EXTERNAL COMMERCIAL BORROWINGS (ECB’S) – FEMA PERSPECTIVE


External Commercial Borrowings
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Meaning of External Commercial Borrowings (ECB’s)

ECB’s (External Commercial Borrowings) are commercial loans/debts/borrowings raised by eligible resident entities from recognized non-resident entities outside India for commercial purposes and should conform to specified parameters. The specified parameters are minimum maturity period, permitted and non-permitted end-uses, maximum all-in-cost ceiling, etc. The parameters apply in totality and not on a standalone basis.

Types of External Commercial Borrowings (ECB’s)

The External Commercial Borrowings can be raised by resident entities from recognized non-resident entities in the following forms:

  • Loans including bank loans
  • Securitized instruments (like floating rate notes, fixed rates bonds, non-convertible, optionally convertible or partially convertible preference shares/debentures)
  • Buyer’s Credit
  • Supplier’s Credit
  • Foreign Currency Convertible Bonds (FCCBs)
  • Financial Lease
  • Foreign Currency Exchangeable Bonds (FCEBs)

The External Commercial Borrowings can be obtained through an automatic route or approval route or by a combination of both the routes. The automatic route cases are examined by the Authorized Dealer Category – I (AD Category –I) banks and under the approval route, the prospective borrowers are required to send their requests to the RBI through their AD’s for examination. FCEBs can be issued only under the approval route.

Minimum Average Maturity Period (MAMP)

Minimum average maturity is defined as the weighted average of all disbursements taking each disbursement individually and its period of retention by the borrower for the purpose of External Commercial Borrowings. 

The framework for raising loans through External Commercial Borrowings covers the following three tracks:

Track – 1:  Medium Term Foreign Currency ECB with MAMP of 3/5 years

  • 1 Year for ECB raised by manufacturing companies up to USD 50 Million or its equivalent
  • 3 Years for ECB up to USD 50 Million or its equivalent
  • 5 Years for ECB beyond USD 50 Million or it’s equivalent
  • 3 Years for companies in the infrastructure sector, NBFC’s, housing finance companies (regulated by the National Housing Bank), and core investment companies, irrespective of the amount of borrowing.
  • 5 Years for FCCBs/FCEBs irrespective of the amount of borrowing. The call and put options, if any for FCCBs shall not be exercisable prior to 5 Years.

Track – 2:  Long Term Foreign Currency ECB with MAMP of 10 years.

Track – 3: Indian Rupee denominated ECB with MAMP of 3/5 years (Same as per Track 1)

Recognized Lenders/Investors

Track – ITrack – 2Track – 3
International Banks All entities listed under Track I except overseas branches / subsidiaries of Indian banks.  All entities listed under Track I except overseas branches / subsidiaries of Indian banks. In case of NBFCs-MFIs, other eligible MFIs, not for profit companies and NGOs, ECB can also be availed from overseas organisations and individuals.  
International Capital markets
Financial Institutions
Export Credit Agencies
Suppliers of Equipment
Foreign Equity Holder
Overseas Long-Term Investors (like pension funds, insurance companies, sovereign health funds etc.)
Overseas branches / subsidiaries of Indian Banks

Note: Foreign Equity Holder means (a) direct foreign equity holder with minimum 25% direct equity holding by the lenders in the borrowing entity, (b) indirect equity holder with minimum indirect equity holding of 51%, and (c) group company with common overseas parent.

All in Cost (AIC): External Commercial Borrowings (ECBs)

6 Months LIBOR (or applicable benchmark for the respective currency), plus (+) 450 Base points, for ECBs under Track – 1 and Track – 2.

For External Commercial Borrowings under Track – 3 (Rupee ECBs) and Rupee Denominated Bonds, it will be the prevailing yield of the Government of India Securities of the corresponding maturity – RBI AP(DIR) circular No. 25 dated 27.04.2018.

Inclusions of All-in-Cost (AIC)

The term ‘All-in-Cost’ includes the rate of interest, other fees, expenses, charges, guarantee fees whether paid in foreign currency or Indian Rupees.

Exclusions

  • Commitment Fees and withholding taxes paid in INR
  • Pre-payment charges
  • Penal interest up to 2 percent over and above all in cost.

Note: Any component of all-in cost cannot be paid out of the drawn of ECB’s.

Currency of Borrowing

External Commercial Borrowings can be raised in any freely convertible foreign currency as well as in Indian Rupees.

  • In the case of rupee-denominated ECB, the NR lender, other than a Foreign Equity holder, should mobilize Indian rupees through swaps/outright sale undertaken through an AD category – 1 bank in India.
  • Change of currency of ECB from one convertible foreign currency to any other convertible foreign currency as well as to INR is freely permitted. Change of currency from INR to any foreign currency is, however, not permitted.
  • Change of currency of ECB into INR can be at the exchange rate prevailing on the date of the agreement between the parties or at an exchange rate which is less than the rate prevailing on the date of the agreement if consented by the ECB lender.

Procedure of raising External Commercial Borrowings

Approval Route Cases: The borrower will approach the RBI with an application in Form ECB for examination through the AD Category – I bank. ECB proposals received in the Reserve Bank above a certain threshold limit would be placed before the Empowered Committee set up by the Reserve Bank. Reserve Bank will take a final decision in the cases taking into account the recommendation of the Empowered Committee.

Automatic Route Cases: The borrower will approach an AD Category I bank with their proposal along with duly filled in Form 83.

End Use prescriptions over ECB

External Commercial Borrowings (ECBs) can be used for any tasks except for activities included in the negative list where ECBs proceeds cannot be used.

Negative List for all tracks

  • Real Estate Activities
  • Investment in Capital Market
  • Equity Investment

Additionally, for Track 1 and 3, the following end list uses will also apply except when raised from direct and indirect equity holders or from a Group company, and provided the loan is for a MAMP of 5 years.

