Know all about ECB (external commercial borrowings)

ECB stands for External commercial borrowings, it is one of the route to bring funds into Indian company/entity may be by way of commercial loans, Supplier credit(Supplier’s credit is a credit facility a Buyer is able to avail from a Financial Institution in the seller's country. )/buyers credit(A loan facility extended to an importer by a bank or financial institution to finance the purchase of capital goods or services and other big-ticket items), preference shares , FCCB's (Foreign currency convertible bonds are issued in currencies different from the issuing company's domestic currency which are nothing but with mix features of equity and debt)

ECB in legal terms can be understood in following fourteen questions,

1) What is External commercial borrowings in Indian context ?

[Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000 - Notification No. 3/2000-RB dated May 3, 2000 as amended … Read with Sec 6(3) of FEMA 1999 ]

Broadly External Commercial Borrowings {ECB} in foreign exchange by persons other than Authorized Dealer (AD) are classified as under:

  1. Commercial Loans as commonly understood or securitized instruments.
  2. Suppliers Credits/ Buyers credit
  3. Foreign Currency Convertible Bond {FCCB}
  4. Preference shares (i.e. non-convertible, optionally convertible or partially convertible)
  5. Other Borrowings

 

External Commercial Borrowings (ECB) – Commercial Loans , Buyers credit, suppliers credit etc

Typically ECB refer to commercial loans in the form of bank loans, buyers’ credit, suppliers’ credit, securitized instruments (e.g. floating rate notes and fixed rate bonds, non-convertible, optionally convertible or partially convertible preference shares) availed from non-resident lenders with minimum average maturity of 3 years.

 

2) ECB is allowed/permitted to all companies/entities ? OR who is eligible to take ECB ?

ECB is permitted either under :

  1. The Automatic Route – Does not require Reserve Bank / Government of India approval
  2. The Approval Route – Does require Reserve Bank / Government of India approval

Automatic Route

Eligible Borrowers :

  1. Corporate registered under the Companies Act, 1956 - Industrial & Infrastructure sector
  2. Corporate in Specified Service Sector Viz. Hotel, Hospital and Software Industry
  3. Infrastructure Finance Companies (IFCs) & Asset Finance Companies(AFC) ( Both in NBFC category ) & SIDBI except financial intermediaries, such as banks, financial institutions (FIs), Housing Finance Companies (HFCs) and Non-Banking Financial Companies (NBFCs) other than those permitted.
  4. Non-Government Organizations (NGOs) engaged in Micro Finance Activities
  5. Micro Finance Institutions (MFIs) engaged in micro finance activities { Regd under Societies Regn Act 1860, Sec. 8 Companies, Conventional Co-operatives, Indian trusts Act 1882 etc }
  6. Units in SEZ for their own requirement
  7. Companies in Miscellaneous Services sector (ECB permitted only from overseas direct / indirect equity holders & group companies). Companies in miscellaneous services mean companies engaged in training activities (but not educational institutes), research/development activities and companies supporting infrastructure sector. Companies doing trading business, companies providing logistics services, financial services and consultancy services are not covered under the facility.
  8. Certain types of Holding Companies / Core Investment Companies (CICs) are permitted to raise ECB for project use in Special Purpose Vehicles (SPVs) provided the business activity of the SPV is in the infrastructure sector , where “infrastructure” is defined as per the ECB guidelines. Refer circular No. 78 dt: 3-12-13.

Individuals, Trusts/Non-Profit making Organizations ( other than as above ) are not eligible to raise ECB.

 

3) Who can be eligible lender in case of ECB in Indian Context ?

