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External Commercial Borrowings (ECB) Compliance – FDI Compliance

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Things to know

ECB Compliance: An Overview

External Commercial Borrowings refers to the commercial loans offered by the recognized foreign lenders to the eligible Indian borrowers. These fresh investments act as a tool for expansion. The primary difference between ECB and FDI revolves around their structure. FDI is against the issue of equity interest whereas ECB is essentially debt raised by the Indian borrowers. ECBs can take the form of bank loans, buyer’s credit, supplier’s credit, securitized instruments, bonds, etc. Here’s a detailed guide to ECB compliance requirements.

Benefits of External Commercial Borrowings

External Commercial Borrowings have opened a new route of borrowing finance and are a great alternative to the Indian borrowing landscape dominated by the banks and NBFCs. Following are the benefits of ECB:

Many foreign economies charge a lower interest rate than their Indian counterparts. This enables borrowing at affordable rates as compared to borrowings from India.
ECBs are primarily debt instruments and therefore enable the raising of capital without diluting equity stake.
ECBs open up the borrower to the global economies and players.
Benefits the country in terms of increasing the growth prospects manifold.
Government can channel the funds to high-growth prospect sectors. For instance, ECB limits can be increased in sectors where the government is looking to create opportunities like SME, infrastructure, etc.
ECBs, being debt fundraising, offers leverage to the Indian borrowers.

Routes for ECB

External Commercial Borrowings can be raised either in INR or any freely convertible foreign currency. Two routes are prescribed for raising ECB similar to FDI viz. Automatic Route and Approval Route. Here are the deep insights about the requirements of these two routes:

Automatic Route: Here, the cases are examined by the AD Category-I Banks, and the prospective borrowers are not required to take prior approval of RBI for raising ECB.
Approval Route: Here, requests shall be sent to RBI for examination and approval of ECB by the prospective lenders through the AD banks.

ECB Compliances Checklist – Framework

Foreign Currency (FCY) Denominated ECB

INR Denominated ECB

Forms of raising ECB

Bank Loans
Foreign Currency Exchangeable Bonds (FCEBs)
Foreign Currency Convertible Bonds (FCCBs)
Security Instruments (fixed / floating rate bonds / notes, non-convertible or partially convertible or optionally convertible debentures/preference shares)
Trade Credits (Supplier’s credit and Buyer’s credit beyond 3 years)
Financial Lease

Bank Loans
Security Instruments (fixed / floating rate bonds / notes, non-convertible or partially convertible or optionally convertible debentures/preference shares)
Financial Lease
Trade Credits (Supplier’s Credits and Buyer’s Credits beyond 3 years)
INR denominated Plain Vanilla Bonds issued overseas (Those that can be placed privately or listed on stock exchanges as per the regulations of the host country)

Eligible Borrowers

All the entities that are eligible to receive Foreign Direct Investments (FDI)
Port trusts
SIDBI
Units in SEZ
EXIM Bank of India

All the entities that are eligible to raise Foreign Currency ECB
Registered entities that are engaged in activities relating to micro-finance i.e., registered Not-for-Profit Companies, societies, cooperatives, trusts, and NGOs

Eligible Lenders

Lenders resident of FATF or IOSCO compliant nation
Multilateral Financial Institutions (e.g., World Bank, IMF, etc.) and Regional Financial Institutions (e.g., European Investment Bank, Asian Development Bank, etc.) where India is a member country.
Individuals can be the lenders if they are the foreign equity holders or for subscription to debentures/bonds listed above
Subsidiaries or foreign branches of Indian banks can act as recognized lenders only for FCY denominated ECBs (except for FCEBs and FCCBs)
Subsidiaries or Foreign Branches of Indian banks can participate as underwriters / arrangers / traders / market makers for overseas issued INR denominated bonds.
Issuances by Indian banks are not permitted to be underwritten by the subsidiaries or foreign branches of Indian Banks

Foreign Equity Holder means:

Direct foreign equity holder holding minimum direct equity of 25% in the borrowing entity, or

Indirect equity holder holding minimum indirect equity of 51%, or

Group company having a common overseas parent.

Limit for Raising ECBs

All the eligible borrowers can raise USD750 million or equivalent in ECB per financial year under the automatic route
The liability-equity ratio cannot exceed 7:1 for ECBs in case of raising FCY denominated ECBs from direct foreign equity holder
The above ratio is not applicable in case the outstanding, as well as proposed amount of all ECBs, does not exceed USD 5 million or equivalent

Negative List

Proceeds from ECB cannot be utilized for the following purposes:

Capital Market Investments
Real Estate Activities
For Working Capital purposes (except if allowed in Minimum Average Maturity Period)
Rupee loan repayments (except if allowed in Minimum Average Maturity Period)
General corporate purposes (except if allowed in Minimum Average Maturity Period)
Equity Investments
Lending to other entities for the above activities (except if allowed in Minimum Average Maturity Period)

Minimum Average Maturity Period (MAMP)

MAMP for ECB is 3 years
Call and put options shall not be exercisable before completion of MAMP

MAMP has been prescribed separately for specified categories:

