External Commercial Borrowing (ECB) Regulations

Narendra Kumar

25 May, 2023

External Commercial Borrowing (ECB) ECB is basically a loan availed by an Indian entity from a non-resident lender. Most of these loans are provided by foreign commercial banks and other institutions. It is a loan availed of from non-resident lenders with a minimum average maturity of 3 years.

What External Commercial Borrowing?

ECBs comprises of buyers’ credit, commercial bank loans, suppliers’ credit, securitized instruments such as Floating Rate Notes and Fixed Rate Bonds etc., credit from official export credit agencies and commercial borrowings from Multilateral Financial Institutions. ECBs are being permitted by the Government as a source of finance for Indian Corporate for expansion of existing capacity as well as for fresh investment.

Advantages of External Commercial Borrowing(ECB)

• ECBs provide opportunity to borrow large volume of funds
• The funds are available for relatively long-term
• Interest rate is also lower compared to domestic funds
• ECBs are in the form of foreign currencies which enable the corporate to have foreign currency to meet the import of machinery etc.
• Corporate can raise ECB from internationally recognized sources such as banks, export credit agencies, international capital markets etc.

External Commercial Borrowings (ECB) Routes

ECB = Commercial loans availed by eligible resident entities from recognized non-resident entities and should conform to parameters such as minimum maturity permitted and non-permitted end uses, maximum all-in-cost ceiling etc.

1. Automatic Route

• Eligible borrowers

• Corporates (registered under the Companies Act except financial intermediaries (such as banks, financial institutions (FIs), housing finance companies and NBFCs) are eligible to raise ECB. Individuals, Trusts, and NPO are not eligible to raise ECB.

• Units in Special Economic Zones (SEZ) are allowed to raise ECB for their own requirement. However, they cannot transfer or on-lend ECB funds to sister concerns or any unit in the Domestic Tariff Area.

Recognised lenders

• Borrowers can raise ECB from internationally recognized sources such as 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). A minimum holding of equity in the borrower company as set out below are required by a foreign equity holder to be eligible as a recognized lender under the automatic route:

• For ECB up to USD 5 million – minimum equity of 25 percent held directly by the lender.

• For ECB more than USD 5 million – minimum equity of 25 percent held directly by the lender and debt-equity ratio not exceeding 4:1 (i.e. the proposed ECB not exceeding four times the direct foreign equity holding).

• Amount and Maturity

• The maximum amount of ECB which can be raised by a corporate is USD 500 million or equivalent during a financial year.

• ECB up to USD 20 million or equivalent in a financial year with the minimum average maturity of three years.

• ECB above USD 20 million and up to USD 500 million or equivalent with a minimum average maturity average maturity of five years.

• ECB up to USD 20 million can have call/put option provided the minimum average maturity of three years is complied with before exercising call/put option.

• All-in-cost ceilings

• The rate of interest, other fees, and expenses in foreign currency except for commitment fee, pre-payment fee, and fees payable in Indian Rupees are included All-in-cost. Moreover, the payment of withholding tax in Indian Rupees is excluded for calculating the all-in-cost. The all-in-cost ceilings for ECB are reviewed from time to time. Below are the ceilings:

End-use of fundraising via External Commercial Borrowing

• Investment e.g. import of capital goods by new or current 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 (water supply, sanitation, and sewage projects);
• Overseas direct investment in Joint Ventures (JV) / Wholly Owned Subsidiaries (WOS) subject to the existing guidelines on Indian Direct Investment in JV/WOS abroad.
• Ends-users not permitted
• Utilisation of ECB proceeds is not permitted for on-lending or investment in capital market or acquiring a company (or a part thereof) in India by a corporate
• Utilisation of ECB proceeds is not permitted in real estate,
• Utilisation of ECB proceeds is not permitted for working capital, general corporate purpose, and repayment of existing Rupee loans.
• Guarantees
• Issuance of guarantee, standby letter of credit, letter of undertaking or letter of comfort by banks, Financial Institutions and Non-Banking Financial Companies (NBFCs) relating to ECB is not permitted.
• Security
• The choice of security to be provided to the lender/supplier is left to the borrower. As amended from time to time, the creation of charge over immovable assets and financial securities, such as shares, in favor of the overseas lender is subject to Regulation 8 of Notification No. FEMA 21/RB- 2000 dated May 3, 2000, and Regulation 3 of Notification No. FEMA 20/RB- 2000 dated May 3, 2000, respectively.