  • Working capital purposes
  • General Corporate Purposes
  • Repayment of Rupee Loans

For all tracks, the following negative end use will also apply

  • On lending to entities for the activities mentioned above in negative end-use.

Real Estate Activities – ECB

Real Estate Activities were defined for the first time through AP (DIR Series) Circular No. 17 dated 16th January 2019

Any real estate activity involving own or leased property, for buying, selling, and renting of commercial and residential properties or land and also includes activities either on a fee or contract basis assigning real estate agents for intermediating in buying, selling, letting, or managing real estate. However, this would not include,

  • Construction/development of industrial parks/integrated townships/SEZ
  • Purchase/long term leasing of industrial land as part of a new project/modernization of expansion of existing units and
  • Any activity under infrastructure definition.

Parking of ECB Proceeds

External Commercial Borrowings proceeds meant for rupee expenditure should be repatriated immediately. Pending utilization of rupee expenditure ECB proceeds are allowed to be parked in term deposits with AD Category – 1 bank’s for a maximum cumulative period of 12 months. These fixed deposits should not be encumbered or pledged.

External Commercial Borrowings proceeds meant for forex expenditure can be parked abroad pending utilization. Till utilization, they can be invested in:

  • Indian bank branches abroad
  • Deposits or certificate of deposits or other products offered by banks rated not less than AA (-) by standard and Poor/Fitch IBCA or Aa3 by Moddy’s;
  • Treasury bills other monetary instruments of one year maturity with rating not less than AA (-) by standard and Poor/Fitch IBCA or Aa3 by Moddy’s.

ECBs by Entities Undergoing Restructuring

An entity that is under a restructuring scheme or CIRP can raise ECBs only if specifically permitted under the resolution plan.

Eligible borrowers under the framework who are participating in the CIRP under IBC, 2016 as resolution applicants can raise ECBs

  • From all recognized lenders except Foreign branches and subsidiaries of Indian Banks
  • For repayment of rupee term loans of the target company
  • Only through Approval route with prior approval from RBI

Guarantees for ECB’s by Financial Institutions and Foreign Banks

Indian banks, financial institutions, and NBFC’s are prohibited to give any type of Guarantee relating to ECBs, and also they are not allowed to invest in FCCBs/FCEBs in any manner whatsoever.

However, ECBs can be credit enhanced, guaranteed, and insured by overseas banks, financial institutions, and reputed financial intermediaries provided they fulfill the recognized lender’s criteria.

Reporting Requirements of ECB

  • Loan Registration Number (LRN): This is the first step required to be taken by the entity looking to raise ECB. To obtain the LRN, borrowers are required to submit duly certified Form 83, which also contains terms and conditions of the ECB, in duplicate to the designated AD Category I bank. Any draw-down in respect of an ECB as well as payment of any fees/charges for raising an ECB should happen only after obtaining the LRN from RBI. Copies of the loan agreement for raising ECB are not required to be submitted to the Reserve Bank.  
  •  Changes in Terms and Conditions of ECB: Permitted changes in ECB parameters should be reported to the Department of Statistics and Information Management (DSIM) through revised Form 83 at the earliest, in any case not later than 7 days from the changes effected. While submitting revised Form 83 the changes should be specifically mentioned in the communication.
  • Reporting of Actual Transactions: The borrowers are required to report actual ECB transactions through ECB 2 Return through the AD Category I bank on a monthly basis so as to reach DSIM within seven working days from the close of the month to which it relates. Changes, if any, in ECB parameters should also be incorporated in ECB 2 Return.
  • Reporting of Conversion of ECB into Equity: In case of the partial or full conversion of ECB into equity, the reporting to the RBI will be as under:
    • For partial conversion, the converted portion is to be reported to the concerned Regional Office of the Foreign Exchange Department of RBI in Form FC-GPR prescribed for reporting of FDI flows, while monthly reporting to DSIM in ECB 2 Return will be with suitable remarks “ECB partially converted to equity”.
    • For full conversion, the entire portion is to be reported in Form FC-GPR, while reporting to DSIM in ECB 2 Return should be done with remarks “ECB fully converted to equity”. Subsequent filing of ECB 2 Return is not required.
    • For conversion of ECB into equity in phases, reporting through ECB 2 Return will also be in phases.

Refinancing of ECB

Refinancing of existing External Commercial Borrowings (ECB) with fresh ECB is permitted provided the fresh ECB is raised at a lower all-in-cost and residual maturity is not reduced. Overseas branches/subsidiaries of Indian banks are permitted only to refinance ECBs of highly rated (AAA) corporates as well as Navratna and Maharatna PSUs, provided the outstanding maturity of the original borrowing is not reduced and the all-in-cost of fresh ECB is lower than the existing ECB. Partial refinance of existing ECBs is also permitted subject to the same conditions.

Responsibilities of AD – 1 Banks and Borrowers

Indian companies or their ADs are not allowed to issue any direct or indirect guarantee or create any contingent liability or offer any security in any form for such borrowings by their overseas holding/associate/subsidiary/group companies except for the purposes explicitly permitted in the relevant Regulations.

Funds raised abroad by overseas holding/associate/subsidiary/group companies of Indian companies with the support of the Indian companies or their ADs cannot be used in India unless it conforms to the general or specific permission granted under the relevant Regulations. Indian companies or their ADs using or establishing structures which contravene the above shall render themselves liable for penal action as prescribed under FEMA.

Source: FED Master Direction No.5/2015-16

Link of my other articles: Fee For Technical Services, Tax Benefits of SODEXO Food Coupons, Royalty Taxation in India, All about Faceless Tax Assessment Part-1, Faceless tax Assessment – Part 2

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