External Commercial Borrowings – ECB Regulations under Automatic & Approval route

External Commercial Borrowings – ECB Regulations under Automatic & Approval route

External Commercial Borrowings – ECB Regulations under Automatic & Approval route

There are multiple ways in which foreign investments can be attracted to India. One of the prominent ways is to raise investments by way of debt. This is commonly known as External Commercial Borrowings (ECB) and is subject to FEMA rules and regulations. What are ECBs and what are the key external commercial borrowing rules in India? Let us find out!

What are External Commercial Borrowings?

External Commercial Borrowings are commercial loans that are raised by eligible resident entities from recognized non-resident entities. There are various parameters to which the ECB transactions shall adhere In India, investments can be raised through the following two modes of ECB:

  1. Automatic Route: Under the automatic route, no separate permission is required from the government or Reserve Bank of India for raising ECBs. The automatic route cases are directly examined by the Authorised Dealer Category-I (AD Category-I) banks.
  2. Approval Route: Under the approval route, the borrowers are required to obtain permission/approval from the RBI before raising ECBs.

Advantages of External Commercial Borrowings

The following are the benefits of raising ECBs:

  1. Funds can be raised at a lower interest rate as compared to the domestic funds
  2. Huge amounts of funds can be raised through the ECB framework
  3. The funds can be raised for a relatively longer term
  4. Funds can be raised from any of the internationally recognized lenders and sources like international capital markets, export credit agencies, banks, financial institutions, etc.
  5. Currency is not a restriction as the ECB framework allows borrowing in both Indian as well as freely convertible foreign currencies.

External Commercial Borrowings – RBI Guidelines and Regulations

The following are the external commercial borrowing rules that you should follow while raising funds through ECB:

1.) Currency: As discussed earlier, ECBs can be either raised in Indian currency (INR) or any other freely convertible foreign currency.

2.) Eligible Borrowers: All the borrowers that are eligible to raise Foreign Direct Investments (FDIs) can also raise ECBs. Further, the following entities are also allowed to raise ECBs:

  • Units in SEZs
  • Port Trusts
  • Exim Bank of India
  • Small Industries Development Bank of India (SIDBI)

Further, if the ECBs are to be raised in INR, then the following entities are also allowed to raise ECBs apart from the above:

Registered entities that are engaged in microfinance activities. This includes registered not-for-profit organizations, non-government organizations, registered trusts, societies, or cooperative societies.

3.) Recognized Lenders: ECBs should be raised from recognized lenders. The lender should be a resident of the FATF or IOSCO-compliant country, including that at the date of transferring ECB. Further, the following lenders shall also be considered as the recognized lenders:

  • Multilateral and regional financial institutions in which India is a member country
  • Individuals will be permitted to be considered as lenders if they are foreign equity holders or for the subscription of debentures or bonds that are listed abroad.
  • Foreign subsidiaries or branches of Indian banks shall be considered recognized lenders only for the purpose of Foreign Currency (FCY) ECBs. However, foreign subsidiaries or branches of Indian banks can participate as underwriters/traders/arrangers/market makers for the Rupee denominated bonds that are issued overseas. However, in case of issuances by Indian Banks, foreign subsidiaries or branches of Indian banks shall not be allowed as underwriters. 

4.) Minimum Average Maturity Period (MAMP): Another important external commercial borrowing regulation is the MAMP. The MAMP for the ECBs shall be 3 years. Further, put or call options shall not be exercised before the completion of the MAMP. However, there are different MAMPs prescribed for certain specific categories that may range from 1 year to as long as 10 years.

5.) Negative List For ECBs: Certain sectors have been included in the negative list. This implies that the funds raised through ECBs cannot be utilized in these sectors. This includes the following:

  1. Investment in capital markets
  2. Real estate activities
  3. Working capital purposes (except for certain specified purposes)
  4. Equity investments
  5. Repayment of rupee loans (except for certain specified purposes)
  6. General corporate purposes (except for certain specified purposes)
  7. On-lending to any other entities for the above-specified purposes (except for certain specified purposes)

6.) Change of Currency: In case the ECBs have been raised in foreign currency, then the ECBs can be freely converted from one freely convertible foreign currency to another freely convertible foreign currency. However, if the ECBs are raised in INR, then it is not allowed to convert the ECBs to any freely convertible foreign currency.

External Commercial Borrowing Compliances

If an entity raises ECBs, then it shall ensure the following ECB compliances:

Particulars

Applicable Forms

Period

Allotment of Loan Registration Number (LRN) for both automatic and approval route

Form-83

Unless the LRN is obtained, the loan amount cannot be drawn.

Monthly ECB return

Form ECB-2

Within 7 days after the end of the month

Application for ECB under approval route

Form ECB

When ECB is intended to be raised under the approval route

Full conversion of ECB into equity

Form FC-GPR

Within 7 days after the end of the month

Partial conversion of ECB into equity

Form FC-GPR for the portion converted into equity. For the remaining portion, Form ECB-2 shall be filed.

For modifications or changes in the following:

  • Repayment or drawdown schedule
  • Currency of the borrowing
  • AD bank

Form 83

When the changes take place

Following was a complete guide to the ECB regulations and rules in India. In case you are willing to raise external commercial borrowings, then it is important to know all the ECB regulations and compliances to avoid legal complications. For more information about ECB regulations and rules, feel free to contact the ASC Group.

 

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