Fintech

What are the External Commercial Borrowings (ECBs)?

External Commercial Borrowings (ECBs) are commercial loan availed from non-resident lenders by an Indian entity with a minimum average maturity of 3 years

Why External Commercial Borrowings (ECBs) have been considered as most preferred mode for Fundraising?

Presenting an overview to allow decision makers to take important decisions effectively and efficiently:

As a part of the development policy, India has always promoted capital inflows. In other words to make domestically investment foreign capital is obtained from foreign countries. There are some reasons which compelled our government to go after foreign capital such as Lack of domestic capital and deficit in the current account. There are different types of foreign capital and the major category is foreign investment including FDI (Foreign Direct Investment) and FPI (Foreign Portfolio Investment). There are following types of foreign capital such as trade credit, NRI deposits, and External Commercial Borrowings.

External Commercial Borrowings (ECB) is a commercial loan availed from non-resident lenders by an Indian entity with a minimum average maturity of 3 years. These types of loans are provided by foreign commercial banks and other institutions. External Commercial Borrowings (ECBs) are defined as money borrowed from foreign resources in the form of

• Commercial bank loans;
• Buyers’ credit/ suppliers’ credit;
• Securitized instruments such as floating rate notes and fixed rate bonds;
• Credit from official export credit agencies and commercial borrowings from Multilateral Financial Institutions.

External Commercial Borrowings have emerged as a major form of foreign capital like FDI and FII in the post-reform period. In Country from several years contribution of ECBs was between 20 to 35 percent of the total capital flows. In large number Indian corporate and PSUs have used the ECB as sources of investment. Private sector corporates have obtained the bulk of the overseas loans or ECBs. ECB is easy to obtain fund for the corporates and it also helps them to make business/investment expansion. For expansion of existing capacity as well as for fresh investment, ECBs are being permitted by the Government as a source of finance for Indian Corporates.

What are the objectives of External Commercial Borrowings (ECBs) ?

• For expanding the existing capacity as well as for fresh investments government permits the ECB as an additional source of financing reporting.
• ECB policy seeks to emphasize the priority of investing in the infrastructure and core sectors such as Power, telecom, Railways, Roads, Urban infrastructure etc. and also an emphasis on the need of capital for Small and Medium scale enterprises.

How External Commercial Borrowings are different from FDI?

ECB refers to a type of funding other than Equity. Foreign Direct Investment is termed as foreign money used to finance the Equity Capital. In case of ECB, regulations stipulated by the Government or its agencies such as Reserve Bank of India (RBI) should be satisfied. ECB includes bonds, Credit notes, Asset-Backed Securities, Mortgage Backed Securities or anything of that nature.

Here are the following which are not included in the External Commercial Borrowings (ECB):

• The investment made towards core capital of an organization such as equity shares, convertible preference shares or convertible debentures. Under the FDI Policy, convertible instruments are covered
• In ECB, direct capital is not allowed.

What are the Advantages of ECB?

Here are the following advantages of External Commercial Borrowings:

• With the help of ECBs it provides an opportunity to borrow a large volume of funds;
• Funds are relatively available for long-term;
• In comparison to domestic funds interest rate are also lower;
• Since PCBs are in the form of foreign currencies, they enable the corporate to have foreign currency to meet the import of machinery
• ECBs can be raised by corporates from internationally recognized sources such as banks, export credit agencies, international capital markets etc.

India has a vibrant corporate sector unlike many other emerging market economies and many of them have overseas operations as well. In India, to the corporates, the domestic financial market is not often able to provide big sized loans at a competitive rate of interests. For domestic companies, ECBs have emerged as a valuable source of the investable resource of funds. Under ECB Policy government put restrictions on the amount of loan that can be obtained by a company, end user restrictions, interest rate ceiling for ECBs, maturity period etc. The government put a ceiling on the total amount of PCBs that can be obtained through the ECB route during a year by all Indian firms.

Is a Limited Liability Partnership (LLP) or Partnership firm or Proprietary concern eligible to raise ECB?

No, entities which are not covered by the provisions contained in Master Direction issued by RBI are not eligible to raise ECB. (such companies doing trading business, companies involved in activities such as tourism, beauty clinics, entertainment business, retail sales, e-commerce companies, etc., on any other activity not covered within these provisions)

What are the Benefits to the Borrower?

• ECB funding helps corporates in paying to suppliers in other countries that may not be available in India.
• In comparison to domestic funds, the cost of funds borrowed from external sources is cheaper.
• The borrower can diversify the investor base.
• It provides an international market to borrowers. In ECB there are internationally recognized sources such as banks, export credit agencies, suppliers of Equipment, foreign collaborators, foreign equity holders, international capital markets etc.

