Understanding External Commercial Borrowings (ECB) Regulations

External Commercial Borrowings (ECB) play a significant role in facilitating access to global capital for eligible entities. Governed by the Foreign Exchange Management Act (FEMA), ECB allows resident entities to raise commercial loans from recognized non-resident entities. This article provides a comprehensive overview of ECB, including its concept, modes of raising, forms, routes, eligible lenders and borrowers, criteria, restrictions, compliance requirements, and filing procedures.

Concept of External Commercial Borrowings:

• External Commercial Borrowings are commercial loans used by eligible resident entities who raise External Commercial Borrowings from recognised non-resident entities.
• External Commercial Borrowings are governed by Foreign Exchange Management Act (FEMA) Notification No. 3R & 8.

Mode of raising External Commercial Borrowings:

• Foreign currency denominated External Commercial Borrowings.
• INR denominated External Commercial Borrowings.

*Any entity raising INR denominated External Commercial Borrowings is not permitted to convert the liability arising out of INR External Commercial Borrowings into foreign currency liability in any manner

Forms of raising External Commercial Borrowings:

• Loan including bank loan
• Bonds and debentures (both fixed and floating)
• Trade credits beyond 3 years- This means the credit extended by the overseas supplier, bank, financial institution and other permitted recognised lenders for imports of capital/non-capital goods permissible under the Foreign Trade Policy of the Government of India.
• Foreign Currency Exchangeable Bonds
• Foreign Currency Convertible Bonds
• Financial Lease

Route of raising External Commercial Borrowings:

Automatic route

Approval route

Under Automatic Route, the AD Category-I Bank examines the case and gives the approval. Entities wanting to raise External Commercial Borrowings under the automatic route may approach an AD Category-I Bank with their proposal along with a duly filled Form External Commercial Borrowings. Post approval by AD Category-I Bank, the application along with Form External Commercial Borrowings is sent to RBI for issuance of LRN.

Under Approval Route, prospective borrowers send in their requests to the RBI through their AD Category-I Banks for examination. Such cases are considered based on macroeconomic situation and merits of the specific proposals, keeping in view the overall guidelines.

Eligible lenders:

1.	Lenders of External Commercial Borrowings must be FATF or IOSCO compliant country
2.	Multilateral or regional financial institution and individual lenders (foreign equity holders) *Foreign Equity Holders means: a. A direct Foreign Equity Holder holding a minimum 25% equity in the Borrowings company. b. An indirect Foreign Equity Holder holding a minimum 51% equity in the Borrowings company. c. A group company with a common overseas parent.

Eligible Borrowers:

For foreign currency denominated External Commercial Borrowings	For INR Denominated External Commercial Borrowings
Entities eligible to received FDI; Port trusts; Units in SEZ; SIDBI EXIM Bank of India.	Entities eligible to raise foreign currency denominated External Commercial Borrowings; Registered entities engaged in micro-finance activities being Not for profit organization Registered societies/trusts/ cooperatives; Non-government organisation.

 Note: Here important to note is that Limited Liability Partnership are not eligible to raise External Commercial Borrowings.

Restriction on End-use

External Commercial Borrowings cannot be used for following activities:

• Real estate activities
• Investment in capital markets, equity investment
• Working capital purpose sand General corporate purposes
• Repayment of rupee loans

Parking of External Commercial Borrowings proceeds:

Foreign currency denominated

INR denominated

Only those meant for expenditure in foreign currency expenditure can be parked pending utilisation. Till utilisation to be invested in following: – deposits or Certificate of Deposit or other products offered by banks rated not less than AA (-) by Standard and Poor/Fitch IBCA or Aa3 by Moody’s; – Treasury bills and other monetary instruments of one-year maturity deposits with foreign branches/subsidiaries of Indian banks abroad

External Commercial Borrowings proceeds meant for INR expenditure should be repatriated immediately for: credit to rupee a/c with AD Cat 1 banks in India b Term deposits with AD Cat1 banks in India permitted for a maximum period of 12 months cumulatively

Minimum Average Maturity Period (MAMP):

MAMP of External Commercial Borrowings will be 3 years. Any call and put options, shall not be exercisable prior to completion of minimum average maturity. However, for the specific categories mentioned below, the MAMP will be as prescribed therein:

Sr. No.	Category	MAMP
1.	External Commercial Borrowings raised by manufacturing companies up to USD 50 million or its equivalent per financial year.	1 year
2.	External Commercial Borrowings raised from foreign equity holder for working capital purposes, general corporate purposes or for repayment of Rupee loans	5 years
3.	External Commercial Borrowings raised for (i) working capital purposes or general corporate purposes (ii) on-lending by NBFCs for working capital purposes or general corporate purposes	10 years
4.	External Commercial Borrowings raised for (i) repayment of Rupee loans availed domestically for capital expenditure (ii) on-lending by NBFCs for the same purpose	7 years
5.	External Commercial Borrowings raised for (i) repayment of Rupee loans availed domestically for purposes other than capital expenditure (ii) on-lending by NBFCs for the same purpose	10 years
	for the categories mentioned at (b) to (e) – (i) External Commercial Borrowings cannot be raised from foreign branches / subsidiaries of Indian banks (ii) the prescribed MAMP will have to be strictly complied with under all circumstances.

Limits:

1. All eligible borrowers can raise External Commercial Borrowings up to USD 750 million or equivalent per financial year under the automatic route.

2. In case of FCY denominated External Commercial Borrowings raised from direct foreign equity holder, External Commercial Borrowings liability-equity ratio for External Commercial Borrowings raised under the automatic route cannot exceed 7:1.

