{"id":30519,"date":"2020-04-08T12:54:37","date_gmt":"2020-04-08T07:24:37","guid":{"rendered":"https:\/\/enterslice.com\/learning\/?p=30519"},"modified":"2020-11-20T16:42:55","modified_gmt":"2020-11-20T11:12:55","slug":"external-commercial-borrowings-and-compliance-requirements-for-start-ups","status":"publish","type":"post","link":"https:\/\/enterslice.com\/learning\/external-commercial-borrowings-and-compliance-requirements-for-start-ups\/","title":{"rendered":"External Commercial Borrowings and Compliance Requirements for Start-Ups"},"content":{"rendered":"<p class=\"has-drop-cap\">A start-up is considered as a business at\nthe inception stage. The Department for Promotion of Industry and Internal Trade\n(DIPP) has classified the meaning of a start-up. The following are the\nrequirements for a start-up: <\/p>\n\n\n\n<p><strong>From the\ninception period of the business to the current phase, if the operations of the\nbusiness are less than ten years, then it is considered a start-up. Apart from\nthis, the turnover from the time of formation is considered for the definition\nof a start-up. If the turnover is more than a hundred crore from the time of\nformation, then the business is called a start-up. The business activities of\nthe start-up should be mainly for innovation, digitization, and\ncommercialization<\/strong>.\nPreviously the meaning of start-up was defined as an entity which has the\nfollowing:<\/p>\n\n\n\n<ul><li>Business from the stage of inception -7 years<\/li><li>Turnover from the time of formation of the start-up- 25 crore<\/li><\/ul>\n\n\n\n<p>For this, the DIPP amended the provisions\nrelated to a start-up. This was relaxed because foreign financing could be\nincreased for start-ups. <\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Sources of Funds for Start-ups<\/h2>\n\n\n\n<p>For an entrepreneur to commence a start-up,\nthere is a requirement of having a business plan in place for securing finance.\nThe various sources of finance are:<\/p>\n\n\n\n<ul><li>Individual Financing Options<\/li><li>Angel Investors<\/li><li>Seed Funding Rounds<\/li><li>Loan Options<\/li><li>Foreign Loans such as External Commercial Borrowings<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\">What are External Commercial Borrowings?<\/h2>\n\n\n\n<p>External Commercial Borrowings, also known as ECB, in short, are loans that are borrowed from foreign banks and institutions. As the name indicates, External Commercial Borrowings are borrowings that are made from international institutions and banks. ECB can only be used for a specific purpose. Many start-ups consider this option of using External Commercial borrowings for loan financing. When a company uses ECB instruments, particular criteria have to be met. The following are the requirements for external commercial borrowings: <\/p>\n\n\n\n<ul><li>The requirement of an external\ncommercial borrowing<\/li><li>Minimum Average Maturity Period\n(MAMP) related to ECB<\/li><li>The specific purpose and End-user\nrequirements related to ECB<\/li><\/ul>\n\n\n\n<p>Based on the\nneed of the borrower, the external commercial borrowing will be issued with a\nmaturity period. However, there will be a clause regarding the particular\nend-use requirement of external commercial borrowing. End-use means the primary\npurpose of the instrument.<\/p>\n\n\n\n<p>The use of external commercial borrowings is regulated by the Ministry of External Affairs, <strong><em><a href=\"https:\/\/www.rbi.org.in\/\">the RBI<\/a><\/em><\/strong>, and the Department of Finance. There are a lot of <strong><em><a href=\"https:\/\/enterslice.com\/learning\/external-commercial-borrowings-ecbs-compliances\/\">compliance requirements<\/a><\/em><\/strong> with the use of external commercial borrowings; hence the government has relaxed the norms for the usage of ECBs by start-ups.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Types of External Commercial Borrowings<\/h2>\n\n\n\n<p><strong>External commercial borrowings can be in the form of the following:<\/strong><\/p>\n\n\n\n<ul><li>Securitized instruments ( Fixed and Floating Rate notes )<\/li><li>Foreign loans from banks<\/li><li>Credit from buyer and supplier<\/li><li>Foreign Currency Convertible Bonds (FCCB)<\/li><li>Foreign Currency Exchangeable Bonds (FCEB)<\/li><\/ul>\n\n\n\n<p>Apart from the above, ECBs can also be\nissued in Rupee Denominated instruments.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Previous Framework for External Commercial Borrowings for\nStart-ups<\/h2>\n\n\n\n<p>The RBI in a notification (&ldquo;previous framework&rdquo;) issued in 2016 relaxed the norms regarding the requirement of external commercial borrowing for start-ups. This was introduced as there was a need for start-ups to access foreign funds apart from the domestic investment. This notification allowed start-ups to obtain funds by way of external commercial bonds from international lenders. <\/p>\n\n\n\n<p>For the external commercial borrowing requirement\nby start-ups, there are three tracks of investment. These tracks also specify\nthe amount of maturity period for the amount of minimum investment.<\/p>\n\n\n\n<ul><li>Track 1- This track the ECB has a MAMP of 3 to 5 years. This is a\nmedium-term foreign currency denominated ECB. <\/li><li>Track 2- In this track, the ECB has a MAMP of up to 10 years. This is\na foreign currency denominated ECB. <\/li><li>Track 3- In this track, the ECB has a MAMP of 3 to 5 years. This is an\nIndian currency denominated ECB.