Compliance with Loans from Foreign Companies

Varun Hariharan

19 Jan, 2021

A company in order to improve its liquidity status would require borrowing loans to serve the working capital purposes. Borrowing from an overseas company or a Non-Resident Indian is regulated by the Foreign Exchange Management Act, 1999. Due to the effect of globalization, many businesses around the world are improving their funding patterns by depending on loans from foreign companies. Loans from foreign companies can be availed by Indian companies and entities. However, entities have to comply with the provisions related to foreign exchange management act. Individuals that set up companies, look for lucrative options for External Commercial Borrowings from foreign companies. There are specific requirements for borrowing of loans from foreign companies. An Indian entity can acquire a loan from a foreign company under two routes of investment.

The following are the routes to foreign investment:

Automatic Route- Under the automatic route, prior approval is not required for any form of investment. Therefore a borrower can get a loan from a foreign company without the prior approval from the Government of India. 100% foreign investment is allowed through this route in specific sectors.

Approval/ Government Route- Under the approval route of FDI , prior approval is required from the Government of India. Securing a loan from a foreign company will require prior approval from the concerned authorities.

Regulation of Loans from Foreign Companies in India

The borrowing of Indian Rupees and Foreign currency is regulated by the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018. Previously borrowing of Indian Rupees and Foreign Currency was regulated by the Foreign Exchange Management (Borrowing and Lending in Indian Rupee) Regulations, 2000 and the Foreign Exchange Management (Borrowing and Lending in Foreign Exchange^[1]) Regulations, 2000. These regulations have been repealed due to regular changes in handling foreign exchange transactions. The Reserve Bank of India (RBI) brings out specific regulations from time to time on loans from foreign companies.

Difference between ECB and Loan from Foreign Companies

The current regulations have brought out the meaning of external commercial borrowings (ECB). The framework related to ECB is governed by a separate law under the RBI. External commercial borrowings are commercial loans used by eligible borrowers.

Indian Companies and Public Sector undertakings prefer using external commercial borrowings on comparison to loans raised in India for the following reasons:

• Borrowers get an opportunity to borrow a large amount of sums;
• Funds are available for a longer period;
• Foreign banks offer lower interest rates on comparison to Indian Banks;
• Indian Companies prefer using ECBs as they are raised in the form of foreign currency; and
• ECB’s will help the Indian Company to raise foreign exchange reserves.

Therefore an Indian company can raise loans from foreign companies through an external commercial borrowing or by issuing capital instruments. However, these forms of raising loans are completely different due to regulatory requirements and their mode of operation.

Restriction on borrowing of Loans from Foreign companies

As per the FEMA regulations, any individual is not allowed to borrow foreign exchange from an individual outside India or borrow currency in the form of Indian Rupees from a person outside India. However, there are specific exceptions to the above prohibition. One of the exceptions is when there is prior permission taken from the RBI.

A company or an individual receiving permission from the RBI is allowed to borrow foreign exchange or currency in the form of Indian Rupees. Another exception is when an Indian individual or an Indian Company uses a credit card outside India. This would not be classified as borrowing of loans from foreign company.

Apart from the above exceptions, an Authorised Dealer (an institution that regularly deals in borrowing of foreign exchange) is permitted to borrow foreign exchange.

The following instances where Authorised Dealers are allowed to take loans (borrow money):

Borrowing carried out by an Authorised Dealer or its branch office which is established outside India

• An authorised dealer is permitted to borrow foreign exchange from its head office or its branch office or correspondent office outside India. Prior permission is required from the RBI, in consultation with the Government of India.
• When an authorised bank has a branch office outside India, then the authorised bank is allowed to borrow from the branch office established outside India. The borrowing must take place in the normal course of banking business. However, this would be subject to the guidelines issued by the RBI and the regulatory compliance with the authorities in the foreign country.
• Apart from this, an authorised bank is also allowed to borrow foreign exchange from a bank or financial institution outside India. Borrowing foreign exchange is for meant for granting pre-shipment and post-shipment foreign exchange to the exporter.  However, this must be in accordance to the rules of the RBI.
• Authorised banks are allowed to borrow and raise money in the form of external commercial borrowings. External commercial borrowings (ECB) that are raised by the authorised bank should only be raised in the form of freely convertible foreign currency or in Indian rupees or any other form of currency as prescribed by the RBI.

