What is External Commercial Borrowings?
External Commercial Borrowings, more commonly referred to as ECB, includes bank loans, buyers’ credit, suppliers’ credit, foreign currency convertible bonds, financial lease, foreign currency exchangeable bonds and securitized instruments which can be availed by specified Indian borrowers from recognized foreign lenders for the permitted end-uses under the regulations notified by the Reserve Bank of India (‘RBI’) from time to time. Any borrowing from a foreign lender, whose maturity period extends beyond three years, is eligible to qualify as an ECB. Due to the prolonged duration of such borrowings, they qualify as long term debts and thus, can be termed to be capital account transactions as defined under the Foreign Exchange Management Act, 1999.1
The recent trend of investment in Indian companies has been enthralling for startups and innovative companies. In order to promote investment into businesses, Securities Exchange Board of India (‘SEBI’) and the RBI have been striving to liberalize financing. While the SEBI has floated concept papers on crowd funding and has introduced an institutional trading platform for startups and the small and medium-sized enterprises, the RBI has moved to improve the foreign investment prospects in Indian companies by issuing various circulars on this subject matter, from time to time.
ECB can be obtained either through automatic or approval route, depending on the restrictions which may be in force at the time of filing the application. For automatic route, the cases are examined by the concerned Authorized Dealer Banks (‘AD Banks’), whereas under the approval route, the prospective borrowers are required to send their requests to the RBI through their concerned AD Banks.
The RBI in 20132 for the first time permitted the eligible borrowers to avail ECB from their direct foreign equity holders, for general corporate purposes, subject to certain conditions specified therein, under the approval route.
In 20143, the RBI further permitted the eligible borrowers (viz. the companies belonging to manufacturing, infrastructure, hotels, hospitals and software sectors) to obtain ECB from direct equity holders for general corporate purposes (including working capital requirement), under the automatic route.
Recently, a revised framework (‘Revised Framework’) of ECB policy was floated by the RBI in November, 2015 for further simplification of the procedure for availing ECB, inter-alia, for general corporate purposes. The said Revised Framework has been enforced with effect from December 02, 2015. This article will elaborate on the allowed ECBs for general corporate purposes, in view of the reformative outlook of the RBI.
Automatic Route and Approval Route
Borrowers are permitted to park their ECB proceeds either through automatic route or the approval route. A brief on both the means are discussed below:
Automatic Route: Access of funds under the automatic route does not require approval either by the RBI/ GOI. Corporate including hotel, hospitals, software sectors, Infrastructure Finance Companies (IFC) other than financial intermediaries like banks, FI’s, HFC’s and NBFC’s can raise ECB. ECB can be raised from internationally recognized sources like International Banks, International Capital Markets, Multilateral Financial Institutions, etc.
Approval Route: Proposals falling under the approval route category include:-
- Lending for specific purposes by the EXIM Bank which varies from case to case.
- Banks and financial institutions engaged or having participated in the textile or steel sector restructuring packages; they work the way approved by the Government.
- ECB to finance the import of equipment in relation to infrastructure for leasing them out to infrastructure projects, those having a minimum average maturity of five years.
- NBFCs which are characterized as Infrastructure Finance Companies (IFCs) for the purpose of on-lending to the infrastructure sector as described in the ECB policy by the Reserve Bank of India (RBI) (beyond 50% of their owned funds) which are also subjected to compliance of certain stipulations.
- Housing Company Bonds issue FCCBs (Foreign Currency Convertible Bonds).
- RBI notifies Special Purpose Vehicles or SPV or any other entity which are set up to finance infrastructure companies / projects exclusively.
- The co-operative societies which are financially solvent and are engaged in manufacturing.
- The SEZ developers that provide infrastructure facilities within SEZ.
- Corporates that are eligible under the automatic route and are not in the services viz. hotels, hospitals and software sector which can avail of ECB beyond USD 750 million per financial year.
- Corporates which are in the service sector for availing ECB beyond USD 200 million per financial year.