<\/li><\/ul>\n\n\n\n<p>A start-up under this framework can borrow\nup to USD 3 Million per million in the form of Foreign Currency or Indian\nCurrency or a combination of both the denominations. The maturity period for\nECBs related to start-ups is three years. The end use of the ECB instruments\nwas based on the requirement of the start-up.&nbsp;\nMonitoring and compliance related to these forms of ECB were carried out\nby the Authorised Dealer and the RBI.<\/p>\n\n\n\n<p>Through this notification, the RBI has\nrelaxed the requirement for ECBs related to start-ups. This is due to the\ncondition that start-ups would get the maximum value that is derived from the\nECB.<\/p>\n\n\n\n<div class=\"read\"><p><b>Also, Read:<\/b> <mark><a href=\"https:\/\/enterslice.com\/learning\/external-commercial-borrowing-startup\/\" target=\"_blank\" rel=\"noopener noreferrer\">External Commercial Borrowing for Startup<\/a><\/mark>.<\/p><\/div>\n\n\n\n<h2 class=\"wp-block-heading\">Current Framework for External Commercial Borrowings for\nStart-ups<\/h2>\n\n\n\n<p>In the new notification (&ldquo;Current\nFramework&rdquo;) &nbsp;that was issued in January\n2019, the RBI considered the norms related to <strong>further relaxation<\/strong> of rules about borrowings made by a start-up\nwhen it comes to ECB. In this view, the RBI found the financing requirement of\nforeign investors and venture capitalists. For using the benefits of the\ncurrent framework, the business has to be a startup.<\/p>\n\n\n\n<p>&nbsp;In this current framework, <strong>the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018<\/strong> considered both borrowing and lending requirements of Indian rupees and foreign currency would come under the purview of a single head.&nbsp; The current framework also allowed ECB borrowings to be carried out in both Indian Rupees and Foreign Currencies. This requirement was present in the previous framework.&nbsp; The MAMP requirement has been kept at three years for the current framework.<\/p>\n\n\n\n<p>In the previous framework, there were three\nseparate tracks for ECB. The tracks had different requirements related to the\namount of maturity period for each ECB.&nbsp;\nThese forms of ECB accepted Indian currency and foreign currency\ndenominations. These types of ECB were given based on the term of the loan. In\nthe current framework related to ECB, there are two tracks for the forms of\nECB. The type of ECB is just dependent on the denomination of the currency.\nWhether the ECB is a foreign currency-denominated or Indian currency\ndenominated, the ECBs are categorized accordingly. The tracks are not\ncategorized based on the term of the loan and the maturity period of the ECB.\nThe tracks in the current framework are just dependent upon the denomination of\nthe currency. <\/p>\n\n\n\n<p>Apart from the above changes related to\nthe track in the current framework, the RBI has considered making changes in\nthe meaning of eligible borrowers and lenders.&nbsp;\nIn the previous framework, the eligibility criterion for borrowers was\nbased on the end-use requirement of the ECB and the industry. So if a borrower\nwas considering the previous framework, then only if they were in a specific\nsector or industry, then the ECB could be utilized. In view of this\nrequirement, the use of ECB was limited for many start-ups. Start-ups are into\nareas related to digitization and innovation; hence the RBI has considered\nrelaxing the requirement in the current framework.&nbsp; The current framework allows any business\nwhich is eligible for borrowing ECB under the framework. This has removed the\nhurdle to innovation start-ups for securing ECB.<\/p>\n\n\n\n<p>The current framework also enhanced the meaning of the list of eligible lenders. <\/p>\n\n\n\n<p><\/p><div class=\"shadow1\"><strong>According to this framework, one of the requirements to be a suitable lender is the institution must come under the definition of foreign equity holder<\/strong>. <strong>The second requirement is that the business activities of the lender must come from a country that has been defined under the Financial Action Task Force or the International Commission of Securities Compliant Countries.<\/strong> <strong>So accordingly, the lender must be a resident of a member country of the FATF or the ICSC. <\/strong><\/div>\n\n\n\n<p>The previous framework required the lender to be classified as a foreign bank, export credit institutions, and multilateral finance institutions. Because of this, the current framework has provided a clear and concise definition related to eligible lenders. The previous framework restricted several institutions from lending External Commercial Borrowings. <\/p>\n\n\n\n<p>By the above requirement, if a venture\ncapitalist or a private investor is a foreign equity holder, then they would\nonly be eligible to provide loans. The current framework has changed the\nmeaning regarding a lender and allows venture capitalists to provide loans\nthrough the ECB route for start-ups. <\/p>\n\n\n\n<p>According to the current framework,\nforeign borrowing can be in the form of convertible\/non-convertible preference\nshares or even in the form of loans. &nbsp;In\nthe current framework, the amount of borrowing is limited to USD 3 Million.\nThis amount is similar to the previous framework. <\/p>\n\n\n\n<p>Security requirements related to the loan\nwhen borrowing an ECB are at the discretion of the borrower. Many forms of\nsecurity can be provided against the loan requirement.&nbsp; Under the requirement of security, a personal\nor corporate guarantee can also be issued. <\/p>\n\n\n\n<p>The meaning of all-in cost regulation has\nbeen discussed in the ECB framework, which states that the borrower cannot use\nthe ECB for the repaying the interest on the loan. The requirement of all-in\ncost regulations could be negotiated or mutually decided between the borrower\nand lender. This requirement for the all-in cost is the same between the\ncurrent framework and the previous framework.