Parking of ECB proceeds overseas

• ECB raised for foreign currency expenditure for permissible end-uses shall be parked overseas and not be remitted to India. ECB proceeds parked overseas 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 the Standard & Poor / Fitch IBCA or Aa3 by Moody’s; deposits with overseas branch of an Authorised Dealer in India; and Treasury bills and other monetary instruments of one year maturity having minimum rating as indicated above.
• The funds should be invested in such a way that the investments can be liquidated as and when funds are required by the borrower in India.
• Pre-payment
• 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.
• Refinancing of an existing ECB
• The existing ECB may be refinanced by raising a fresh ECB subject to the condition that the fresh ECB is raised at a lower all-in-cost and the outstanding maturity of the original ECB is maintained.
• Debt Servicing
• The designated Authorised Dealer (AD bank) has the general permission to make remittances of installments of principal, interest and other charges in conformity with ECB guidelines issued by Government / Reserve Bank of India from time to time.
• Procedure
• Borrowers may enter into loan agreement complying with ECB guidelines with a recognized 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.

2. Approval Route

• Eligible Borrowers

Below are the types of proposals for ECB are covered under the Approval Route

• Financial institutions dealing exclusively with infrastructure or export finance such as IDFC, IL&FS, Power Finance Corporation, Power Trading Corporation, IRCON and EXIM Bank are considered on a case by case basis.
• Banks and financial institutions which had participated in the textile or steel sector restructuring package as approved by the Government are also permitted to the extent of their investment in the package and assessment by Reserve Bank based on prudential norms. Any ECB availed for this purpose so far will be deducted from their entitlement.
• ECB with a minimum average maturity of 5 years by Non-Banking Financial Companies (NBFCs) from multilateral financial institutions, reputable regional financial institution, official export credit agencies, and international banks to finance the import of infrastructure equipment for leasing to infrastructure projects.
• Foreign Currency Convertible Bonds by HFC (Housing Finance Companies) fulfilling the minimum criteria i.e. the minimum net worth of the financial intermediary during the previous 3 years shall not be less than ₹ 500 cores, a listing on the BSE or NSE, minimum size of FCCB is USD 100 million, the applicant should submit the purpose/plan of utilization of funds.
• Special Purpose Vehicles, or any other entity notified by the Reserve Bank, set up to finance infrastructure companies/projects exclusively, will be treated as Financial Institutions and ECB by such entities will be considered under the Approval Route.
• Multi-State Co-operate Societies engaged in manufacturing activity satisfying the following criteria (i) the Co-operative Society is financially solvent and (ii) the Co-operative Society submits its up-to-date audited balance sheet.
• Corporates engaged in the industrial sector and infrastructure sector in India can avail ECB for Rupee expenditure for permissible end-uses.
• Non-Government Organisations (NGOs) engaged in microfinance activities are eligible to avail ECB for Rupee expenditure for permissible end-uses. Such NGO should have a satisfactory borrowing relationship for at least 3 years with a scheduled commercial bank authorized to deal in foreign exchange and a certificate of due diligence on ‘fit and proper’ status of the board/committee of management of the borrowing entity from the designated AD as Bank required.
• Corporate in services sector viz. hotels, hospitals and software companies can avail ECB for import of capital goods.
• Cases falling outside the purview of the automatic route limits and maturity period indicated in paragraph I A (iii).
• Recognised Lenders under ECB
• Borrowers can raise ECB from internationally recognized sources such as international banks, international capital markets, multilateral financial institutions, export credit agencies, suppliers of equipment, foreign collaborators and foreign equity holders (other than erstwhile OCB).
• From ‘foreign equity holder’ where the minimum equity held directly by the foreign equity lender is 25 percent but debt-equity ratio exceeds 4:1 that means the proposed ECB exceeds four times the direct foreign equity holding.
• ECB to Non-Government Organisations (NGOs) engaged in microfinance activities may be provided by overseas organizations and individuals complying with the safeguards.
• Overseas Organisations recommending to lend ECB will have to furnish a due diligence Certificate from an overseas bank which in turn is subject to the regulation of host-country regulator and adheres to Financial Action Task Force (FATF) regulations to the AD bank of the borrower. The due diligence certificate comprises that the lender maintains an account with the bank for at least a period of 2 years, that the lending entity is organized as per the local law and held in good esteem by the business / local community and that there is no criminal action pending against it.
• Individual Lender has to obtain a due diligence certificate from an overseas bank indicating that the lender maintains an account with the bank for at least a period of two years. All the documents such as the audited statement of account and income tax return which the overseas lender may furnish need to be certified and forwarded by the overseas bank. Individual lenders from countries wherein banks are not required to adhere to Know Your Customer (KYC) guidelines are not eligible to extend ECB.