3. However, this ratio will not be applicable if the outstanding amount of all External Commercial Borrowings, including the proposed one, is up to USD 5 million or its equivalent.

Compliance Requirements:

Obtaining Loan Registration Number (LRN)

Any draw-down in respect of an External Commercial Borrowings should happen only after obtaining the LRN from RBI.

• To obtain the LRN, borrowers are required to submit duly certified Form External Commercial Borrowings, Which Also Contains Terms and Conditions of the External Commercial Borrowings, In duplicate To The Designated AD Cat I Bank.
• In turn, the AD Cat I bank will forward one copy to the Director, Reserve Bank of India, Department of Statistics and Information Management, External Commercial Borrowings Division, Bandra-Kurla Complex, Mumbai– 400 051 (Contact numbers 022-26572513and 022-26573612).
• Copies of loan agreement for raising External Commercial Borrowings are not required to be submitted to RBI.

Monthly reporting:

• Actual External Commercial Borrowings transactions to be reported through Form ECB-2 Return through the AD Category I bank on monthly basis so as to reach DSIM with in seven working days from the close of month to which it relates.

Note: Borrowers has the responsibility to ensure compliance with External Commercial Borrowings guidelines.

Steps and procedure for ECB:

1. The first steps in relation with procurement of External Commercial Borrowings is to obtain the Loan Identification Number (LRN).

Manner of obtaining LRN:

As we have discussed above, that to obtain LRN, the borrower is required to submit form ECB in duplicate to AD bank and AD will forward the copy to the Director, Reserve Bank of India, Department of Statistics and Information Management, External Commercial Borrowings Division, Bandra-Kurla Complex, Mumbai– 400 051.

2. As we have discussed in first step that for obtaining LRN, the borrower needs to submit the form ECB to AD bank.

Manner of filing form ECB:

This is the form used for application and reporting of loan agreement details under Foreign Exchange Management Act, 1999.Following points should be kept in mind while filing this form:

1.	All dates should be in the format YYYY/MM/DD.
2.	No item should be left blank. In case, any item is not applicable, write ‘N.A.’ against it
3.	If space is not sufficient for giving full details against any item, separate sheet(s) may be attached to the Form and serially numbered as Annex. Each such Annex should be certified by both the borrower and AD.
4.	The borrower should give a brief description of his business activity (whether in manufacturing/ trade/ provide services etc.) for the AD’s use
5.	Before forwarding the Form to the Reserve Bank of India, AD must ensure that the form is complete in all respects and scrutinise all the related original documents at its end. Incomplete Forms are liable to be rejected/returned by RBI to AD.
6.	The form is divided into 5 parts (A, B, C, D and E) Part A of the form contains the details of the borrower. Part B of the form contains the details of the lender. Part C of the form contains the details of the loan details. Part D of the form contains the details of other charges. Part E of the form contains the details of the ECB already availed.
7.	AD will check all details in form and if satisfied, then forward one copy to director, RBI within 7 days from the date of signing loan agreement.
8.	The authorised officials of the company will put his/her signature along with the stamp of the company by stating that information and true and correct.
9.	CA/CS will certify the summary sheet for form ECB by stating that information filled in form are correct

• In case of any changes, the same need to be reported in form ECB within 7 days of such changes.

3. After procurement of ECB, the third step is to file form ECB-2 which need to be submitted on monthly basis

Form ECB-2

Filed for the purpose of reporting of actual transactions of external commercial Borrowings (ECB) under Foreign Exchange Management Act, 1999 (for all categories and any amount of loan)

Following points should be kept in mind while filing this form:

1.	This return should be filled in for all categories of ECB.
2.	It should be submitted within 7 working days from the close of the month through the designated Authorised Dealer to the Director, External Commercial Borrowings Division, Department of Statistics and Information Management, Reserve Bank of India, C-9, Bandra-Kurla Complex, Bandra (East), Mumbai-400 051.
3.	If there is no transaction during a particular period, a Nil Return should be submitted.
4.	No filed should be left blank and need to furnish all the particulars, in case it is not applicable the write NA.
5.	All dates should be in format YYYY/MM/DD.
6.	Borrowers obtaining sub-loans through DFIs/Banks/NBFCs etc. should not complete this form as the concerned financial institution would directly submit Form ECB-2.
7.	The Company Secretary / Chartered Accountant must scrutinise related original documents and ensure that the return is complete and in order as per ECB guidelines issued by Government/RBI, before forwarding it to RBI.
8.	Loan Registration Number should be specified for all the loans approved after February 01, 2004. For earlier loans, Loan Identification Number (LIN) / Registration Number allotted by RBI should be specified.
9.	If space is not sufficient for giving full information against any item, a separate sheet may be attached to the return and serially numbered as Annex.
10.	The form is divided into 6 parts: Part A deal with the particulars of identification of loan. Part B deals with the disbursement of loan in a month. Part C deals with the utilisation of principal amount in month. Part D deals with details relating to debt servicing. Part E deals with other details. Part F deals with details of outstanding principal amount. Summary sheet deals with details of LRN
11.	CA/CS need to certify the form.
12.	Authorised dealer will also certify the form.

*  Reserve bank has list of banks that will acts as authorised dealer Category 1 bank for ECB purpose.

Conclusion: Navigating through the landscape of External Commercial Borrowings demands a thorough understanding of regulatory frameworks, compliance obligations, and procedural intricacies. From evaluating eligibility criteria to selecting appropriate modes and routes, each step in the ECB process requires meticulous attention and adherence to guidelines. By ensuring compliance, leveraging expert advice, and adopting prudent financial strategies, entities can harness the benefits of ECB to fuel growth, expansion, and diversification, while mitigating associated risks.