FEMA

Reporting of External Commercial Borrowings: A Comprehensive Checklist

External Commercial Borrowings (ECBs) are loans taken by Indian entities from foreign sources for various purposes such as capital expenditures, refinancing of rupee loans, and working capital requirements. The Reserve Bank of India (RBI) regulates ECBs to ensure stability in the balance of payments and the exchange rate. This blog will provide a comprehensive checklist for reporting ECBs to ensure compliance with RBI guidelines.

Introduction of ECB

An ECB is an instrument for accessing foreign funds to finance the trade, investment, and other activities of an Indian entity. ECBs are classified into two categories: Automatic Route and Approval Route. ECBs under the Automatic Route do not require prior approval from the RBI, while ECBs under the Approval Route require prior approval from the RBI.

The reporting of ECBs is essential to ensure compliance with RBI guidelines and keep track of foreign funds’ inflow and outflow. The reporting of ECBs is done through the Submission of Returns on External Commercial Borrowings and Trade Credits (Form ECB 2).

Checklist for Reporting of External Commercial Borrowings

The following is a comprehensive checklist for reporting ECBs to the RBI:

1. Identify the purpose for which the ECB is taken.
2. Determine the type of ECB, whether it is under the Automatic Route or Approval Route.
3. Ensure that the ECB is taken from a recognized foreign lender.
4. Ensure that the ECB is denominated in an acceptable currency.
5. Ensure that the ECB guidelines structure the ECB.
6. Obtain the necessary approval from the RBI if the ECB is under the Approval Route.
7. Maintain proper documentation and records of the ECB.
8. Report the ECB to the RBI within 60 days of its disbursal.
9. Report any change in the terms and conditions of the ECB to the RBI within 30 days.
10. Ensure that the ECB is utilized for its purpose and by the ECB guidelines.
11. Report the annual utilization of the ECB to the RBI.
12. Repay the ECB in accordance with the repayment schedule.
13. Report any default in repayment of the ECB to the RBI within 30 days.
14. Report the pre-payment of the ECB to the RBI within 30 days.
15. Report the closure of the ECB account to the RBI within 30 days.

It is important to note that non-compliance with the reporting requirements of ECBs can lead to penalties and legal action by the RBI. Hence, it is essential to follow the above checklist to ensure compliance with the RBI guidelines.

Advantages of External Commercial Borrowings

External Commercial Borrowings (ECBs) have several advantages for Indian entities, including:

• Access to a broader range of funding sources: ECBs provide Indian entities with access to a more comprehensive range of funding sources, including international banks^[1], financial institutions, and foreign investors.

• Lower cost of funds: ECBs can be cheaper than domestic borrowing options, particularly in times of high-interest rates in India.

• Flexible repayment options: ECBs often come with flexible repayment options, including longer tenors and more flexible repayment schedules, which can benefit Indian entities with long-term investment requirements.

• Diversification of funding sources: ECBs can help Indian entities diversify their funding sources, reducing their dependence on domestic funding sources and improving their overall financial stability.

• Access to global capital markets: ECBs provide Indian entities with access to global capital markets, enabling them to raise funds in foreign currencies, hedge their currency risk, and participate in global investment opportunities.

Challenges of External Commercial Borrowings

While ECBs offer several advantages for Indian entities, some challenges must be considered, including:

• Compliance with RBI guidelines: ECBs are subject to strict RBI guidelines, and Indian entities must ensure that they comply with these guidelines, including reporting requirements and restrictions on using funds.
• Exchange rate risk: ECBs are often denominated in foreign currencies, which exposes Indian entities to exchange rate risk. The fluctuation in foreign exchange rates can impact the cost of servicing the ECB and result in significant losses for Indian entities.
• Repayment risk: ECBs are often subject to repayment risk, particularly during economic downturns or financial stress. Indian entities must ensure adequate resources to repay the ECB by the repayment schedule.
• Credit risk: ECBs are subject to credit risk, which is the risk of default by the borrower. Indian entities must carefully consider the creditworthiness of the foreign lender before taking an ECB and ensure that they have adequate collateral to secure the ECB.

Conclusion

In conclusion, External Commercial Borrowings (ECBs) can be a valuable funding source for Indian entities. However, it is essential to be aware of the strict RBI guidelines that govern ECBs, including reporting requirements and restrictions on using funds. By following the checklist provided in this article, Indian entities can ensure that their ECBs are structured, utilized, and repaid by the RBI guidelines and avoid penalties and legal action by the RBI. Indian entities must also consider the advantages and challenges of ECBs, including access to a broader range of funding sources, lower cost of funds, flexible repayment options, exchange rate risk, repayment risk, and credit risk. By carefully considering these factors, Indian entities can make informed decisions about the structure, utilization, and repayment of their ECBs and ensure that they comply with the RBI guidelines.

Read our Article: External Commercial borrowing: All You Need to Know