Bringing a Loan in FOREX to India

Businesses often aim to raise capital for various purposes for the betterment and growth of their companies. At times, these loans may be borrowed abroad and you may bring the capital to India later on. However, this needs to be done through an extensive process while adhering to certain guidelines laid down by the Reserve Bank of India and the Government of India. Borrowing money in foreign currency and bringing it to India can be done only through the way of External Commercial Borrowing (ECB).

What is External Commercial Borrowing (ECB)?

External Commercial Borrowing (ECB) refers to borrowing capital from entities outside of India (non-resident entities) while adhering to the structure set by the Reserve Bank of India (RBI) in consultation with the Government of India.

Transactions related to ECB are overseen by provisions stated under the Foreign Exchange Management Act (FEMA), 1999.

What are the Advantages of Availing ECB?

• Low Interest rates as compared to domestic funds.
• Chance to gain huge volume of funds.
• Relatively long-term availability of funds.
• Internationally recognized sources such as banks, export credit agencies, etc. can be used to raise ECB by corporates.
• ECB can be in foreign currencies. Thus, they enable the corporate with foreign currency to fulfill the machineries’ import costs, etc.

What are the Disadvantages of Availing ECB?

• Exchange Rate Risk: ECB exposes companies to exchange rate risk, as variations in INR’s value compared to other currencies influences the loan repayment cost. This may increase the financing costs for businesses if the rupee’s value drops against the foreign currency in which the loan has been availed.
• Sovereign Risk: Companies are exposed to sovereign risk due to ECB, as the ability of a foreign government to repay its debt may influence the creditworthiness of foreign lenders. Basically, if a foreign government in unable to pay its dues, the foreign lenders’ ability to repay their dues to Indian companies may be doubted as well.
• Credit Risk: If you consider the potential of foreign lenders not being equally protected against default as domestic lenders, ECB exposes companies to a significant credit risk. This implies that companies may face bigger risks for defaulting on loans.
• Regulatory Risk: ECB is prone to regulatory risk; Any changes to ECB-related government regulations can influence the availability and cost of borrowing.
• Dependence on Foreign Funding: ECB can result in Indian companies becoming more reliant on funding from foreign countries. It can be risky if access to foreign capital dries up or becomes more costly in the future.
• Reputation Risk: If an Indian company defaults on its ECB, it could damage their reputation and make it significantly more difficult to obtain financing in the future.

Sources of ECB

Two routes, namely Automatic and Approval, can be used to avail External Commercial Borrowings.

• Automatic Route: ECBs can be availed through Authorized Dealers, AD Category-I banks.
• Approval Route: Perspective borrowers should send proposal for ECB to RBI through AD-Category-I bank for examination.

ECB Framework

Currency of Borrowing

•    FCY Denominate ECB

Any Freely Convertible Foreign Currency (FCY)

•    INR Denominated ECB

The currency of India - Indian Rupee.

Forms of ECB

•    FCY Denominate ECB

Loans, floating/fixed rate notes, bonds, debentures, trade credits beyond three years, FCCBs, FCEBs, and Financial Leases.

•    INR Denominated ECB

Loans, floating/fixed rate notes, bonds, debentures, preference shares, financial leases, and trade credits beyond three years. Furthermore, Plain Vanilla Rupee Denominated Bonds that are issued overseas are acceptable as well.

Eligible Borrowers

All entities are eligible to accept Foreign Direct Investments.

Note: Port trusts, Units in SEZ, SIDBI, EXIM Bank of India can also borrow under this framework.

Registered entities involved in micro-finance activities may only borrow in INR denominated ECB under this framework.

Change of Currency of Borrowing

•    FCY Denominate ECB

You can freely change ECB’s currency from one foreign currency to another.

•    INR Denominated ECB

You cannot change ECB in INR to any freely convertible foreign currency.

Exchange Rate

•    FCY Denominate ECB

If the ECB lender approves of it, conversion of FCY ECB to INR ECB can be done at the exchange rate or a lesser rate than the exchange rate as on the date of the agreement for such a conversion between the concerned parties.

•    INR Denominated ECB

The exchange rate for conversion to INR shall be the same as on the settlement date.

Recognized Lenders

Multilateral & Regional Financial Institutions that have Indian as a member country.

Individuals, who are foreign equity holders or for subscription to bonds/debentures that are listed abroad.

Foreign branches/subsidiaries of Indian banks are deemed as recognized lenders for FCY ECB (except FCCBs & FCEBs). Foreign branches/subsidiaries of Indian banks, depending on applicable prudential norms, may participate as arrangers/ underwriters/ market-makers/ traders for Rupee Denominated Bonds that have been issued overseas. Although, any underwriting by foreign branches/subsidiaries of Indian banks are not allowed for issuances.