- Cases falling outside the purview of the automatic route limits and maturity indicated, etc. ECB can be availed from the recognized lenders as explained under Automatic Route.
End Use Regulations
End Use Regulations as clarified under the Foreign Exchange Management Act. They include:
- For the purpose of raising investment in new projects, for the purpose of modernization/ expansion of existing units in industrial and service sectors including the infrastructure sector; ECB’s can be raised for investment.
- According to the guidelines issued on Indian Direct Investment in Joint Venture or Wholly Owned Subsidiaries (WOS), Overseas Direct Investment in Joint Ventures or Wholly Owned Subsidiaries can be made but subjected to such guidelines.
- In the two-stage process: first stage acquisition of shares in the disinvestment procedure and in the mandatory second stage offer which is done to the public under the Government’s disinvestment programme of Public Sector Unit shares.
- NBFCs categorized as Infrastructure Financing Companies (IFC) are permitted to avail ECBs including outstanding in existing ECBs up to 50% of their owned funds under the Approval Route.
- The lending that is done to the good faith micro finance activity including capacity building by NGOs, self-help groups or for micro-credit, micro finance activities, etc.
Restrictions that are imposed on External Commercial Borrowings (ECB) regulations are as follows:
- The utilization which can be done for on-lending or investment in capital market or acquiring a company (or a part thereof) in India by an investment in real estate sector, by a corporate, general corporate purpose, repayment of existing Rupee loans.
- The issue of standby letter credit, FIs, and NBFCs from India relating to ECB, guarantee, letter of undertaking or letter of comfort by banks,
- The borrower can create security against the ECB. Creation of charge over financial securities and immoveable assets such as shares in favour of the overseas lender is subjected to FEMA regulations under the ECB guidelines.
Other relevant regulations in relation to the external commercial borrowings are as follows:
- Borrowers are permitted to remit the funds to India or to either park the ECB proceeds abroad.
- ECB proceeds which are parked in various liquid assets can be invested in Treasury Bills and other monetary instruments of one-year maturity and having minimum rating etc. Whenever the funds are required by the Borrower in India, the funds are invested in such a way that they can be liquidated
- Whenever the ECB funds are pending utilization for permissible end-uses, ECB funds can be repatriated to India for credit to the Borrowers’ Rupee Accounts with banks (AD) in India.
- Prepayment of ECB up to USD 500 million can be made by the AD banks without prior approval of RBI upon compliance of minimum maturity period which applies to the loan.
- A fresh ECB can be raised and can be used for refinancing an existing ECB subjected to the fact that the fresh one is raised at a lower all-in-cost, and the outstanding maturity of the original ECB is maintained.
- For the purpose of making remittances of installments of principal, interest and other charges in conformity with the ECB guidelines, the designated AD bank has the general permission.
- In compliance and consonance with the ECB guidelines, the Borrowers enter into an agreement with the recognized Lender without the RBI approval and obtain a LOAN REGISTER NUMBER (LRN) from RBI before drawing the ECB as per the procedure laid down in the policy.
FEMA lays down a series of penalties of regulations in relation to the External Commercial Borrowings are not complied with. Section 13 of the Foreign Exchange Management Act (FEMA) deals with the Penalties on Contravention of Provisions under this act:
- If there is any contravention of any rule, regulation, notification, direction or order of the FEMA Act or there is contravention of any condition which is subjected to the authorization of the Reserve Bank, the person doing the same shall upon adjudication be liable to a penalty up to thrice the sum involved in such contravention where the amount is quantifiable and in case the amount is not quantifiable up to two lakh rupees which can be extended to five thousand rupees for every day after the first day if the violation continues.
The Adjudicating Authority while adjudging any violation under sub-section (1) may in addition to the Any Adjudicating Authority adjudging any contravention under sub-section (1), may if he thinks fit in addition to the penalty he will be subjected to for violation of the act can declare that in addition to the penalty which is imposed, the currency, security or any other money or security in respect of which the violation has been committed be liable to be confiscated by the Central Government and a further direction can be passed that the foreign exchange holdings in respect of which the violation is committed shall be brought back to India.