ECB: External Commercial Borrowings in India – Status, Policy & Latest Guidelines

ECB refers to the loan taken by eligible resident entities from recognized foreign entities. It must meet certain criteria, including minimum tenure, permitted and non-permitted uses, maximum all-in-cost ceiling, etc.

Some of the types of ECBs are:

• Partially /Optionally convertible (preference debentures/shares)
• Financial Lease
• Trade Credits beyond 3 years
• Loans including bank loans
• Trade Credits beyond 3 years
• Foreign Currency Convertible Bonds (FCCBs)

Benefits of an ECB

• ECBs offer the possibility to borrow large amounts
• As compared to domestic funds their interest rates are lower.
• Funds are available for a relatively long period
• Companies can obtain ECBs from internationally recognized sources such as banks, export credit institutions, international capital markets, etc.
• ECBs are in the form of foreign currency. Thus, they allow companies to use foreign currencies, respond to imports of machinery, etc.

Framework of ECB

S.No.	Parameters	FCY denominated ECB	INR denominated ECB
1.	Currency	Any freely convertible Foreign Currency	Indian Rupee
2.	Forms of ECB	Loans including bank loans; fixed rate notes/ floating/debentures/ bonds (other than fully and compulsorily convertible instruments); Trade credits that are beyond 3 years; FCCBs; FCEBs and Financial Lease.	Loans including bank loans; floating/ fixed rate notes/ debentures/ bonds preference shares (other than fully and compulsorily convertible instruments); Trade credits that are beyond 3 years; Financial Lease. Also, plain vanilla rupee denominated bonds issued overseas, which can be either placed privately or listed on exchanges as per host country regulations.
3.	Eligible borrowers	All entities are eligible to receive FDI. Additionally, the following entities are also eligible to raise ECB: i. Units in SEZ ii. Port Trusts iii. SIDBI iv. EXIM Bank of India.	a) All entities eligible to raise FCY ECB. b) Registered entities engaged in micro-finance activities, viz., registered Not-for-profit companies, registered societies/trusts/ cooperatives and Non-Government Organizations.
4.	Minimum Average Maturity Period (MAMP)	MAMP for ECB will be three years. Call and put options, if any, shall not be exercisable prior to completion of minimum average maturity. However, for the specific categories, the MAMP will be as prescribed therein: S.No Category MAMP 1. Manufacturing companies up to USD 50 million or its equivalent per financial year. 1 year 2. foreign equity holder for working/ general capital purposes or for repayment of rupee loans 5 years 3. ECB raised for (i) on-lending by NBFCs for working capital purposes or general corporate purposes (ii) working capital purposes or general corporate purposes 10years 4. ECB raised for (i) on-lending by NBFCs for the same purpose (ii) repayment of Rupee loans availed domestically for capital expenditure. (ii) on-lending by NBFCs for working capital purposes or for basic corporate purposes 5. ECB raised for (i) on-lending by NBFCs for the same purpose (ii) repayment of rupee loans availed domestically for purposes apart from capital expenditure 10 years

Limit and Leverage

The eligible borrowers can raise an ECB up to USD 1.5 billion or equivalent, per financial year, under the automatic route. The liability-equity ratio for the ECB raised under the automatic route cannot surpass 7:1 in the case of FCY-denominated ECB raised from a direct foreign equity holder.

What are the Routes for Raising ECB in India?

There are two routes for raising ECB in India:

• Automatic Route

• Government Approval Route

Procedure for Raising ECB

Every ECB that conforms to the parameters prescribed for the automatic route can be raised under the Automatic route. For raising ECB by an automatic route, the entity may approach an AD Category-I Bank with its proposal and duly filled Form ECB.

In the Government route, the borrowers may approach the RBI with an application as prescribed in Form ECB for examination through AD Category-I Bank. The RBI considers the application depending on the overall guidelines, economic situation, and merits of the proposal.

Further, if an ECB proposal before RBI is beyond a threshold limit prescribed from time to time, then it will be placed before the Empowered Committee (EC) and then after the recommendations of the EC, the final decision shall be taken by the RBI.

Who is the Eligible Lender in ECB?

The eligible lenders of ECB are as follows:

• A resident of the International Organization of Securities Commissions (IOSCO) or the Financial Action Task Force (FATF).
• Multilateral and Regional Financial Institutions to which India is a member country.
• Individual subscribers to bonds and debentures listed abroad.
• Foreign Equity Holders including a direct equity holder who owns a minimum of 25% direct equity holding in the borrowing entity, an indirect equity holder who owns a minimum of 51% indirect equity holding, and a group company with an overseas parent.
• Branches or subsidiaries of Indian Banks in a foreign country are permitted as lender’s foreign currency denomination ECBs apart from FCCBs and FCEBs.

What are the Reporting Requirements of ECB?

1. Firstly, we have to obtain the Loan Registration Number (LRN) from the RBI
2. Secondly, if there are any Changes in the terms and conditions of the ECB, then the same is reported within 7 days in Form ECB-2 Return.
3. Late Submission Fee in case of delay in reporting the Form ECB-2 Return.
4. Thirdly, the borrower will report the ECB transaction on a monthly basis through ECB-2 return through the AD Category-I Bank within 7 working days from the close of the month.

Where ECBs Cannot be Used?

ECB cannot be utilized for the following:

1. Business in Real estate activities.
2. Business of Investment in the capital market.
3. Equity investment.
4. Working capital purposes, except from what is allowed in MAMP.
5. General corporate purposes, except from what is allowed in MAMP.
6. Repayment of Rupee loans, except from what is allowed in MAMP.
7. On-lending to entities for the above activities, except in the case of ECB raised by NBFC.

Conclusion

ECB rules have been amended and simplified from time to time. Optimized interest and tax rate and liquidity for both lender and borrower make it an attractive option for the Indian units of the ECB to take foreign loans for future projects. In addition, ECBs can also be used to finance existing business needs such as working capital or general business operations. This facilitated access to foreign markets, making the ECB one of the most important investment vehicles in India. The ECB has become significantly beneficial to the companies developing the Indian economy.