What are the routes to access External Commercial Borrowings (ECB)?

• ECB can be accessed under two routes such as Automatic Route and Approval Route.
• Under Automatic Route, ECB for investment in the industrial sector, infrastructure sector is Under this, they do not require the Reserve Bank approval or the approval of Government of India. For specific sectors such as export and import, before taking the loan the borrower has to take the explicit permission of the government.

Automatic Route

Eligible Borrowers under External Commercial Borrowings (ECB) guidelines:

• Corporates including those in the hotel, hospital, software sectors
• Non-Government Organizations (NGOs) engaged in microfinance activities are eligible to avail of ECB.
• Units in Special Economic Zones (SEZ) Units (except financial intermediaries, individuals, Trusts)
• NBFC-IFC, NBFC-AFC
• Companies in Miscellaneous Services i.e. Training Activities, R&D; and Infra Support; (except Educational Inst., Trading business, Logistic Services, Financial Services, and Consultancy Services) only from its Direct/Indirect Equity Holder/Group Cos
• Small Industries Development Bank of India (SIDBI) can avail of ECB for on lending to MSME Sector)
• Other specified

Recognized Lenders:

• International Banks
• International Capital Markets
• Multilateral Financial Institutions such as IFC, ADB, CDC etc.
• Export credit agencies
• Suppliers of equipment
• Foreign collaborators
• Foreign Equity Holders (min. 25%)
• For ECB beyond USD 5M – ECB Liability- Equity Ratio 4:1
• Indirect Equity Holder- Only if indirect Holding in IC is 51%
• Group Co.- ECB from a group company is permitted provided both the borrower and the foreign lender are subsidiaries of the same parent

What is the maximum amount which can be raised through External Commercial Borrowings?

The maximum amount of ECB which can be raised by a corporate is USD 750 million or its equivalent during a financial year other than hotel, hospital and software sectors, and corporate in the miscellaneous services sector.

• USD 200 M- Hotel, Hospital, S/W, and Miscellaneous Service;
• U$ 10 M- NGO in MF –MFI;
• Specified NBFC and SIDBI as per conditions
• Minimum average maturity 3 or 5 years depending on the quantum of ECB

Minimum Average Maturity period

• USD 20 M – 3 years
• Beyond USD 20 up to 750 M – 5 years

All in Cost Ceiling

• 3-5 years – LIBOR + 350 bps
• Beyond 5 years – LIBOR + 500 bps

(Fixed rate loans: swap cost +margin)

End Use

• Real/ Industrial sector (SME)–
  • Import of capital goods,
  • New Projects, Expansion/ modernization of existing units
  • Overseas Direct Investment in Joint Ventures (JV)/ Wholly Owned Subsidiaries (WOS) Payment of Interest During Construction (IDC)
• First stage acquisition of shares in the disinvestment process and also in the mandatory second stage offer under GOIs disinvestment program
• Payment for obtaining License/ permit for 3G spectrum.
• For lending to self-help groups or for microcredit by NGO’s
• Repayment of rupee loans by companies in infrastructure sector manufacturing and hotel sector (with a project cost of NR 250 or more)
• The general corporate purpose from foreign direct equity holder

End-Use (Not Permitted):

• On lending, Investment in capital market or acquiring a company in India
• Real Estate Sector
• General corporate purposes
• Repayment of existing INR Loan

Other Permitted End Uses

• Import of capital goods; New projects;
• Modernization/expansion of existing projects in the real sector (industrial sector including SME and infrastructure sector);
• Hotel Sector (fixed capital investment of ≥ Rs. 200 Crore)
• Convention Centers (fixed capital investment of ≥ Rs. 300 Crore)
• Common infrastructure for Industrial Parks, SEZ, Tourism Facilities;
• Capital investment in fertilizers;
• Post-harvest infrastructure for agricultural and horticultural products including cold storage;
• Soil testing laboratories; Cold chain for farm level pre-cooling, preservation, storage or agricultural and allied produce, marine produce, and meat;
• ODI in JV/WOS abroad;
• Acquisition of shares in the disinvestment process of PSU shares;
• IDC for Indian Infrastructure sector;
• Capital expenditure in the maintenance and operations of a toll system;
• Refinancing of Bridge finance availed for import of capital goods in the infrastructure sector;
• Import of services, technical know-how, payment of license fee etc.;
• General corporate purposes from FDEH in manufacturing, infrastructure, hotels, hospitals and IT sector (minimum average maturity 7 years);
• Payment of spectrum allocation;

ECB Policy

ECB Policy is regularly regulated by Reserve Bank of India and Government of India.

