Foreign Investment

Process of Raising ECB in India

ECB in India

ECBs are loans or debts or borrowings of Indian entities from entities registered outside India. These loans or debts are solely for commercial purposes. In India, the RBI regulates the ECBs, and over the years, RBI has reduced restrictions on eligible borrowers and lenders, end-use restrictions, minimum average maturity rate, etc. In addition to that RBI has granted several benefits for availing ECB such as lower interest rates and greater access to the global market. The benefit of the ECB is that entities can borrow a large number of currencies without having to compromise on control. Since the borrowings come from a foreign country, it is necessary to ensure compliance with all the applicable ECB rules. Failure to comply with the ECB rules attracts penalties and legal action under the Foreign Exchange Management Act of 1999 (FEMA). In this write-up, we will discuss the process of raising ECB in India.

What is the framework of ECB Regulatory?

The following are the ECB Regulatory Framework in India:

  • Foreign Exchange Management Act (FEMA), 1999;
  • Exchange Management (Borrowing and Lending) Regulations, 2018 (ECB Regulations);
  • Foreign Exchange Management (Transfer/Issue of any Foreign Security) Regulations, 2004; and
  • Master Direction- External Commercial Borrowings, Trade Credits, and Structured Obligations (Master Directions).

What is the entry route for raising ECB in India?

The entry routes for raising ECB are as under:

  • Automatic route
    Under this route, the potential borrowers do not have to take approval from RBI. The borrowings are directly examined by the Authorized Dealer Category- I Banks (AD  Category-I).
  • Government Approval Route
    Under this route, the potential borrowers send their requests to the RBI via AD Banks for examination.

What are the types of ECBs?

Following are the types of ECBs:

  • INR Currency Denomination ECB–  They are loans raised in Indian Rupees
  • Foreign Currency Denomination ECB- They are loans raised in any freely convertible foreign currency.

What is the procedure for raising ECB?

Every ECB which conforms to the parameters prescribed for the automatic route can be raised under the Automatic route. For raising ECB through an automatic route, the entity may approach an AD Category-I Bank with its proposal and duly filled Form ECB.

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In the case of the Government route, the borrowers may approach the RBI with an application as prescribed in Form ECB for examination through AD Category-I Bank. The RBI considers the application depending upon the overall guidelines, economic situation, and merits of the proposal. Further, if an ECB proposal before RBI is beyond a threshold limit prescribed from time to time, then it will be placed before the Empowered Committee (EC)[1] and then after the recommendations of the EC, the final decision shall be taken by the RBI.

What instruments of borrowing are covered by ECB? – Raising ECB

Instruments of borrowings covered under Foreign Currency Denomination ECB and INR Currency Denomination ECB are as follows:

Foreign Currency Denomination ECBINR Currency Denomination ECB
Bank LoansBank Loans
Floating and fixed rate notes/bonds/debentures like optionally convertible debentures and non-convertible debenturesFloating and fixed rate notes/bonds/debentures like optionally convertible debentures and non-convertible debentures, preference shares except fully and compulsorily convertible instruments.
Trade credits beyond 3 yearsTrade credits beyond 3 years
Foreign Currency Convertible Bonds (FCCBs)Plain vanilla rupee-denominated bonds issued overseas that are either placed privately or listed on exchanges as per host country regulations.
Foreign Currency Exchangeable Bonds (FCEBs)
Financial LeaseFinancial Lease

What is the Hedging requirement under ECB?

For the Foreign currency denomination ECB, the hedging requirement is as follows:

  • The entities must comply with the guidelines related to the sectoral or prudential regulator concerning foreign currency exposure.
  • The infrastructure companies shall comply with the risk management policy approved by the Board and are compulsorily required to hedge 70% of their ECB exposure in case the average maturity is less than 5 years.

For the Indian currency denomination ECB, the hedging requirement is as follows:

  • The overseas investors are eligible to hedge their exposure in Rupee through permitted derivative products with the AD Category-I banks in India.
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Who are the Eligible Borrowers?

Under the foreign denomination, ECB the following entities are eligible borrowers:

  • All entities that are eligible to receive FDI
  • EXIM Bank of India
  • Small Industries Development Bank of India
  • Port Trusts
  • Units of SEZ

Under the INR Denomination ECB, the following entities are eligible lenders:

  • All entities eligible to receive foreign denomination ECB
  • Registered entities engaged in micro-finance activities
  • Registered societies/trusts/cooperatives
  • Companies registered not for profit purpose
  • Non-Government Organizations

Who is the Eligible Lender?

