EXTERNAL COMMERCIAL BORROWINGS: (ECBs) are loans in India made by non-resident lenders in foreign currency to Indian borrowers. They are used widely in India to facilitate access to foreign money by Indian corporations and PSUs (public sector undertakings). ECBs include commercial bank loans, buyers’ credit, suppliers’ credit, securitised instruments such as floating rate notes and fixed rate bonds etc., credit from official export credit agencies and commercial borrowings from the private sector window of multilateral financial Institutions such as International Finance Corporation (Washington), ADB, AFIC, CDC, etc. ECBs cannot be used for investment in stock market or speculation in real estate. The DEA (Department of Economic Affairs), Ministry of Finance, Government of India along with Reserve Bank of India, monitors and regulates ECB guidelines and policies. Most of these loans are provided by foreign commercial banks and other institutions.
LENDER: Lender for ECB purposes should be: A resident of Financial Action Task Force (FATF) [or International organization of Securities commissions (IOSC) compliant country Multilateral and regional financial institution where India is a member country Individuals, if they are foreign equity holders or for subscription to bond/debentures listed abroad Foreign branches / subsidiaries of Indian Banks – only for FCY ECB except FCCBs and FCEBs
PROCEDURE: Entities looking to raise ECB may approach the RBI with an ECB application form in prescribed format for examination through their AD Category I bank. Cases shall be considered keeping in view the overall guidelines, macroeconomic situation and merits of the specific proposals. ECB proposals received by the RBI above certain threshold limit (re-fixed from time to time) would be placed before the Empowered Committee set up by the Reserve Bank. The Empowered Committee will have external as well as internal members and the Reserve Bank will take the decision based on the recommendation of the Empowered Committee. Entities desirous to raise ECB under the automatic route may approach an AD Category I bank with their proposal along with duly filled Form 83. Formats of ECB Form and Form 83 are available at Annex I and II respectively of Part V of the Master Directions Reporting under Foreign Exchange Management Act, 1999.
PERMISSIONS FROM RBI: External Commercial Borrowing (ECB) can be raised either under the automatic route or under the approval route. For the automatic route, a case is examined by the Authorised Dealer (AD) Category-I bank. Under the approval route, the borrower is required to send the request to the Reserve Bank of India (RBI) through the AD for examination. While the regulatory provisions are mostly similar, some differences between the two routes include the amount of borrowing, eligibility of the borrowers and the permissible end-uses.
Refinancing of Rupee denominated ECB with Foreign Currency denominated ECB under Track II is not permitted.
ECB includes
- Loans
- Securitized instruments
- Buyers’ and supplier’s credit
- Foreign Currency Convertible Bonds (FCCBs)
- Financial Lease and Foreign Currency Exchangeable Bonds (FCEBs)
- Compulsory Convertible Preference Shares (CCPS)
- Optional Convertible Preference Shares (OCPS)
AVERAGE MATURITY: Minimum average maturity period (MAMP) is three years for all external commercial borrowings (ECB). However, for ECB raised from foreign equity holder and utilised for specific purposes, the MAMP is five years.
HEDGING REQUIREMENTS: Companies in infrastructure sector, Non-Banking Financial Companies -Infrastructure Finance Companies (NBFC-IFCs), NBFCs-Asset Finance Companies (NBFC-AFCs), Holding Companies and Core Investment Companies (CICs) are eligible borrowers. These companies are required to: Have a board approved risk management policy and will require to keep their ECB exposure hedged 100 per cent at all times in case the average maturity is less than 5 years. Further, the designated AD Category-I bank shall verify that 100 per cent hedging requirement is complied with during the currency of ECB and report the position to RBI through ECB 2 returns. Lastly, the entities raising ECB under the provisions of tracks I and II are required to follow the guidelines for hedging issued, if any, by the concerned sectoral or prudential regulator in respect of foreign currency exposure.
WORKING CAPITAL PURPOSE: ECB can be raised under Track III (i.e. INR denominated ECB) for general corporate purpose (including working capital). The minimum average maturity period will be 3 years for ECB up to $ 50 million or equivalent and 5 years for ECB beyond $ 50 million or equivalent.
CONVERSION IN TO EQUITY: The conversion of External Commercial Borrowings (ECB) in convertible foreign currency into equity is subject to the following conditions: The activity of the Company is covered under the Automatic Route for FDI or the Company has obtained Government approval for foreign equity The foreign equity after conversion of ECB into equity is within the sectoral cap, if any Pricing of shares is as per the provision of section (2), Annexure 3 of the Consolidated FDI Policy Compliance with the requirements prescribed under any other statute and regulation in force The conversion facility is available for ECB availed under the Automatic or Government Route and is applicable to ECB, due for payment or not, as well as secured/unsecured loans availed from non-resident collaborators.
CURRENCY OF ECB: ECB can be raised in Indian Rupees (INR) and / or any convertible currency. Any entity raising INR denominated ECB is not permitted to convert the liability arising out of this ECB into foreign currency liability in any manner or assuming foreign currency risk in any manner by either entering into a derivative contract or otherwise.
BORROWING REQUIREMENTS: Borrowings under ECB Framework are subject to following reporting requirements apart from any other specific reporting required under the framework: Loan Registration Number (LRN): Any drawdown in respect of an ECB should happen only after obtaining the LRN from the RBI. To obtain the LRN, borrowers are required to submit duly certified Form ECB, which also contains terms and conditions of the ECB, in duplicate to the bank Changes in terms and 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 DSIM through revised Form ECB at the earliest, in any case not later than seven days from the changes effected. While submitting revised Form ECB the changes should be specifically mentioned in the communication Monthly reporting of actual transactions: The borrowers are required to report actual ECB transactions through Form ECB 2 Return (Annex II) through the AD Bank on monthly basis so as to reach DSIM within seven working days from the close of month to which it relates. Changes, if any, in ECB parameters should also be incorporated in Form ECB 2 Return.
