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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.
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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) 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 These regulations have been repealed due to regular changes in handling foreign exchange transactions.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.
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:
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.
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):
A resident Indian or an Indian Company can also borrow loans from a non resident Indian (NRI).
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.
Varun Hariharan has completed the Legal Practice Course from BPP Law School, Manchester. He has a Masters in Commercial and Corporate Law from the Queen Mary University of London and LLB Honours from Bangor University, UK. He specialises in law related to corporate, artificial intelligence and technology law.
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