The list of eligible lenders of ECB is as follows:

  • A resident of the Financial Action Task Force (FATF) or International Organization of Securities Commissions (IOSCO).
  • Multilateral and Regional Financial Institutions to which India is a member country.
  • Individual subscribers to bonds and debentures listed abroad.
  • Foreign Equity Holders including a direct equity holder who owns a minimum of 25% direct equity holding in the borrowing entity, an indirect equity holder who owns a minimum of 51% indirect equity holding, and a group company with an overseas parent.
  • Branches or subsidiaries of Indian Banks in a foreign country are permitted as lender’s foreign currency denomination ECBs apart from FCCBs and FCEBs. In addition to this, they can participate as arrangers/underwriters/markers/traders for Indian currency ECBs issued overseas but underwriting by a branch of Indian Banks in a foreign country to be issued by Indian Banks is not allowed.

What are the different criteria for Minimum Average Maturity Period (MAMP)?

In general, the MAMP for ECBs is 3 years however, different criteria have been provided for some companies that are listed below:

BorrowerLenderLimit/ PurposeMAP
Manufacturing companiesAll eligible lendersUp to USD 50 million or its equivalent amount per FY1 year
Eligible borrowersForeign equity holderGeneral corporate purposeRepayment of rupee loans5 years
Eligible borrowersAll eligible lenders except for foreign branches/ overseas subsidiaries of Indian banksWorking capital purposes or general corporate purposesRepayment of rupee loans availed domestically for purposes other than capital expenditure10 years
NBFCsAll eligible lenders except for foreign branches/ overseas subsidiaries of Indian banksOn lending for working capital purposes or general corporate purposes7 years
NBFCsAll eligible lenders except for foreign branches/ overseas subsidiaries of Indian banksOn lending for repayment of the rupee, loans availed domestically for purposes other than capital expenditure10 years

To what limit can ECB be raised? – Raising ECB

ECB up to USD 750 Million or an equivalent amount can be raised by eligible borrowers under Automatic Route. In addition to this, foreign currency denominated ECB raised directly from foreign equity holders cannot be raised beyond the liability-equity ratio of 7:1. This ratio is however, not applicable if the outstanding amount of all ECBs including the proposed one is upto USD 5 million or equivalent.

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For what purposes can the ECB proceeds not be utilized?

The negative list for which ECB proceeds cannot be utilized is as follows:

  • Real estate activities
  • Capital market investments
  • Equity investment
  • Working capital purposes, apart from what is allowed in MAMP.
  • General corporate, apart from what is allowed in MAMP
  • Repayment of Indian currency denomination loan, apart from what is allowed in MAMP.
  • On-lending to entities for the above activities apart from ECB raised by NBFCs.

What is the meaning of “All-in-cost”? What is the ceiling of “All-in-cost” prescribed for ECB?

All-in-cost means the cost involved in a financial transaction or business operation. It consists of the rate of interest, fees, expenses, charges, and guarantee fees, whether paid in foreign currency or Indian Rupees. It excludes costs like commitment fees, pre-payment fees or charges, and withholding tax payable in INR. Further, in the case of fixed-rate loans, the swap cost plus spread should be more than the floating rate plus the applicable spread.

The ceiling of All-in-cost per annum is limited to 450 basis points over the benchmark rate per annum.

What are the reporting requirements of the ECB?

Before providing a loan in India, a Loan Registration Number (LRN) has to be obtained from the Reserve Bank of India. The borrowers should report actual ECB transactions through ECB-2 return through the AD Category-I Bank on a monthly basis within 7 working days from the close of the month to reach the Department of Statistics and Information Management within 7 working days from the close of the month to which it relates. Further, the changes in the terms and conditions of ECB have to be reported within 7 days in Form ECB-2 Return.

What is the Penalty prescribed for the delay in reporting?

FormDelay PeriodApplicable late submission fee
Form ECB 2Delay of up to 30 days from the due date of submissionRs. 5,000/-
Form ECB 2/ Form ECBDelay of up to 3 days from the due date of submission/date of drawdownRs. 50,000/- per year
Form ECB 2/ Form ECBDelay of more than 3 years from the due date of submission/ due date of drawdownRs. 1,00,000/- per year.

Conclusion

The ECB regulations have been amended and relaxed from time to time. The optimized rate of interest and tax for both lender and borrower along with the liquidity ratio makes ECB an attractive choice for Indian entities to raise overseas loans for their upcoming projects. Further, ECBs can also be raised to finance their existing business requirement like for working capital or general corporate purpose. This has facilitated increased access to the overseas market making ECB one of the primary investment vehicles in India. ECB has become significantly profitable for companies leading to development in the Indian economy.

Also Read:
What are the External Commercial Borrowings (ECBs)?
What are External Commercial Borrowing Regulations?
External Commercial borrowing: All You Need to Know

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