External Commercial Borrowing Automatic Route Compliance

Narendra Kumar

02 Dec, 2020

FDI as debt or preference shares can be raised under ECB norms & External Commercial Borrowing in India is highly regulated.

What is External Commercial Borrowing Compliance for Money borrowed from abroad?

External Commercial Borrowing is nothing but money borrowed from a foreign source or foreign institutions. Such money borrowed from abroad shall be utilized for commercial activities.

As defined, External Commercial Borrowings (ECB) refer to commercial loans [in the form of bank loans, buyers’ credit, suppliers’ credit, securitized instruments (e.g. floating rate notes and fixed rate bonds)] availed from non-resident lenders with a minimum average maturity of 3 years. RBI has laid down guidelines to deal with External Commercial Borrowing.

Routes of External Commercial Borrowing:

ECB can be accessed under two routes:

• Automatic Route
• Approval Route

Eligible Borrower under ECB Guidelines :

Followings are the entities allowed to raise money through ECB:

• Manufacturing and development sector, i.e. in “real” or industrial sector
• SIDBI- Small Industries Development Bank of India;
• Units in Special Economic Zones (SEZs);
• Shipping and airlines companies;
• Export-Import Bank of India
• Non-Banking Financial Companies (NBFCs;
• Companies in the infrastructure sector;
• Holding companies;
• Core Investment Companies (CICs);
• Real Estate Investment Trusts and Infrastructure Investment Trusts which comes under the regulatory framework of the Securities and Exchange Board of India (SEBI);
• NBFCs-Micro Finance Institutions (NBFCs-MFIs), Societies, trusts and cooperatives (registered under the Societies Registration Act, 1860, Indian Trust Act, 1882 and State-level Cooperative Acts/Multi-level Cooperative Act/State-level mutually aided Cooperative Acts respectively), Non-Government Organisations (NGOs) which are engaged in microfinance activities1;
• Companies engaged in miscellaneous services viz. research and development (R&D), training (other than educational institutes), companies supporting infrastructure, companies providing logistics services;
• Developers of Special Economic Zones (SEZs) or National Manufacturing and Investment Zones (NMIZs);

Eligible Lenders under ECB:

• International banks;
• International capital markets;
• Multilateral financial institutions (such as IFC, ADB, CDC, etc.);
• Export credit agencies;
• Suppliers’ of equipment;
• Foreign collaborators and
• Foreign equity holders (other than erstwhile OCB).

ECB through Automatic Route: No Prior RBI Approval

Eligible Borrowers under automatic route:

• Corporates which are registered under the Companies Act 1956 / 2013.
• Units in Special Economic Zones (SEZ), however, they cannot transfer or on-lend ECB funds to sister concerns or any unit in the Domestic Tariff Area
• NBFCs-IFCsfor on-lending to the infrastructure sector
• NBFCs-AFCsfor financing the import of infrastructure equipment for leasing to infrastructure projects.
• Non-Government Organizations (NGOs) engaged in microfinance activities.

Not eligible borrowers:

• Financial intermediaries (such as banks, financial institutions (FIs), housing finance companies and NBFCs)
• Individuals, Trusts and Non- Profit making Organisations.

Recognized lenders:

• International banks
• International capital markets
• Multilateral financial institutions
• Export credit agencies
• Suppliers of equipment
• Foreign collaborators
• Foreign equity holders (other than erstwhile OCB).
• “foreign equity holder’ to be eligible as “recognized lender’ in the automatic route shall require the minimum holding of equity in the borrower company as following:
• ECB up to USD 5 million – the minimum holding of equity shall be 25 percent directly by the lender.
• ECB more than USD 5 million – the minimum holding of equity of 25 percent directly by the lender and debt-equity ratio not exceeding 4:1.

Ceilings on amount and Maturity period:

Maximum amount raise through ECB:

Maximum corporate can raise USD 500 million or equivalent during a financial year.

Maturity period:

• ECB equal to USD 20 million or equivalent: Minimum three years of maturity
• ECB above USD 20 million and equal to USD 500 million: minimum five years
• ECB equal to USD 20 million can have call/put option provided the minimum average maturity of three years complied with before exercising call/put option.

Ceilings on all in Const:

• All-in-cost consist of the rate of interest, other fees and expenses in foreign currency except for commitment fee, pre-payment fee, and fees payable in Indian Rupees.
• The payment of withholding tax in Indian Rupees is excluded for calculating the all-in-cost.

Permitted End-use of money raised under ECB Automatic route:

• Investment e.g. import of capital goods, by new or existing production units, in real sector- industrial sector including small and medium enterprises (SME) and infrastructure sector – in India. Infrastructure sector is defined as power, telecommunication, railways, road including bridges, seaport and airport, industrial parks, and urban infrastructure;
• Foreign direct investment in Joint Ventures / Wholly Owned Subsidiaries subject to the existing guidelines on Indian Direct Investment in JV/WOS abroad

End-users not permitted:

• Use of ECB proceeds is not permitted for on-lending or investment in capital market or acquiring a company in India by a corporate,
• Use of ECB proceeds is not permitted in real estate,
• Use of ECB proceeds is not permitted for working capital, general corporate purpose, and repayment of existing Rupee loans.

Parking of ECB proceeds overseas:

ECB raised up for foreign currency expenditure for allowable end-uses shall not be remitted to India and shall be parked overseas.

ECB proceeds which are parked out of the country can be invested in the following liquid assets:

• Deposits or Certificate of Deposit or other products offered by banks rated not less than AA (-) by Standard and Poor / Fitch IBCA or Aa3 by Moody’s.
• Deposits with an overseas branch of an Authorised Dealer in India.
• Treasury bills and other monetary instruments of one-year maturity having a minimum rating as indicated above.

Prepayment:

Prepayment of ECB up to USD 500 million may be allowed by AD banks without prior approval of RBI subject to compliance with the stipulated minimum average maturity period as applicable to the loan.

Procedure:

• Borrowers shall enter into an agreement of loan complying with ECB Guidelines with the recognised lender for raising ECB under Automatic Route without prior approval of RBI.
• The borrower must obtain a Loan Registration Number (LRN) from the Reserve Bank of India before drawing down the ECB.

Reporting arrangements and dissemination of information:

Reporting Arrangements:

• Submission of a copy of loan agreement is dispensed.
• For allotment of loan registration number, borrowers are required to submit Form in duplicate, certified by the Company Secretary (CS) / Chartered Accountant (CA) to the designated AD bank. One copy is to be forwarded by the designated AD bank to the Director.
• The borrower shall draw-down the loan only after taking the loan registration number from DSIM, Reserve Bank of India.
• Borrowers are required to submit ECB-2 Return certified by the designated AD bank on the monthly basis so as to reach DSIM, RBI within seven working days from the close of month to which it relates.

Dissemination of Information:

To provide greater transparency, information with regard to the name of the borrower, amount, purpose, and maturity of ECB under both Automatic Route and Approval Route are put on the Reserve Bank website on a monthly basis with a lag of one month to which it relates.