Fintech

External Commercial Borrowing for Startup

Startup India is a campaign to promote the business possibility in India from various inspiring people in an easy and convenient way. An entity shall be considered as a Startup if:-

1. Incorporated as a Private Limited Company or registered as a Partnership Firm or Limited Liability Partnership in India and
2. Up to seven years from the date of its incorporation/registration; however in case of startups in the biotechnology sector, the period shall be up to 10 years from the date of its incorporation/registration; and
3. Turnover for any Financial Years since incorporation/registration has not exceeded Rs. 25 crores; and
4. It is working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with high potential for employment generation or wealth creation.

Provided that any such entity formed by splitting up or reconstruction of a business already in existence shall not be considered a “Startup”

All the Startup entities need to register in the Startup India portal designed and maintained by the Ministry of Commerce and Industry. Unless it is recognized by the department the same can’t be termed as Startup. An entity required to make an application to the department for recognition of Startup for an entity subject to fall under the above definition of an entity.

What is ECB?

It is commercial loans raised by eligible resident entities (Borrower) i.e. Startup (recognized from Department) from recognized non-resident entities (Lender) and should conform to parameters such as minimum maturity, permitted and non-permitted end-uses, maximum all-in-cost ceiling, etc. The parameters apply in totality and not on a standalone basis. The framework for raising a loan through ECB is broadly comprised of three modes i.e.

1. Medium Term Foreign Currency Denominated ECB with a minimum average maturity of 3 to 5 years. [in short MTFCDECB5]
2. Long-Term Foreign-Currency Denominated ECB with a minimum average maturity of 10 years. [in short LTFCDECB10]
3. Indian Rupee (INR) denominated ECB with a minimum average maturity of 3 to 5 years. [in short INRDECB5]

Being more specifically on ECB facility for Startup, all the requirement and guidelines are set up below: –

ECB Facility for Startup:

Any entity recognized as Startup by the Central Government as on date of raising ECB will be eligible under the facility under the automatic route from AD Category-I Bank. The Minimum Average Maturity period will be 3 years. The Lender/Investor shall be a resident of a country who is either a member of Financial Action Task Force (FATF) or a member of a FATF-Style Regional Bodies; and shall not be from a country identified in the public statement of the FATF as: –

1. A jurisdiction having a strategic Anti-Money Laundering or Combating the Financing of Terrorism deficiencies to which countermeasures apply; or
2. The jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the FATF to address the deficiencies.

However overseas branches/subsidiaries of Indian Bank and Overseas wholly-owned subsidiary^[1]/joint venture of an Indian Company will not be considered as recognized lenders under this framework.

Read our article:Startup India Registration Process – The Complete Guide

Guidelines for Table

The various forms/guidelines to be duly completed in process of ECB or to regulate the ECB are listed below:-

S.No	Particulars	Remarks
1	Forms	It can be in the form of loans or non-convertible, optionally convertible or partially convertible preference shares
2	Currency	It can be any freely convertible currency or in Indian Rupees or a combination thereof. In case of borrowing in INR, the Non-resident lender should mobilize INR through swaps/outright sale undertaken through an AD Category I Bank.
3	Amount	Limited to USD 3 Mn or equivalent per Financial Year either in INR or any Convertible Foreign Currency or a Combination of both.
4	All-in-Cost	Shall be mutually agreed between the borrower and the lender.
5	End-uses	For any expenditure in connection with the business of the borrower.
6	Conversion into Equity	Conversion of ECB into equity is freely permitted subject to regulations applicable for Foreign Investment in Startups.
7	Security	The choice of Security to be provided to the lender is left to the borrowing entity. Security can be the nature of movable, immovable, intangible assets (including patents, intellectual property rights), Financial Securities, etc.
8	Corporate & personal guarantee	Issuance of a corporate or personal guarantee is allowed. Guarantee issued by Non-Residents is allowed only if such parties qualify as a lender. However, issuance of a guarantee, standby letter of credit, letter of undertaking or letter of comfort by Indian banks, All India Financial Institutions and NBFCs is not permitted.
9	Hedging	The overseas lender, in the case of INR denominated ECB, will be eligible to hedge its INR exposure through permitted derivative products with AD Category I Bank in India. The lender can also access the domestic market through branches/subsidiaries of Indian banks abroad or branches of Foreign Bank with Indian presence on a back to back basis.
10	Conversion Rate	In case of borrowing in INR, the foreign currency-INR conversion will be at the market rate as on the date of the agreement.
11	Other Provisions	Other provisions like parking of ECB proceeds, reporting arrangement, powers delegated to AD banks, borrowing by entities under investigation, conversion of ECB into equity will be as applicable to others.  However, the provision on leverage ratio and ECB liability: Equity ratio will not be applicable.

Based on Master Direction dated 1^st January 2016, the extracts above have helped the Startup campaign of Government of India as far as the financial needs of such entity is a concern. The liberalized way of reporting and compliance list has made it friendlier for both borrowers and investors to work together in India.

Read our article:What are the Income Tax Laws for Startups in India