Reserve Bank of India (RBI) vide master direction. RBI/FED/2018-2019/67 FED Master Direction No.5/2018-19 dated 26th March,2019 updated as on 12th April 2021 has issued External Commercial Borrowings, Trade Credits and Structured Obligations under the said Direction Oil Marketing companies and startups are eligible for raising funds through External commercial borrowing subject to conditions.
External Commercial Borrowings are commercial loans raised by eligible resident entities from recognized non-resident entities and should conform to parameters such as minimum maturity, permitted and non-permitted end-uses, maximum all-in-cost ceiling, etc. The parameters given below apply in totality and not on a standalone basis.
Approval route: Under the ECB/TC framework, ECB/TC can be raised either under the automatic route or under the approval route. Under the approval route, the prospective borrowers are required to send their requests to the Reserve Bank through their AD Banks for examination.
Automatic route: For the automatic route, the cases are examined by the Authorised Dealer Category-I (AD Category-I) banks.
Authorised dealer: Means a person authorised as an authorised dealer under subsection (1) of section 10 of the FEMA, 1999 (42 of 1999).
Public Sector Oil Marketing Companies (OMCs) can raise ECB for working capital purposes with minimum average maturity period of 3 years from all recognised lenders under the automatic route without mandatory hedging and individual limit requirements. The overall ceiling for such ECB shall be USD 10 billion or equivalent. However, OMCs should have a Board approved forex mark to market procedure and prudent risk management policy, for such ECB. All other provisions under the ECB framework will be applicable to such ECB.
Authorized Dealer Category-I banks are permitted to allow Startups to raise ECB under the automatic route as per the following framework:
1. Eligibility: An entity recognised as a Startup by the Central Government as on date of raising ECB.
2. Maturity: Minimum average maturity period will be 3 years.
3. Forms: The borrowing can be in form of loans or non-convertible, optionally convertible or partially convertible preference shares.
4. Currency: The borrowing should be denominated in any freely convertible currency or in Indian Rupees (INR) or a combination thereof. In case of borrowing in INR, the non-resident lender, should mobilise INR through swaps/outright sale undertaken through an AD Category-I bank in India.
5. Amount: The borrowing per Startup will be limited to USD 3 million or equivalent per financial year either in INR or any convertible foreign currency or a combination of both.
6. Conversion into equity: Conversion into equity is freely permitted subject to Regulations applicable for foreign investment in Startups.
7. Security: The choice of security to be provided to the lender is left to the borrowing entity. Security can be in the nature of movable, immovable, intangible assets (including patents, intellectual property rights), financial securities, etc. and shall comply with foreign direct investment / foreign portfolio investment / or any other norms applicable for foreign lenders / entities holding such securities. Further, issuance of corporate or personal guarantee is allowed. Guarantee issued by a non-resident(s) is allowed only if such parties qualify as lender under ECB for Startups. However, issuance of guarantee, standby letter of credit, letter of undertaking or letter of comfort by Indian banks, all India Financial Institutions and NBFCs is not permitted.
8. Hedging: The overseas lender, in case of INR denominated ECB, will be eligible to hedge its INR exposure through permitted derivative products with AD Category – I banks in India. The lender can also access the domestic market through branches/ subsidiaries of Indian banks abroad or branches of foreign bank with Indian presence on a back to back basis.
Note: Startups raising ECB in foreign currency, whether having natural hedge or not, are exposed to currency risk due to exchange rate movements and hence are advised to ensure that they have an appropriate risk management policy to manage potential risk arising out of ECB.
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