Amount and Maturity

• Corporates can avail of ECB of an additional amount of USD 250 million with an average maturity of more than 10 years under the approval route, over and above the existing limit of USD 500 million under the automatic route, during a financial year. Other ECB criteria such as end-user, all-in-cost ceiling, recognized lender, etc., need to be complied with. However up to a period of 10 years repayment and call/put options would not be permissible for such ECB.
• Corporates in infrastructure sector can avail ECB up to USD 100 million and Corporates in industrial sector can avail ECB up to USD 50 million for Rupee capital expenditure under Automatic Route for permissible end-uses within the overall limit of USD 500 million per borrower, per financial year.
• NGOs engaged in microfinance activities can raise ECB up to USD 5 million during a financial year. Designated AD bank has to safeguard that at the time of drawdown the forex exposure of the borrower is hedged.
• Corporates in the services sector viz. hotels, hospitals and software companies can avail ECB up to USD 100 million, per borrower, per financial year, for import of capital goods.
• All-in-cost ceilings
• All-in-cost includes a rate of interest, other fees and expenses in foreign currency except for commitment fee, pre-payment fee, and the fee payable in Indian Rupees. Moreover, the payment of withholding tax in Indian Rupees is excluded for calculating the all-in-cost.The current all-in-cost ceilings are as under: The following ceilings are valid till reviewed:

* For the respective currency of borrowing or applicable benchmark

End-Use

• Investment [such as import of capital goods (as classified by DGFT in the Foreign Trade Policy), implementation of new projects, modernization/expansion of existing production units] in real sector – industrial sector including small and medium enterprises (SME) and infrastructure sector – in India. Infrastructure sector is defined as (i) power, (ii) telecommunication, (iii) railways, (iv) road including bridges, (v) seaport and airport, (vi) industrial parks and (vii) urban infrastructure (water supply, sanitation, and sewage projects);
• Overseas direct investment in Joint Ventures (JV) / Wholly Owned Subsidiaries (WOS) subject to the existing guidelines on Indian Direct investment in JV/WOS abroad.
• The first stage acquisition of shares in the disinvestment process and also in the mandatory second stage offer to the public under the Government’s disinvestment program of PSU shares.
• Import of capital goods by Corporates in the service sector, viz., hotels, hospitals and software companies.
• End-users not permitted
• Utilisation of ECB proceeds is not permitted for on-lending or investment in capital market or acquiring a company (or a part thereof) in India by a corporate except banks and financial institutions eligible under paragraph I(B)(i)(A) and I(b)(i)(b),
• Utilisation of ECB proceeds is not permitted in real estate,
• Utilisation of ECB proceeds is not permitted for working capital, general corporate purpose, and repayment of existing Rupee loans
• Guarantee
• Issuance of guarantee standby letter of credit, letter of undertaking or letter of comfort by banks, financial institutions and NBFCs relating to ECB is not normally permitted Applications for providing guarantee/standby letter of credit or letter of comfort by banks, financial institutions relating to ECB in the case of SME will be considered on merit subject to prudential norms. With an opinion to facilitating capacity expansion and technological upgradation in Indian Textile industry issue of guarantees, standby letters of credit, letters of undertaking and letters of comfort by banks in respect of ECB by textile companies for modernization or expansion of textile units will be considered under the Approval Route subject to prudential norms.
• Security
• The choice of security to be provided to the lender/supplier is left to the borrower. However, a creation of charge over immovable assets and financial securities, such as shares, in favor of the overseas lender is subject to Regulation 8 of Notification No. FEMA 21/RB-2000 dated May 3, 2000, and Regulation 3 of Notification No. FEMA 20/RB-2000 dated May 3, 2000, as amended from time to time, respectively.
• Parking of ECB proceeds overseas
• ECB raised for foreign currency expenditure for permissible end-uses shall be parked overseas and not remitted to India and ECB raised for Rupee expenditure for permissible end-uses shall be parked overseas until actual requirement in India. Parking of ECB proceeds overseas shall be invested in the subsequent liquid assets deposits or certificate of deposits or other products offered by banks rated not less than AA(-) by Standard and Poor / Fitch IBCA or Aa3 by Moody’s; deposits with overseas branch of an AD bank in India; and Treasury bills and other monetary instruments of 1 year maturity having minimum rating as indicated. The investments can be liquidated as and when funds are required by the borrower in India and thus the funds should be invested in such a way.
• Prepayment
• Prepayment of ECB up to USD 500 million may be allowed by AD bank without prior approval of Reserve Bank subject to compliance with the stipulated minimum average maturity period as applicable to the loan.
• Pre-payment of ECB for amounts exceeding USD 500 million would be considered by the Reserve Bank under the Approval Route.
• Refinancing of an existing ECB
• Existing ECB may be refinanced by raising a fresh ECB subject to the condition that the fresh ECB is raised at a lower all-in- cost and the outstanding maturity of the original ECB is maintained.
• Debt Servicing
• The designated AD bank has general permission to make remittances in installments of principal, interest and other charges in conformity with ECB guidelines issued by Government / Reserve Bank of India from time to time.
• Procedure
• Applicants are required to submit an application in form ECB through designated AD bank to the Chief General Manager-in-Charge, Foreign Exchange Department, Reserve Bank of India, Central Office, ECB Division, Mumbai – 400 001, along with required documents.
• Empowered Committee
• Reserve Bank has set up an Empowered Committee to consider proposals coming under the Approval Route.

Restrictions

Restrictions which are executed on ECB regulations are as under:

• The utilization which can be done for on-lending or investment in capital market or acquire a company (or a part thereof) in India by an investment in real estate sector by a company, general corporate purpose, repayment of existing rupee loans.
• The issue of standby letter credit, FIs, and NBFCs from India relating to ECB, guarantee, letter of undertaking or letter of comfort by banks.
• The borrower can generate safety against the ECB by a creation of charge over financial securities and immovable assets such as shares in favor of the overseas lender is subjected to FEMA regulations under the ECB guidelines.

Penalties Imposed

FEMA lays down a sequence of penalties of regulations with respect to ECB are not complied with. Penalties for Contravention of Provisions of this act are dealt under Section 13 of the Foreign Exchange Management Act (FEMA)-

• If there is any breach of any rule, regulation, notification, direction or order of the FEMA Act or there is breach of any condition which is subjected to the authorization of the Reserve Bank, the individual doing the same shall upon adjudication be liable to a penalty up to thrice the sum involved in such contravention where the amount is quantifiable and in case the amount is not quantifiable up to 2 lakh rupees which can be extended to ₹ 5000 for every day after the first day if the violation continues.
• The Adjudicating Authority while adjudging any violation or any contravention in accordance to the regulations may if he thinks fit in addition to the penalty he shall be subjected to for violation of the act can declare that in addition to the penalty which is imposed, the currency, security or any other money or security related to which violation has been committed be liable to be confiscated by the CG and directions can be passed that the foreign exchange holdings related to which violation is committed shall be brought back to India.