External Commercial Borrowings

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:

• Loans including bank loans;
• Securitized instruments (e.g. floating rate notes and fixed-rate bonds etc.)
• non-convertible, optionally convertible or partially convertible preference shares (other than fully or compulsorily convertible preference shares);
• Debentures (excluding fully or compulsorily convertible debentures);
• Buyers’ credit/ Suppliers’ credit beyond 3 years;
• Rupee denominated bonds issued overseas (that can be privately held or issued through the public issue as per host country regulations);
• Foreign Currency Convertible Bonds (FCCBs);
• Financial Lease; and
• Foreign Currency Exchangeable Bonds (FCEBs)

ECBs can be obtained by Indian eligible borrowers through two routes, namely:

• Automatic route - Under the automatic route, the prescribed parameters need to be complied with by the prospective borrowers and the cases are examined by the Authorised Dealer Category-I (AD Category-I) banks.
• Approval route – Under this route, eligible borrowers need to send their requests to the Reserve Bank through their Authorised Dealer (AD) Banks for examination in an application in prescribed form seeking approval. RBI may grant approval after perusing the merits of the proposal, exercising its own discretion based on the country’s macro-economic conditions and prescribed ECB guidelines.

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

• External Commercial Borrowings can be borrowed by eligible borrowers only;
• Lenders should be eligible to borrow from ECB route
• The minimum maturity period of ECB
• The All-in-cost ceiling should be maintained
• End-uses of ECB should not be restricted
• Currency risk due to exchange rate fluctuations
• Hedging provision for foreign exchange exposure

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;

c) SIDBI;

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:

• Ensuring compliance with RBI prescribed parameters for ECBs;
• Obtaining Loan Registration number (‘LRN’) from RBI

• RBI compliance and reporting in relation to ECBs;

• Planning and advisory on changes in terms, refinancing or conversion of ECB into equity;
• Assistance in obtaining ECB facility for eligible start-ups under the new External Commercial Borrowings framework.