Recognized/Eligible Lenders :

  1. International banks
  2. International capital markets
  3. Multilateral financial institutions (such as IFC, ADB, CDC etc.) / regional financial institutions and Government owned development financial institutions.
  4. Export credit agencies
  5. Suppliers of equipment – ECB raised does not exceed total cost of the equipment being supplied by the lender
  6. Foreign collaborators
  7. Foreign equity holder (other than erstwhile OCBs) 


A "foreign equity holder" to be eligible as recognized lender under the automatic route would require minimum holding of paid-up equity in the borrower company as set out below:

  • For ECB up to USD 5 million – minimum paid up equity of 25% held directly by the lender.
  • For ECB more than USD 5 million – minimum paid up equity of 25% held directly by the lender and ECB liability-equity ratio not exceeding 4:1.

For the purpose of calculating ECB Liability-equity ratio , the Paid-up capital plus free reserves (including the share premium received in foreign currency only from the lender) as per the latest audited balance sheet shall be considered. For calculating the ‘ECB liability’, not only the proposed borrowing but also the prior outstanding ECB shall be taken into account.

ECB from indirect equity holders is permitted provided the indirect equity holding in the Indian company by the lender is at least 51 per cent. ECB from a group company is permitted provided both the borrower and the foreign lender are subsidiaries of the same parent.
 

  1. Overseas Organizations & Individual can lend to NGO/MFI for Micro Finance provided they obtain a due diligence certificate from an overseas bank subject to FATF & KYC issues. 2 year track record.

 

4) ECB funds can be utilised for what purposes ?

Permissible end use (purpose of ECB/loan)

  1. Modernization/ expansion of existing production units in real sector-industrial sector including SMEs, Infrastructure sector and Specified service sector i.e. Hotel, Hospital, Software & Misc services sector. Infrastructure sector is defined as (i) Energy, (ii) Communication, (iii) Transport (iv) Water & Sanitation (v) mining , ( vi) refining;(f) Social and commercial infrastructure which will include hospitals (includes medical colleges and para medical training institutes) cold storage or cold room facility, including for farm level pre-cooling, for preservation or storage of agricultural and allied produce, marine products and meat and such related areas as mentioned in the notification. (Refer Master Circulars). In fact ‘Maintenance, Repairs and Overhaul’ (MRO) will also be treated as a part of airport infrastructure.
  2. Investment in the form of Import of capital goods (as classified by DGFT in the foreign trade policy) or for New Projects.
  3. Overseas direct investment in JV/WOS abroad, subject to existing guidelines on Overseas Direct Investment in JV/ WOS.
  4. Acquisition of shares in first & subsequent stage of disinvestment of PSU.
  5. Interest During Construction (IDC) for Indian companies in Infrastructure sector provided IDC is capitalized and forms part of project cost.
  6. Lending to Self help group, micro credit or bonafide micro finance activity including capacity building by NGOs.
  7. NBFC-IFCs can avail of ECBs only for on-lending to the infrastructure sector as defined under the ECB policy. NBFC-AFCs can avail of ECBs only for financing the import of infrastructure equipment for leasing to infrastructure projects.
  8. Import of services, technical know-how and payment of license fees. The companies in the manufacturing and infrastructure sectors may import services, technical know-how and payment of license fees as part of import of capital goods subject to certain conditions
  9. ECB by companies belonging to manufacturing, infrastructure, hotels, hospitals and software sectors for general corporate purpose which includes working capital financing provided such ECB is only from direct equity holder holding 25% equity ( As per Circular No. 130 dt: 16-5-14 ). Min average maturity period of 7 years.
  10. Capital expenditure for the purpose of maintenance and operations of toll systems for roads and highways provided they form part of the original project.

Existing ECB may be refinanced by raising a fresh ECB provided it is raised at a lower all-in-cost and the outstanding maturity of the original ECB is maintained.

Non-Permissible End Use

  1. On-lending or investment in capital market or acquiring a company (or a part thereof) in India by a corporate. Investments in Special Purpose Vehicles (SPVs), Money Market Mutual Funds (MMMFs) etc., are also considered as investment in capital markets.
  2. Investment in real estate. Buying land is not permitted.
  3. General working capital – Other than those permitted & for Repayment of INR Loans

 

5) How much maximum amount can be raised through ECB ? Or what is maximum amount that can be raised by way of ECB ?

Government has defined this more in the context of sectors, so different limits are defined for different sectors, this is done by GOI keeping in mind which sector of economy needs investment/growth.

Amount of ECB

Category of Borrower

Amount of ECB

Corporate other than those in the hotel, hospital, software & Misc services sector

USD 750 million or its equivalent per borrower company per financial year. ECB beyond this limit would fall under approval route.

Corporate in the services sector viz. hotels, hospitals , software & Misc services sector

USD 200 million or its equivalent per borrower company per financial year for meeting foreign currency and/ or Rupee capital expenditure for permissible end-uses. ECB beyond this limit will require approval route. The proceeds of ECBs should NOT be used for acquisition of land.

NGOs engaged in micro finance activities and MFIs

USD 10 million or its equivalent per borrower per financial year. At the time of drawdown the forex exposure of the borrower is fully hedged.

  • Limits are also placed for ECB borrowed by NBFC-IFC’s or AFC’s and by SIDBI
  • NGOs engaged in micro finance activities can avail of ECBs designated in INR from overseas organizations and individuals.

Non-residents are allowed to hedge their currency risk in respect of ECBs denominated in INR, with AD Category I banks in India subject to prescribed terms and conditions.

 

6) What is duration or maturity or tenure AND overall cost ceiling of ECB ?

Maturity period of ECB

Category of Borrower

Minimum Average Maturity Period

ECB up to USD 20 million or equivalent

3 years ( with Call/Put option )

ECB above USD 20 million and up to USD 750 million or equivalent

5 years

‘Minimum Average Maturity’ is defined as weighted average of all disbursements taking each disbursement individually and its period of retention by the borrower for the purpose of ECBs.

All-in-cost ceilings

All-in-cost includes rate of interest, other fees and expenses in foreign currency except commitment fee, pre-payment fee and fees payable in Indian Rupees. Payment of withholding tax(TDS) in Indian Rupees excluded for calculating all-in-cost.

(Note: TDS is collected on behalf of government by the borrower to ensure that foreign entity lending in India and earning interest from same should not escape from tax liability)

The all-in-cost ceilings for ECB are reviewed from time to time. Present all-in-cost ceiling is as under:

Average Maturity period over 6 month LIBOR*

All-in-cost ceilings

3 to 5 years

350 basis points

More than 5 years

500 basis points

* for the respective currency of borrowing or applicable benchmark.

LIBOR is nothing but a benchmark rate at which funds are exchanged by banks.

In the case of fixed rate loans, the swap cost plus margin should be the equivalent of the floating rate plus the applicable margin.

 

7) How much prepayment can be done for ECB raised by Indian entity ?

Prepayment

(a) Prepayment of ECB up to USD 500 million is allowed without RBI approval subject to compliance with the stipulated minimum average maturity period as applicable to the loan.

(b) Prepayment of ECB for amounts exceeding USD 500 million would be considered by RBI under the Approval Route.

(c). The rate of penal interest should not be more than 2 per cent of the all-in-cost of ECB.

Other Issues

Issuance of guarantee, standby letter of credit (SBLC) , Letter of Undertaking or Letter of comfort by banks, Financial Institutions and Non-Banking Financial Companies (NBFCs) from India relating to ECB is NOT permitted.

Banks have been delegated powers to convey ‘NOC’ under the FEMA for creation of charge on immovable assets, financial securities and issue of corporate or personal guarantees in favour of overseas lender / security trustee, to secure the ECB to be raised by the borrower.