Sr. No.	Category	MAMP
a	ECB up to USD 50 million or it’s equivalent per financial year raised by any manufacturing company.	1 year
b	ECB raised from foreign equity holder either for: Working capital purposes General Corporate purposes Repayment of rupee loans	5 years
c	ECBs raised for: Working capital purposes or general corporate purposes or On-lending for working capital purposes or general corporate purposes by NBFCs	10 years
d	ECB raised for: Repayment of rupee loans availed for capital expenditure domestically On-lending for the same purpose by NBFC	7 years
e	ECB raised for: Repayment of rupee loans availed of for other than capital expenditure domestically On-lending for the same purpose by NBFC	10 years

For the categories (b) to (e):

ECB cannot be raised from subsidiaries or foreign branches of Indian banks.
MAMP as prescribed above shall be complied with in all the circumstances.

All-In Costs

All-in-costs for ECB are as under:

For Existing FCY ECBs linked to LIBOR whose benchmarks are changed to ARR .Benchmark Rate + 550 bps spread
For New FCY ECBs

Benchmark Rate + 500 bps spread

For INR ECB

Benchmark Rate + 450 bps spread

Penal charges / prepayment charges, if any, for breach or default of covenants should not be more than 2% over the contracted interest rate on the outstanding principal amount. It will be outside the all-in-cost ceiling.

Benchmark Rate:

FCY ECB: 6 months LIBOR rate of different currencies or any of the 6 months interbank rate of interest applicable to the currency in which the borrowing is done. E.g.: EURIBOR

INR ECB: Prevailing yield of the Government of India Securities with the corresponding maturity.

How to do ECB Compliance – Process

The process for raising ECB is as under:

Automatic Route:

The applicant shall approach the concerned authorized dealer. The application for ECB shall be sent to the following address:

Chief General Manager-in-Charge,
Foreign Exchange Department, Reserve Bank of India,
Central Office, External Commercial Borrowings Division,
Mumbai – 400 001.

The applicant shall submit the Form-83 in duplicate, duly certified by a CA/CS, to the RBI for getting the Loan Registration Number (LRN). The Form shall be submitted to the designated bank at the following address:

Director, Balance of Payments Statistics Division,
Department of Statistics and Information Management (DSIM),
Reserve Bank of India,
Bandra-Kurla Complex,
Mumbai – 400 051.

After receipt of LRN, the applicant shall submit the Form ECB to the RBI, and after scrutinizing the same, the RBI will allow drawing down the ECB.
Borrowers shall submit the Form ECB-2 Return, duly certified by the designated AD bank on a monthly basis. The submission shall be such that it reaches the DSIM, RBI within 7 working days from the end of each month to which it relates.

Approval Route:

Under the approval route, the borrowers shall approach the RBI with an application in Form ECB. The cases shall be subject to the macro-economic situation, overall guidelines, and merits of the proposal.

The proposals received by the RBI shall be placed before the Empowered Committee set up by the RBI if they cross a certain threshold limit. The Empowered Committee will make recommendations to the RBI considering which the RBI shall make the final decision.

Documents required for ECB

Following documents are required for ECB compliance:

Loan agreement between the borrowers and authorized dealers.
LRN i.e., Loan Registration Number received from the RBI. The authorized dealer shall submit the Form-83 in duplicate duly verified by a Chartered Accountant or a Company Secretary to RBI for getting the loan registration number.
Form-ECB to be submitted in duplicate by the borrower for all categories and any amount of ECB
Form ECB-2 Return to be filed monthly for reporting actual ECB transactions within 7 days from the close of the month
Copy of the offer letter disclosing details of the offer
Copy of the import contract, bill of lading, or proforma invoice
Undertaking that ECB will be utilized only for the purposes permitted.

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FAQ's

Q : Who is responsible to ensure ECB compliance?

The primary responsibility to ensure adherence to ECB compliance requirements and guidelines rests with the borrower. Any circumvention / bypass of the guidelines or contravention of regulations and ECB non-compliance under FEMA can attract penal provisions under the FEMA, 1999.

Q : Can LLPs raise ECBs?

LLPs are not eligible to raise Foreign Direct Investments. Hence, they cannot raise ECBs.

Q : Can we convert INR-denominated ECBs into Foreign Currency denominated ECB?

An entity, having raised the INR denominated ECB cannot be permitted to convert its INR ECB liability into foreign currency liability. They cannot assume foreign currency risk either by entering derivative contracts or otherwise.

Q : Whether non-convertible preference shares are included in equity for calculating ‘ECB liability to equity ratio’?

No. They shall not be included in equity.

Q : Can the existing Rupee denominated ECB be repaid by raising fresh foreign currency ECB?

Refinancing a rupee-denominated ECB using foreign currency denominated ECB is not permitted.

Q : What precautions should be taken at the time of filing Form ECB?

Following precautions shall be taken care of at the time of filing Form ECB: Draw-down of ECB can be done only after receiving Loan Registration Number from RBI All the terms and conditions related to ECB shall be reported correctly and none of the columns should be left blank. Any changes in the ECB parameters, whether under the automatic route or approval route should be reported through revised Form ECB to the DSIM at the earliest but not later than 7 days of the effected change.

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