<\/p>\n\n\n\n<p>Based on the above differences of the\nframeworks related to External Commercial Borrowings, the current framework has\nrelaxed the norms for borrowings related to ECB. This has made start-ups use\nECB for foreign loans.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Conclusion<\/h3>\n\n\n\n<p>Previously external commercial borrowings\nwere significantly used as foreign financing for business purposes. After the\nnotification,&nbsp; issued in 2016 by the RBI,\nit has allowed startups to use borrowings in the form of ECB. <strong>The 2019 notification issued by the RBI has\nconsiderably improved the framework related to External Commercial borrowings\nmade by a Start-up.<\/strong> One of the main changes is the reduction of tracks for\nECB based on the denomination. Also added to this the meaning of eligible\nlenders and eligible borrowers have been more clear and precise. Apart from the\nabove significant changes, there are other differences between the two\nnotifications. &nbsp;By doing this, the RBI\nhas significantly relaxed the norms related to ECB borrowings by a start-up.<\/p>\n\n\n\n<div class=\"read\"><p><b>See Our Recommendation:<\/b> <mark><a href=\"https:\/\/enterslice.com\/learning\/external-commercial-borrowing-ecb-regulations\/\" target=\"_blank\" rel=\"noopener noreferrer\">External Commercial Borrowing (ECB) Regulations<\/a><\/mark>.<\/p><\/div>\n","protected":false},"excerpt":{"rendered":"<p>A start-up is considered as a business at the inception stage. The Department for Promotion of Industry and Internal Trade (DIPP) has classified the meaning of a start-up. The following are the requirements for a start-up: From the inception period of the business to the current phase, if the operations of the business are less [&hellip;]<\/p>\n","protected":false},"author":37,"featured_media":30520,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[1329,1],"tags":[],"acf":{"service_id":"215"},"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v14.6.1 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>External Commercial Borrowings and Compliance Requirements<\/title>\n<meta name=\"description\" content=\"External Commercial Borrowings, also known as ECB, in short, are loans that are borrowed from foreign banks and institutions.\" \/>\n<meta name=\"robots\" content=\"index, follow\" \/>\n<meta name=\"googlebot\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<meta name=\"bingbot\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/enterslice.com\/learning\/external-commercial-borrowings-and-compliance-requirements-for-start-ups\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"External Commercial Borrowings and Compliance Requirements\" \/>\n<meta property=\"og:description\" content=\"External Commercial Borrowings, also known as ECB, in short, are loans that are borrowed from foreign banks and institutions.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/enterslice.com\/learning\/external-commercial-borrowings-and-compliance-requirements-for-start-ups\/\" \/>\n<meta property=\"og:site_name\" content=\"Enterslice\" \/>\n<meta property=\"article:publisher\" content=\"https:\/\/www.facebook.com\/enterslice\" \/>\n<meta property=\"article:published_time\" content=\"2020-04-08T07:24:37+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2020-11-20T11:12:55+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2020\/04\/External-Commercial-Borrowings-and-Compliance-Requirements-for-Start-Ups.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"670\" \/>\n\t<meta property=\"og:image:height\" content=\"352\" \/>\n<meta name=\"twitter:card\" content=\"summary\" \/>\n<meta name=\"twitter:creator\" content=\"@enterslice\" \/>\n<meta name=\"twitter:site\" content=\"@enterslice\" \/>\n<!-- \/ Yoast SEO plugin. -->","authorName":"Varun Hariharan","authorImageUrl":"https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2020\/03\/Image.png","authorDescription":"Varun Hariharan has completed the Legal Practice Course from BPP Law School, Manchester. He has a Masters in Commercial and Corporate Law from the Queen Mary University of London and LLB Honours from Bangor University, UK.  He specialises in law related to corporate, artificial intelligence and technology law.","postViews":483,"readingTime":6,"nextPost":{"id":30528,"slug":"roc-forms-compliances-and-due-dates-under-the-companies-act-2013"},"prevPost":{"id":30464,"slug":"registrar-and-transfer-agent-rta-registration-a-liaison-between-company-and-securities-holders"},"featuredMediaUrl":"https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2020\/04\/External-Commercial-Borrowings-and-Compliance-Requirements-for-Start-Ups.jpg","postTerms":"Finance Business","_links":{"self":[{"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/posts\/30519"}],"collection":[{"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/users\/37"}],"replies":[{"embeddable":true,"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/comments?post=30519"}],"version-history":[{"count":0,"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/posts\/30519\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/media\/30520"}],"wp:attachment":[{"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/media?parent=30519"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/categories?post=30519"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/tags?post=30519"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}