ECB would be permitted for Rupee expenditure in India and/or foreign expenditure abroad for the above permissible uses. ECB meant only for foreign expenditure can be retained abroad, however it is the responsibility of borrower to ensure that proceeds of the ECB raised abroad meant for Rupee expenditure in India is repatriated immediately to India. Further, bifurcation of the utilization of the ECB proceeds towards foreign currency and rupee expenditure needs to be provided in Form-83 at the time of availing Loan Registration Number (LRN) against the ECB from RBI. Recently ( Notification 21-11-14 ) RBI with a view to providing greater flexibility to the ECB borrowers has decided to permit AD Category -I banks to allow eligible ECB borrowers to park ECB proceeds (both under the automatic and approval routes) in term deposits with AD Category- I banks in India for a maximum period of 6 months pending utilization for permitted end uses.

For obtaining ECB, the Borrower entity must enter into a formal Loan agreement & then obtain a Loan Registration Number (LRN) in Form No. 83 from the Reserve Bank of India before drawing down the ECB.

 

8) When we need to take approval of RBI in case of raising funds through ECB ?

Some of borrowings which is not generally approved by RBI and requires special approval of RBI in order to secure country from over funding, currency risk, business risk to domestic companies etc.

Terms and conditions for approval route are defined in following sub sections

 

9) who can apply for ECB through approval route ?

Following are eligible borrowers :

  1. Banks & FIs which had participated in textile & steel restructuring package to the extent of their investment in package.
  2. NBFC-IFC’s & AFC’s beyond limits as under automatic route.
  3. ECB with minimum average maturity of 5 years by NBFCs from multilateral financial institutions, reputable regional financial institutions, official export credit agencies and international banks to finance import of infrastructure equipment for leasing to infrastructure projects.
  4. IFCs i.e. NBFC categorized as IFC by RBI are permitted to avail of ECBs, including the outstanding ECBs, beyond 50% of their owned funds under the automatic route for on-lending to the infrastructure sector, subject to their compliance with the prudential guidelines as applicable to IFCs, hedging of the currency risk in full and certification of leverage ratio (i.e. outside liabilities/ owned funds) of IFC by AD as required by.
  5. Foreign Currency Convertible Bonds (FCCBs) by housing finance companies subject to specified conditions.
  6. SPVs set up to finance infrastructure companies / projects exclusively, will be treated as FIs and accordingly ECB by such entities will be considered under the Approval Route. Refer circular No. 78 dt: 3-12-13.
  7. Multi-State Co-operative Societies engaged in manufacturing activities.
  8. SEZ developer for providing infrastructure facility within SEZ.
  9. Low Cost Affordable Housing Projects: Developers/builders / Housing Finance Companies (HFCs) / National Housing Bank (NHB) may avail of ECB for low cost affordable housing projects 
    A low cost affordable housing project is a project in which at least 60 per cent of the permissible FSI would be for units having maximum carpet area up to 60 square meters. Slum rehabilitation projects will also be eligible. The eligibility would be based on the parameters to be set by the Central Sanctioning and Monitoring Committee of the Affordable Housing in Partnership Scheme (AHP) constituted for the purpose. ECB proceeds shall be utilized only for low cost affordable housing projects and shall NOT be utilized for acquisition of land. Borrowing companies must have an excellent 3 years track records. Housing Finance Companies (HFCs) can also avail of ECB for financing prospective owners of low cost affordable housing units. FCCB’s are not allowed.
  10. National Manufacturing Investment Zone (NMIZ) developer for providing infrastructure facility within SEZ.
  11. Take-out financing arrangement through ECB, under the approval route, has been permitted for refinancing of Rupee loans availed of from the domestic banks by eligible borrowers in the sea port and airport, roads including bridges and power sectors for the development of new projects, subject to conditions.
  12. Cases falling outside the purview of automatic route limits and maturity period.

 

10) Who can lend ECB under approval route ?

Recognized Lenders

Same as permitted under Automatic Route. However, in case the lender is a "Foreign Equity Holder", in a case of ECB above 5 million USD, the minimum paid-up equity held directly by the foreign equity holder is 25% & the ECB Liability:Equity does not exceed 7:1.

