“Unlock the ABC of External Commercial Borrowings (ECB) under RBI regulations. Delve into the basics, eligibility, documentation, and essential guidelines for businesses seeking debt funding from foreign sources. Stay informed about the latest ECB regulations and make well-informed financial decisions for your company’s growth. Get insights from experts on ECB application, subsequent compliances, and the crucial aspect of compounding in case of contraventions. Discover the essentials of ECB conversion into equity and ensure compliance with RBI guidelines for a smooth borrowing process. Written by CA Shravan Suratwala and Aditi Shelke, this comprehensive guide is a must-read for businesses navigating the complexities of ECB regulations.”
External Commercial Borrowing (ECB) is one of the most sought out debt funding instrument where businesses can obtain funds from their foreign counterparts/ banks for meeting capital expenditure requirements, short-term working capital requirements, refinancing existing debts, and funding imports. The Reserve Bank of India (RBI) is the regulatory authority that governs ECB compliances and time to time, issues guidelines regarding various parameters such as Minimum Average Maturity Period (MAMP), All-in-cost ceilings, permitted and non-permitted end-uses, etc. ECBs can be raised in foreign currency as well as in INR.
It is important to check whether proposed ECB being taken fulfills all conditions prescribed by the RBI before starting the actual application process with the Authorised Dealers, which usually are the bankers of the borrower (commonly known as AD Bank).
A brief overview of ECB regulations prescribed RBI in their master circulation as is as under:
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Sr. No. |
Parameters | FCY denominated ECB | INR denominated ECB | ||||||||||||||||||||||
| i. | Currency of Borrowing | Any freely convertible Foreign Currency | Indian Rupee (INR) | ||||||||||||||||||||||
| ii. | Forms of ECB | Loans including bank loans; floating/ fixed rate notes/ bonds/ debentures (other than fully and compulsorily convertible instruments); Trade credits beyond 3 years; FCCBs; FCEBs and Financial Lease. | Loans including bank loans; floating/ fixed rate notes/bonds/ debentures/ preference shares (other than fully and compulsorily convertible instruments); Trade credits beyond 3 years; and Financial Lease. Also, plain vanilla Rupee denominated bonds issued overseas, which can be either placed privately or listed on exchanges as per host country regulations. | ||||||||||||||||||||||
| iii. | Eligible Borrowers | All entities eligible to receive FDI. Further, the following entities are also eligible to raise ECB:
i. Port Trusts; ii. Units in SEZ; iii. SIDBI; and iv. EXIM Bank of India. |
a) All entities eligible to raise FCY ECB; and
b) Registered entities engaged in micro-finance activities, viz., registered Not for Profit companies, registered societies/trusts/ cooperatives and Non-Government Organizations. |
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| iv. | Recognized Lenders | The lender should be resident of FATF (Financial Action Task Force) or IOSCO (International Organization of Securities Commission) compliant country, including on transfer of ECB. However, the following are also considered as recognized lenders,
a) Multilateral and Regional Financial Institutions where India is a member country; b) Individuals if they are foreign equity holders or for subscription to bonds/debentures listed abroad; and c) Foreign branches / subsidiaries of Indian banks are permitted as recognized lenders only for FCY ECB (except FCCBs and FCEBs). |
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| v. | Minimum Average Maturity Period (MAMP) | The Minimum Average Maturity Period (MAMP) is the minimum period for which the borrowed funds under ECB must be outstanding before they can be repaid. It is calculated from the date of disbursement of the ECB.
MAMP for ECB will be 3 years. Call and put options, if any, 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:
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| vi. | All-in-cost ceiling per annum | The ‘All-in-cost’ is the total cost of the ECB which includes all expenses related to the ECB such as interest, fees, and any other charges payable to the lender or any other third party. It is calculated as a spread over the benchmark rate. | |||||||||||||||||||||||
| Benchmark Rate plus 550 bps spread: For existing ECBs linked to LIBOR whose benchmarks are changed to ARR.
Benchmark rate plus 500 bps spread: For new ECBs. Benchmark rate in case of FCY denominated ECB refers to any widely accepted interbank rate or ARR of 6-month tenor, applicable to the currency of borrowing. For. Eg. SONIA rate for GBP |
Benchmark rate plus 450 bps spread.
Benchmark rate in case of INR denominated ECB will be prevailing yield of the Government of India securities of corresponding maturity.