Guarantee:

• Issuance of guarantee, standby letter of credit, letter of undertaking or letter of comfort by banks, Financial Institutions and Non-Banking Financial Companies (NBFCs) from India relating to ECB is not permitted.
• Pledge of shares by promoters, domestic associate companies of the borrower
• Corporate Guarantee, Personal Guarantee
• Creation of Charge over immoveable assets and financial securities is possible only after obtaining no objection from the AD bank.

In case of enforcement of charge – property will be transferred only to a person resident in India

Authorized Dealer Permit

• Change in Name; Change in Lender; Change in End Use, Change in All-in-Cost
• Transfer of ECB, Currency Reschedulement, Reduction in the amount of ECB
• Cancellation of LRN

Conditions:

• Activities to be under Automatic Route / FIPB approval obtained
• Sectoral Cap not breached
• Pricing: Listed as per SEBI; Unlisted: At a Fair Value arrived based on IAP on ALP on the date of conversion
• Conversion Rate: Maximum at the exchange rate prevailing on the date of the agreement between the parties.

Reporting Structure

• Full conversion of outstanding ECB into equity – Form FC-GPR to AD & Form ECB-2 to DSIM within 7 working days from the close of the month
• Partial conversion of outstanding ECB into equity – Form FC-GPR for converted portion & Form ECB-2 to DSIM mentioning converted and an unconverted portion

Procedure

• Execution of Loan Agreement (filing is not compulsory)
• Filing of Form 83 duly certified by CA/CS to AD
• AD to process the request and send to RBI for LRN
• Drawn should take place post allotment of LRN
• Filing of Monthly Return in ECB 2 by 7^th of next month

Compounding of contraventions

Compounding of contraventions means settle an offense committed by the contravener through the imposition of a monetary penalty without going in for litigation after the contravener acknowledges having committed the contravention.

Objective

To provide comfort by minimizing transaction costs, while taking a severe view of willful, malafide and fraudulent transactions but it is not equal to the withdrawal of a charge or a complaint but an agreement not to pursue the legal battle and spare the accused from further consequences.

Filing Application

• Application Form
• Nature of the contravention
• Provisions of FEMA under which the transaction would be handled
• While undertaking the transaction which of the FEMA provisions were contravened
• Transaction:- Parties involved, Date of the transaction and Amount involved
• DD – in favor of “RESERVE BANK OF INDIA” Payable at RO/MUMBAI

RBI office Jurisdiction:

• Regional offices

1. Delay in AR, FC-GPR
2. Non Allotment/Refund in 180 days
3. Violation of Pricing Guidelines
4. The issue of Ineligible Instruments
5. The issue of securities without RBI/FIPB approval
6. Delay in Filing of FC-TRS-NR/R-R/NR
7. Recording of Transfer by Company without FC-TRS

• Central Offices

New Delhi

1. Acquisition of IMP in/outside India
2. LO, BO, and PO
3. Deposits

Mumbai

1. ECB
2. ODI
3. Export, Import, and Others

Features of Compounding

• Voluntary
• No suo-moto investigation
• Time Bound completion (Within 180 days)
• No further proceedings for contravention so compounded
• Payment of the sum of contravention (within 15 days)
• Once the order is passed, no contravener seek to withdraw the order or to hold it as void or request a review of the order
• No appeal against the Order
• Non-payment shall be deemed as no application is made
• No compounding before the expiry of 3 years of a previous order for a similar contravention
• No Compounding of cases where approval of any statutory authority/Govt. etc. was required unless such approvals have been sought

Ascertainment of Nature in Contravention of RBI

Depends upon whether the contravention is

• Technical/ Minor in nature and needs only Cautionary Advice.
• Serious in nature and warrant Compounding;
• Prima facie, involves Money-Laundering, National and Security concerns involving serious infringement of the regulatory framework;

However, RBI reserves the right to classify the contraventions and nobody else has any right to classify any contravention as technical suo moto.

The Decision of Sum of contravention by RBI depends on

• Amount of Gain of unfair advantage made from contravention;
• Amount of Loss to any agency/authority/exchequer from contravention;
• Economic benefits accruing to the contravener from delayed compliance or compliance avoided;
• Repetitive nature of the contravention, Track Record, History of non-compliance of the Contravener;
• Contravener’s conduct in undertaking the transaction, Disclosure of full facts in the application and submissions made during the personal hearing;
• Any other factor considered relevant and appropriate

Penalty Provisions

• Application for Condonation
• Application for compounding
• Adjudication proceedings
• Penalty/ Confiscation in case of quantifiable offense – Up to 3 times, in case of non -quantifiable offense – Up to Rs. 200,000, in case of continuing penalty – Rs. 5000 per day
• Imprisonment if penalty not paid within the prescribed time.