 

11) ECB funds obtained through approval route can be utilised for what purposes ?

Permissible end use (purpose of loan)

  1. Same as Automatic route as far as investment in the form of Import of capital goods (as classified by DGFT in the foreign trade policy), New Projects or modernization/ expansion of existing production units in real sector-industrial sector including SMEs and Infrastructure sector & Overseas direct investment in JV/WOS abroad, IDC for Indian companies in Infrastructure sector provided IDC is capitalized and forms part of project cost , PSU disinvestment, spectrum allocation.
  2. Indian companies in Infrastructure Sector are permitted to utilize 25% of the fresh ECB raised towards refinancing of the rupee loan(s) availed from the domestic banking system, under the approval route, subject to conditions prescribed. Refer circular No. 78 dt: 3-12-13.
  3. Indian companies in the power sector are allowed to utilize 40% of the fresh ECB raised towards refinancing of the Rupee loan/s availed by them from the domestic banking system, provided at least 60% of the fresh ECB proposed to be raised should be utilised for fresh capital expenditure for infrastructure project(s).
  4. Indian companies in Infrastructure sector are allowed to import capital goods by availing of short term credit (including buyers’ / suppliers’ credit) in the nature of 'bridge finance', under the approval route, subject to conditions , provided the bridge finance shall be replaced with a long term ECB.
  5. The companies in the manufacturing and infrastructure sectors may import services, technical know-how and payment of license fees as part of import of capital goods subject to certain conditions
  6. Eligible borrowers can avail ECB under approval route from their direct foreign equity holder company with a minimum average maturity of 7 years for general corporate purposes (which includes working capital) subject to the following conditions :
    1. Minimum paid-up equity of 25 per cent should be held directly by the lender;
    2. Such ECBs would not be used for any purpose not permitted under extant the ECB guidelines (including on-lending to their group companies / step-down subsidiaries in India); and
    3. Repayment of the principal shall commence only after completion of minimum average maturity of 7 years. No prepayment will be allowed before maturity.

 

12) What is 10 billion dollar scheme as per Circular No.12 Dated: 15-7-13 ?

The 10 Billion USD Scheme : Indian companies in the manufacturing, infrastructure sector and hotel sector (with a total project cost of INR 250 crore or more irrespective of geographical location for hotel sector), can avail of ECBs for repayment of outstanding Rupee loans availed of for capital expenditure from the domestic banking system and/or fresh Rupee capital expenditure provided they are consistent foreign exchange earners during the past three financial years and not in the default list/caution list of the Reserve Bank of India. The overall ceiling for such ECBs shall be USD10 (ten) billion and the maximum ECB that can be availed by an individual company or group, as a whole, under this scheme will be restricted to USD 3 billion restricted to 75% or 50% of export earnings of past 3 years. The ECB repayment should be out of foreign exchange earnings.

Under the USD 10 billion scheme, ECB cannot be raised from overseas branches / subsidiaries of Indian banks. Refer AP (Dir) Circular No.12 dt: 15-7-13 for further details

 

13) What are key consideration while taking ECB

  • Generally any changes in the terms and conditions of the ECB after obtaining LRN from DSIM, RBI required the prior approval of RBI
  • The designated bank may approve requests from ECB borrowers for reduction in all-in-cost, in respect of ECBs availed both under the automatic and approval routes, subject to ensuring that the consent of the lender has been obtained, there are no other changes in the terms and conditions of the ECB.
  • The designated banks may allow changes in the name of the borrower company subject to production of supporting documents.
  • The designated bank may allow change of the existing designated bank by the borrower company for effecting its transactions pertaining to the ECBs subject to NOC from the existing designated bank and after due diligence. The changes should be reported to RBI in Form 83.
  • The primary responsibility to ensure that ECB raised/utilized are in conformity with the ECB guidelines/ regulations / directions is that of the borrower concerned and any contravention will invite penal action under FEMA 1999. The designated bank is required to ensure necessary due diligence on such ECB requests/documents.