Borrowing from persons other than authorised dealers- Loans from Foreign Companies

• Eligible entities that are allowed to borrow loans from foreign companies in the form of ECB apart from authorised dealers:

1. Companies
2. Partnerships (LLPs); and
3. Any other entity regulated and allowed to borrow ECB.

• Borrowing in the form of trade credit is allowed. Trade credit is allowed to be raised by importers for import of capital goods or non capital goods under the Foreign Trade Policy (FTP) of the Director General of Foreign Trade (DGFT). This must be compliant with the provisions of Schedule II of the current regulations.
• An individual present in India is allowed to borrow loan and overdraft or any other facility which offers credit from a bank which is present outside India. An individual can avail this facility when exporting goods. Apart from export of goods and services, the system can be used for execution of any form of turnkey projects or civil construction.
• The loan from foreign company/ bank would only be allowed, if there is proper compliance with the terms and conditions stipulated with the authority that has allowed the export. The approval that is granted must be in accordance to the Foreign Exchange Management (Export of goods and services) Regulations, 2015.
• Financial institutions, banks and companies that deal in finance are allowed to raise loans from foreign companies. These loans can be used for on lending purposes. If borrowings are raised in the form of ECB, then they have to be compliant with the provisions related to Schedule I of the current regulations.
• Individuals are allowed to borrow a sum up to USD 2, 50,000 from their relatives outside India. The amount that can be borrowed is revised by the RBI from time to time.  The amount borrowed by the individual must be in compliance with the relevant laws related to the Government of India.

Borrowing of loans from foreign companies- Rupee Dominated

• Authorised banks are allowed to raise ECB which are rupee dominated in nature. However raising these rupee dominated ECB must be in compliance with Schedule I of the current regulations.
• Any other individual or resident is allowed to borrow rupee denominated ECB outside India. However, the borrowings must be in compliance with schedule I of the regulations.
• Entities are allowed to borrow rupee denominated currencies from multilateral financial institutions outside India. However, these loans must be in accordance with the regulations pertaining to the relevant authority.

NRI Loans to Indian Company- Loans from Foreign Companies

A resident Indian or an Indian Company can also borrow loans from a non resident Indian (NRI).

Process for NRI Loans to Indian Company/ Individual- Loans from Foreign Companies

• The resident Indian or Indian Company has to approach the authorised dealer to borrow money from the NRI.
• The authorised dealer will handle all the remittances on behalf of the NRI for procuring the loan to the company or the resident Indian. There are specific situations where the RBI allows a person to borrow in foreign exchange from a person outside India.

Resident Indian can also borrow in Indian Rupees from NRI

• Money that is borrowed from an NRI cannot be sent back to the home country. The proceeds of maturity are non reparable.
• The remittance can be carried out by Debiting the NRO/NRE/ FCNR account of the NRI and crediting the bank account of the resident Indian. Otherwise this can be done through inward remittance from abroad.
• A loan by an NRI to a resident Indian cannot be given for more than a period of 3 years.
• Rate of interest on the loan is fixed; it should not be more than 2% above bank rate of interest that is prevailing in such period.
• Repayment of principal amount can only be done on a NRO account.

Companies that are incorporated in India can also take loans

• Companies involved in agriculture activities, real estate business and chit funds cannot take a loan from foreign companies.
• Limited Liability partnerships are also allowed to borrow loans from foreign companies.
• Borrowing can be done only through public offer of non convertible debentures.
• Interest that is charged cannot be more than 3% of the bank rate that is prevailing at the time of borrowing the loan amount.
• The loan borrowed must be repaid within a period of 3 years.
• If the borrowing is on repatriation basis, then the percentage of Non convertible debentures (NCD) issued to an NRI to the total paid up value of all NCDs issued shall not exceed the ceiling prescribed for issue of equity shares/convertible debentures for foreign direct investment in India.
• If the borrowing is on a non-repatriation basis from NRIs, then the amount of loan should be received either by inward remittance from outside India or by debit to NRE/ NRO account of the investor maintained with an authorized dealer or an authorized bank in India.

Procedure to be following for an Indian Company while borrowing a loan

• The NRI has to provide the remittance details of the loan and the amount of loan that is borrowed.
• The company has to provide documents for receiving the loan.
• All transactions related to the loan would be handled through the authorised dealer.
• The documents have to be submitted to the authorised bank by the company.
• Apart from this the company has to also provide a Certificate from the Company Secretary that all the procedures have been followed for raising non convertible debentures or any other form of loans from foreign companies.

Procedure to be following for an Indian Company while borrowing a loan

• An Indian company can borrow up to USD 5 million from the NRI. However it has to be used only for corporate purposes.
• The maturity period of the loan borrowed is up to 3 years for an Indian Company.
• Indian Entity can borrow 10 Million from NRI for only few purposes
  1. Financing of infrastructure projects;
  2. Long term borrowings; and
  3. Borrowing by an exporter who is earning in foreign exchange.

Loans from foreign companies can be obtained outside India. However, loans from NRI can also be obtained by the Indian Company.  An NRI can also provide a loan to a resident Indian/ Indian company by being a partner of the firm. While borrowing loans from foreign company an Indian company must be compliant with various foreign exchange laws.

Conclusion