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| vii. | Other Costs | Prepayment charge/ Penal interest, if any, for default or breach of covenants, should not be more than 2 per cent over and above the contracted rate of interest on the outstanding principal amount and will be outside the all-in-cost ceiling. | |||||||||||||||||||||||
| viii. | End-uses (Negative List) | The negative list, for which the ECB proceeds cannot be utilized, would include the following:
a) Real estate activities. b) Investment in capital market. c) Equity investment. d) Working capital purposes, except in case of ECB mentioned at v(b) and v(c) above. e) General corporate purposes, except in case of ECB mentioned at v(b) and v(c) above. f) Repayment of Rupee loans, except in case of ECB mentioned at v(d) and v(e) above. g) On-lending to entities for the above activities, except in case of ECB raised by NBFCs as given at v(c), v(d) and v(e) above. |
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| ix. | Change of Currency of Borrowing | Change of currency of ECB from one freely convertible foreign currency to any other freely convertible foreign currency as well as to INR is freely permitted. | Change of currency from INR to any freely convertible foreign currency is not permitted. | ||||||||||||||||||||||
| x. | Exchange Rate | Change of currency of FCY ECB into INR ECB can be at the exchange rate prevailing on the date of agreement or at rate which is lesser than rate prevailing on date of agreement. | For conversion to Rupee, the exchange rate shall be the rate prevailing on the date of settlement. | ||||||||||||||||||||||
| xi. | Hedging Provision | The entities raising ECB are required to follow the guidelines for hedging issued, if any, by the concerned sectoral or prudential regulator in respect of foreign currency exposure. | Overseas investors are eligible to hedge their exposure in Rupee through permitted derivative products with AD Category I banks in India. | ||||||||||||||||||||||
The aforesaid guidelines / conditions are as on 15 May 2023. We request you to check master directions, etc. on RBI website for latest guidelines/developments. Link to relevant RBI documents:
https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=11510
https://m.rbi.org.in/scripts/FAQView.aspx?Id=120
How make an ECB application and what are subsequent compliances?
The AD bank of the borrower in India usually provides a comprehensive checklist and forms for compiling the ECB application, which may include, but is not limited to following documents:
1. Loan agreement between lender and borrower having details of amounts to be borrowed, interest rate, loan tenure, repayment schedule etc.
2. Application for Loan Registration Number (LRN)
3. ECB application forms as provided by AD Bank
4. Resolutions / Documents authorizing ECB of lender and borrower
5. End-use declarations
6. Chartered Accountant Certificate
Post approval of these documents by RBI/AD Bank, the RBI allots LRN to the borrower, only after which the borrower can bring in the funds and utilize them for the prescribed purpose.
Thereafter, the borrowers are required to report the ECB transactions through prescribed form every month, which is certified by a chartered account, within 7 working days from the end of the respective month. This form includes details of loan taken, repaid, loan utilized, interest charged during the respective month. The form is to be filed through the AD bank. In case of delay, the borrower has to pay late fee to the AD Bank.
Can ECB be converted into Equity?
Conversion of ECB, including those which are matured but unpaid, into equity is permitted subject to following conditions:
1. The activity of the borrowing company is covered under the automatic route or required approval is obtained for FDI;
2. Conversion not to breach applicable sectoral cap under FDI policy, and should be with lender’s consent;
3. Compliance with pricing guidelines (FV on date of conversion)
4. Consent of other lenders, if any;
5. Conversion at exchange rate on date of agreement or any lesser rate with mutual consent;
6. Compliance with filing requirements in Form FC-GPR and ECB 2 in case of partial conversion or conversion is phases.
Again, such complaince of such conversion has to be done via the AD banker by making detailed application and providing required documents to AD Banker.
Contravention and Compounding:
Compounding refers to the process of voluntarily admitting the contravention, pleading guilty and seeking redressal. The application for compounding of a contravention has to be filed within 3 years from the date of contravention or the date on which the applicant becomes aware of the contravention. Therefore, in the borrower has violated any condition of ECB as prescribed by RBI, the same may have to be notified to RBI and compounding of such offence may have to be done. Generally, commonly committed contraventions under ECB Regulations are:
1. Borrowing funds without obtaining LRN
2. Delay or non-submission of monthly ECB returns
3. Utilizing ECB proceeds for activities not permissible under prescribed regulations
4. Not following minimum MAMP guidelines
If there is any contravention to comply with the ECB norms, an application for compounding can be submitted together with prescribed documents and fees. The proceedings would be concluded and order will be issued within 180 days from the date of receipt of the application. The order will be passed after affording an opportunity of being heard to all the concerned. Under the ECB regulations, a fixed amount is applied once for every contravention. In addition to the fixed amount, a variable amount may also be imposed as per the prescribed computation matrix depedning upon the amount involved in contravention.
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The above brief is written by CA Shravan Suratwala and Aditi Shelke. The authors can be reached at contact@smsuratwala.com or shravan.suratwala@outlook.com
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| Shravan Suratwala is a Partner at S.M. Suratwala & Co., Chartered Accountants. Shravan has 8+ years of post-qualification professional experience in advisory, litigation and compliance areas of Corporate and International taxation. He has also worked three plus years in the field of Internal and Process Audit while pursuing chartered accountancy course. | Aditi Shelke is currently pursuing her Chartered Accountancy course and is currently completing her internship with S.M. Suratwala & Co., Chartered Accountants, Pune. |
Disclaimer: The above information is intended for academic guidance and is to be used for informative purpose only. The said information is not to be considered as an opinion or advice. The aforesaid information is proprietary and privileged and is not to be used, reproduced and disclosed without consent. It is advisable to check with a subject matter expert before concluding on applicability or non-applicability of any provisions. The views expressed are strictly personal and are as on 15 May 2023.
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