Full/partial conversion of ECB into equity is permitted subject to certain conditions like :

  1. The activity of the company is covered under the Automatic Route or Government FIPB approval route ( & approval is taken ).
  2. The foreign equity holding after such conversion of debt into equity is within the sectoral cap, if any.
  3. Pricing of shares is as per the pricing guidelines. Exchange rate norms are followed.

The AD’s have been given powers to permit Changes / modifications (irrespective of the number of occasions) in the draw-down and repayment schedules of the ECB or with changes (increase/decrease) in the all-in-cost or for reduction in the amount of ECB (irrespective of the number of occasions) along with any changes in draw-down and repayment schedules, average maturity period and all-in-cost or for Increase in all-in-cost of ECB, irrespective of the number of occasions. Further changes due to name of the borrowers or re-organization will also be attended by AD’s.

 

14) What are structured obligations - debt guaranteed by Non Resident ?

Borrowing and lending in Indian Rupees between two residents does not attract any provisions of the FEMA 1999. However there may be a situation where both the borrower and lender are Indian residents and debt is also in Indian rupees, however, such debt may be guaranteed by Non-resident. There is no transaction involving foreign exchange until the guarantee is invoked. However on invocation, the non-resident guarantor is required to meet the liability under the guarantee by remitting funds from abroad or through NRE / FCNR accounts. In turn the resident borrower ( on whose behalf the Non resident has paid under guarantee ) will repay to the Non-Resident. RBI under FEMA-29 has permitted such payments by the resident to the Non resident. This repayment may be made by credit to the FCNR(B)/NRE/NRO account of the guarantor provided, the amount remitted/credited shall not exceed the rupee equivalent of the amount paid by the non-resident guarantor against the invoked guarantee. The facility of credit enhancement by eligible non-resident entities to domestic debt raised through issue of capital market instruments, such as Rupee denominated bonds and debentures, is available to all borrowers eligible to raise ECB under automatic route subject to certain conditions.

As per Circular No. 128 dt: 9-5-14 certain powers have been delegated to the AD to allow re-schedulement of ECB due to changes in draw-down schedule and / or repayment schedule subject to conditions.

After raising ECB, monthly return in Form No. ECB-2 has to be filed every month.

 

 

IMPORTANT NOTE FOR READERS

I have tried to cover updates and incorporated to the best of efforts. In case of checking latest update on the ECB do refer to www.rbi.org.in

In case of any doubts please leave your comments

 

Also read related article: How to Pay Zero Tax for Income up to Rs 10 Lakhs by CA Chirag Chauhan

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How many modification of ECB is permitted?


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    I hope by reading this article you got enlighten on ,Know all about ECB- external commercial borrowings in IndiaKnow all about ECB (external commercial borrowings), What is External commercial borrowings in Indian context ?, External Commercial Borrowings (ECB) , ECB is allowed/permitted to all companies/entities ? OR who is eligible to take ECB ?, Who can be eligible lender in case of ECB in Indian Context ?, ECB funds can be utilised for what purposes ?, How much maximum amount can be raised through ECB ?, what is maximum amount that can be raised by way of ECB ? , What is duration or maturity or tenure AND overall cost ceiling of ECB ? , How much prepayment can be done for ECB raised by Indian entity ?, When we need to take approval of RBI in case of raising funds through ECB ?, who can apply for ECB through approval route ?, Who can lend ECB under approval route ?, ECB funds obtained through approval route can be utilised for what purposes ?, What is 10 billion dollar scheme as per Circular No.12 Dated: 15-7-13 ?, What are key consideration while taking ECB, What are structured obligations - debt guaranteed by Non Resident (ECB) ?, Know all about ECB- external commercial borrowings in India, further to mention before taken any financial decision based on this content it is prefered to take an expert opinion as matter can be subjective.