financial Companies (NBFCs) for this purpose.

Contravention and Compounding:

Compounding entails voluntarily acknowledging the violation, admitting guilt, and pursuing resolution. The application for compounding of a contravention must be filed within three years from the date of contravention or the date on which the applicant becomes aware of the contravention.

Commonly committed contraventions under ECB Regulations include:

  1. Borrowing funds without obtaining Loan Registration Number (LRN).
  2. Delay or non-submission of monthly ECB returns.
  3. Using ECB funds for activities not allowed under prescribed regulations.
  4. Not adhering to Minimum Average Maturity Period (MAMP) guidelines.

If there is any contravention to comply with ECB norms, an application for compounding can be submitted along with prescribed documents and fees. The proceedings would be concluded, and an order will be issued within 180 days from the date of receipt of the application. The order will be passed after affording an opportunity of being heard to all the concerned parties.

Under the ECB regulations, a fixed amount is applied once for every contravention. In addition to the fixed amount, a variable amount may also be imposed as per the prescribed computation matrix depending on the amount involved in the contravention.

Start-up funding through ECB under Automatic Route
ECB Funding for Startups in India: A Streamlined Option

Looking to raise capital for your innovative startup? The Reserve Bank of India (RBI) offers a simplified ECB facility specifically designed for startups recognized by the Central Government. This program allows startups to access foreign currency or Indian Rupees (INR) through a faster and easier process compared to traditional ECBs.

Here's what you need to know:

Eligibility: Your startup must be officially recognized by the Central Government as of the date you apply for the ECB.

Fast Track Approval: You can access funding through AD Category-I banks via the automatic route, which streamlines the approval process.

Maturity Period: Borrowed funds must have a minimum average maturity of 3 years.

Funding Options: You can choose from various borrowing options including:

Loans from foreign lenders

  • Non-convertible preference shares
  • Optionally convertible preference shares (can be converted into equity later)
  • Partially convertible preference shares (partially convertible into equity)

Currency Flexibility: Borrow funds in any freely convertible foreign currency or INR, or a combination of both.

INR Borrowing Mechanism: If borrowing in INR, the foreign lender needs to arrange the INR funds through swaps or outright sale facilitated by an AD Category-I bank in India.

Funding Limit: The maximum you can borrow per financial year is USD 3 million or its equivalent in INR or another convertible currency.

Interest Rate: The interest rate (all-in-cost) is negotiated between you and the lender.

Fund Usage: Utilize the borrowed funds for any legitimate business expense related to your startup's operations.

Benefits for Startups:

  • Faster access to capital: The automatic route simplifies the approval process, allowing you to secure funding quicker.
  • Flexible financing options: Choose the borrowing structure that best suits your startup's needs.
  • Diversified funding sources: Access foreign capital alongside INR to support your growth plans.
  • Important Note: It's advisable to consult with an AD Category-I bank to determine your eligibility and explore the most suitable borrowing option for your startup's financial goals.

 

Article by Shashwat Tripathi 

and Legal Intern at Corpzo