Minimum Average Maturity Period (MAMP)

MAMP shall be 3 years for ECB. However, for certain categories mentioned below, the MAMP will be as specified:

ECB raised by manufacturing companies up to USD 50 million or its equivalent per financial year.
MAMP: 1 year

ECB raised from foreign equity holder for working capital purposes, general corporate purposes or for repayment of Rupee loans.
MAMP: 5 years

ECB raised for

• working capital purposes or general corporate purposes,
• on-lending by NBFCs for working capital purposes or general corporate purposes.
  MAMP: 10 years

ECB raised for

• repayment of Rupee loans availed domestically for capital expenditure.
• on-lending by NBFCs for the same purpose.
  MAMP: 7 years

ECB raised for

• repayment of Rupee loans availed domestically for purposes other than capital expenditure.
• on-lending by NBFCs for the same purpose.
  MAMP: 10 years

Note: Negative End-Users of ECB for Investment in:

• Real-Estate Activities
• Capital Market
• ‘Other’ Companies’ Equity Shares
• Working Capital Purpose except:
  - Foreign Equity Holders of the Indian Borrowing Company, or
  - Where MAMP is 10-years.
• General Corporate Reasons except:
  - Foreign Equity Holders of the Indian Borrowing Company, or
  - Where MAMP is 10-years.
• Repayment of Rupee loans except:
  - Foreign Equity Holders of the Indian Borrowing Company,
  - Where MAMP is 7-years and Loan was Availed for Capital Expenditures, or
  - Where MAMP is 10-years and Loan was Availed for Non-Capital Expenditures.
• On-lending activities except where ECBs are to be received by the NBFC.

Procedure for Raising ECB

If they conform to the steps stated under the framework, all ECB can be raised under the automatic route. Borrowers may approach the RBI for approval route cases with an application in specified structure (Form ECB) for assessment through their AD Category-I bank.

Limitations of ECB

Up to USD 750 million (or equivalent) can be raised by eligible borrowers each year through the automatic route.

Reporting Requirements

Loan Registration Number (LRN)	Any draw-down in respect of an ECB should happen only after obtaining the LRN from the Reserve Bank. Borrowers are required to submit duly certified Form ECB to the designated AD Category-I bank to obtain the LRN.
Changes in Terms & Conditions of ECB	Changes in ECB parameters in consonance with the ECB norms, including reduced repayment by mutual agreement between the lender and borrower, should be reported to the Department of Statistics and Information Management (DSIM), Reserve Bank of India through revised Form ECB at the earliest, in any case not later than 7 days from the changes effected.
Monthly Reporting of Actual Transactions	Form ECB 2 Return should be used by borrowers to report actual ECB transactions through the AD Category-I bank on a monthly basis. This must not be delayed after the 10th of the following month.
Late Submission Fee (LSF) for Delay in Reporting	Borrowers, who are in general compliant with ECB guidelines, can regularize the delay in reporting of drawdown of ECB proceeds before procuring LRN or delay in submission of Form ECB/Form ECB 2 returns, by paying late submission fees as per the Part XIII of Master Direction – Reporting under Foreign Exchange Management Act, 1999. The minimum LSF payable for each delayed case is INR 7,500 with maximum LSF payable capped at 100% of the amount involved.
LRN Cancellation	DSIM may be approached directly for cancellation of LRN for ECB contracted by specified AD Category-I banks, subject to ensuring that no drawdown against the same LRN has taken place and the monthly ECB-2 returns till date in respect of the allotted LRN have been submitted to DSIM.

Conversion of ECB into Equity

Conversion of ECB into equity is permitted subject to the following conditions:

• The activity of the company is covered under the Automatic Route for Foreign Direct investment or Government.
• Approval for foreign equity participation has been obtained by the company.
• The foreign equity holding after such conversion of debt into equity is within the sectoral cap, if any.
• Pricing of shares is as per SEBI and erstwhile CCI guidelines / regulations in the case of listed /unlisted companies, as the case may be.

Reporting for ECB conversion

Borrowers are required to report full conversion of outstanding ECB into equity in the form FC-GPR to the concerned Regional Office of the Reserve Bank as well as in form ECB-2 submitted to the DSIM within seven working days from the close of month to which it relates. The words ‘ECB wholly converted to equity’ should be clearly indicated on top of the ECB-2 form.

Once reported, it is not mandatory to file ECB-2 in the following months.

In case of partial conversion of remaining ECB into equity, borrowers need to report the converted portion in form FC-GPR to the concerned Regional Office as well as in form ECB-2 clearly differentiating the converted portion from the unconverted portion.

The words ‘ECB partially converted to equity’ should be stated at the top of the ECB-2 form. In the following months, the Department of Statistics and Information Management should be sent a report of the remaining part of ECB in ECB-2 form.

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