ECB Publishes Draft Guide on Qualifying Holding Procedures

Kiran Malik

23 May, 2024

The Reserve Bank of India (RBI) has recently published a draft guide on External Commercial Borrowings (ECBs) in order to provide clarity and consistency in the implementation of ECBs. This guide aims to help both borrowers and lenders understand the requirements and procedures involved in ECB transactions. In this blog, we will discuss the key provisions of the draft guide on ECB Qualifying Holding Procedures (QHPs).

 What are ECBs and Qualifying Holding Procedures?

External Commercial Borrowings (ECBs) refer to the borrowing of funds from non-resident lenders in the form of bank loans, bonds, or buyers’ credit. ECBs are considered as a source of financing for Indian companies as they offer a cheaper alternative to domestic borrowing. However, ECBs are subject to various regulations and guidelines set by the RBI to ensure their smooth functioning and to prevent any adverse impact on the Indian economy.

Qualifying Holding Procedures (QHPs) are a set of procedures that are to be followed by borrowers and lenders in order to ensure that the ECB is in compliance with the RBI regulations. The Qualifying Holding Procedures aim to ensure that the ECB transactions are carried out in a transparent and efficient manner, and that the borrowed funds are used for the intended purpose.

Key provisions of the draft guide on ECB Qualifying Holding Procedures

The draft guide on ECB Qualifying Holding Procedures contains several key provisions that are aimed at ensuring the smooth functioning of ECB transactions. Some of the key provisions of the draft guide are as follows:

• Eligible Borrowers: The draft guide clarifies the eligibility criteria for borrowers who wish to avail of ECBs. The eligibility criteria are based on the end-use of the funds and the credit rating of the borrower.
• Approval Process: The draft guide outlines the approval process for ECB transactions, which includes the submission of a request for approval to the RBI and the submission of various other required documents.
• Monitoring of ECBs: The draft guide provides guidelines for the monitoring of ECBs, which includes regular reporting by the borrowers and the submission of periodic statements by the lenders.
• Repayment Terms: The draft guide clarifies the repayment terms for ECBs, including the repayment schedule, the repayment method, and the penalties for default.
• End-Use Restrictions: The draft guide provides guidelines on the end-use restrictions for ECBs, which are aimed at ensuring that the borrowed funds are used for the intended purpose.

Advantages of ECBs for Indian Companies

The use of ECBs has several advantages for Indian companies, some of which are as follows:

• Cost-Effective: ECBs offer a cost-effective alternative to domestic borrowing, as the interest rates on ECBs are often lower than the interest rates on domestic borrowing.
• Diversification of Funding Sources: ECBs provide Indian companies with a diversification of funding sources, which can help to reduce their dependence on domestic sources of financing.
• Access to Global Capital Markets: ECBs provide Indian companies with access to global capital markets, which can help to attract foreign investment into the country.
• Long-Term Financing: ECBs provide Indian companies with the ability to obtain long-term financing, which can be useful for funding long-term projects and investments.

 Challenges with ECBs

Despite the advantages of ECBs, there are also some challenges associated with their use. Some of the challenges are as follows:

• Regulations and Restrictions: ECBs are subject to several regulations and restrictions set by the RBI, which can make the process of obtaining ECBs complicated and time-consuming.
• Repatriation Restrictions: In some cases, the repatriation of funds obtained through ECBs may be restricted, which can limit the flexibility of Indian companies in using the funds.
• Foreign Exchange Risk: ECBs are denominated in foreign currencies, which can expose Indian companies to foreign exchange risk.

Conclusion

In conclusion, the draft guide on ECB Qualifying Holding Procedures published by the Reserve Bank of India (RBI) is a crucial step in ensuring the smooth functioning of ECB transactions in India. The guide provides clarity and consistency in the implementation of ECBs, which can help Indian companies to effectively access global capital markets. The guide outlines the eligibility criteria for borrowers, the approval process, the monitoring of ECBs, the repayment terms, and the end-use restrictions for ECBs.

ECBs can provide Indian companies with a cost-effective alternative to domestic borrowing and access to global capital markets. However, Indian companies must also be aware of the challenges associated with ECBs, including regulations and restrictions, repatriation restrictions, and foreign exchange risk. The draft guide on ECB Qualifying Holding Procedures will help to mitigate these challenges and provide a clear understanding of the requirements and procedures involved in ECB transactions.

It is important for Indian companies and stakeholders to carefully review the provisions outlined in the draft guide and provide feedback to the RBI in order to ensure that the guide is comprehensive and effectively addresses the challenges associated with ECBs. The final guide on ECB Qualifying Holding Procedures, once published, will provide a clear roadmap for Indian companies looking to access global capital markets through ECBs.

Also Read: Guidelines on ECB Hedging