External Commercial Borrowings are commercial loans issued in foreign currency, raised by eligible borrowers from recognized non-resident entities for permitted end-use as prescribed by RBI. One of the various advantages associated with obtaining External Commercial Borrowings (ECB) by Indian eligible entities is that it does not dilute the shareholding of such Indian Company. Besides this, foreign loan interest rates are lesser than the Indian interest rates. RBI has been exercising its powers to amend the same in line with FEMA Regulations, relevant Notifications, and new AP (DIR Series) Circulars.
Following are permitted forms of borrowings to be obtained from recognized non-resident entities:
ECBs can be obtained by Indian eligible borrowers through two routes, namely:
Categories of External Commercial Borrowings:
There are two categories of External Commercial Borrowings, viz. foreign currency denominated ECB and Indian rupee-denominated ECB. Recently, RBI has pronounced a new framework for external commercial borrowings (ECB) in early 2019, modifying the existing ECB policy. Through issuing the revised ECB framework, RBI has merged the erstwhile Tracks I and II category of ECBs under a single category of ‘Foreign Currency denominated ECB’. These ECBs carry foreign exchange currency hedging risk. Further, the Track III category of ECB loans and the Rupee Denominated Bonds framework have been merged under a single category of “Rupee Denominated ECB”. Indian rupee-denominated ECBs do not carry any foreign currency exchange hedging risk.
Following parameters should be followed while borrowing through ECBs
Eligible borrowers – All entities that are eligible to receive FDI are eligible for receiving ECBs also. Additionally, the following entities are also eligible to raise ECB:
a) Port Trusts;
b) Units in SEZ;
d) EXIM Bank; and
e) Registered entities engaged in micro-finance activities, viz., registered Not for Profit companies, registered societies/trusts/cooperatives and Non-Government Organisations (permitted only to raise INR External Commercial Borrowings).
Recognized Lenders – The lender should be resident of the Financial Action Task Force (‘FATF’) or International Organization of Securities Commission's (‘IOSCO’) compliant country. Further, the following shall also be included within the ambit of recognized lenders for the purposes of issuing External Commercial Borrowings loans in India;
a) Multilateral and Regional Financial Institutions where India is a member country will also be considered as recognized lenders;
b) Individuals as lenders can only be permitted if they are foreign equity holders or for subscription to bonds/debentures listed abroad; and
c) Foreign branches/subsidiaries of Indian banks are permitted as recognized lenders only for FCY ECB (except FCCBs and FCEBs).
Further, foreign branches/subsidiaries of Indian banks, subject to applicable prudential norms, can participate as arrangers/underwriters/market makers/traders for Rupee denominated Bonds issued overseas.
ASC provides the following services in relation to ECB loans: