In this article author discusses one of the most interesting and relevant topic ‘External Commercial Borrowings (ECB) and Trade Credits (TC) under FEMA’.
Friends, in our previous two sessions, we have discussed on legal and procedural aspects on Overseas Direct Investment (ODI) and Foreign Direct Investment (FDI) and both relates to investment in Capital Investments. However, External Commercial Borrowings (ECB) form part of debt structure of Balance Sheet of Company and separate regulation Foreign Exchange Management (Borrowing and Lending) Regulations, 2018, is framed by RBI for this.
Further, RBI has also issued Master Direction on External Commercial Borrowings, Trade Credits and structured Obligations updated upto August 08, 2019 and complete framework for ECB can be find there.
Friends, primary responsibility for ensuring that the borrowing is in compliance with the applicable ECB guidelines are that of the borrower concerned. Structures which bypass/ circumvent ECB guidelines in any manner would also invite penal action under FEMA. Before raising ECB, it is important the check the activities for which ECB are not allowed. These activities include:
a) Real estate activities.
Real estate activities means 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, (i) construction/development of industrial parks/integrated townships/SEZ (ii) purchase/long term leasing of industrial land as part of new project/modernisation of expansion of existing units and (iii) any activity under ‘infrastructure sector’ definition.
b) Investment in capital market.
c) Equity investment.
d) Working capital purposes, except as allowed specifically
e) General corporate purposes, except as allowed specifically
f) Repayment of Rupee loans, except as allowed specifically
g) On-lending to entities for the above activities, except as allowed specifically
Now the next questions arises here is that who can be eligible lender and who can be eligible borrower? So, the eligible lenders are:
The primary requirement for eligible lender is that the lender should be resident of Financial Action Task Force (FATF) or The International Organisation of Securities Commission (IOSCO) compliant country, including on transfer of ECB. However,
a) Multilateral and Regional Financial Institutions where India is a member country will also be considered as recognised lenders;
b) Individuals as lenders can only be permitted if they are foreign equity holders or for subscription to bonds/debentures listed abroad. Foreign equity holders means
i. direct foreign equity holder with minimum 25% direct equity holding in the borrowing entity,
ii. indirect equity holder with minimum indirect equity holding of 51%, or
iii. group company with common overseas parent ; and
c) Foreign branches / subsidiaries of Indian banks are permitted as recognised lenders only for FCY ECB (except FCCBs and FCEBs). Foreign branches / subsidiaries of Indian banks, subject to applicable prudential norms, can participate as arrangers/underwriters/market-makers/traders for Rupee denominated Bonds issued overseas. However, underwriting by foreign branches/subsidiaries of Indian banks for issuances by Indian banks will not be allowed.
Similarly, eligible borrowers can be explained in two parts:
Part I: In case of FCY denominated ECB, eligible borrowers include:
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.
Part II: In case of INR denominated ECB
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 Organisations.
Now, after ascertaining the eligibility, the next step to check the minimum time period for which ECB can be raised. This is also called as Minimum Average Maturity Period (MAMP). The minimum average maturity period for ECB is generally three years. However, for the specific categories, the minimum average maturity period will be different. We are discussing this one by one:
a. ECB raised by manufacturing companies up to USD 50 million or its equivalent per financial year, minimum average maturity period will one year only;
b. ECB raised for
i. working capital purposes or general corporate purposes
ii. On-lending by NBFCs for working capital purposes or general corporate purposes;
the minimum average maturity period will ten years;
c. ECB raised from foreign equity holder for working capital purposes, general corporate purposes or for repayment of Rupee loans, the minimum average maturity period will five years;
d. ECB raised for
(i) repayment of Rupee loans availed domestically for capital expenditure
(ii) on-lending by NBFCs for the same purpose
the minimum average maturity period will seven years;
e. ECB raised for
(i) repayment of Rupee loans availed domestically for purposes other than capital expenditure
(ii) on-lending by NBFCs for the same purpose
the minimum average maturity period will ten years;
Further, in case of working capital/ general corporate purpose/ repayment of rupee loans end-use ECB, equity holding of lender is at least 25 per cent (direct)/ 51 per cent (indirect) of the paid-up equity or the lender is a group company with common overseas parent i.e. lender should fall under the definition of Foreign Equity Holder.
So, for these five purposes, minimum average maturity period are provided specific. One more important point is that expect for ECB raised by manufacturing companies up to USD 50 million or its equivalent per financial year, ECB cannot be raised from foreign branches / subsidiaries of Indian banks. So, the purpose for raising ECB is very important for ascertaining the minimum average maturity period of ECB.
From the above, it is also cleared that ECB can be raised either in FCY denomination or in INR denomination. However, we should also understand the limit upto which Companies / LLP can raise ECB. All eligible borrowers can raise ECB up to USD 750 million or equivalent per financial year under the automatic route. Further, in case of FCY denominated ECB raised from direct foreign equity holder, ECB liability-equity ratio for ECB raised under the automatic route cannot exceed 7:1. However, this ratio will not be applicable if the outstanding amount of all ECB, including the proposed one, is up to USD 5 million or its equivalent. Further, the borrowing entities will also be governed by the guidelines on debt equity ratio, issued, if any, by the sectoral or prudential regulator concerned.
For the purpose of ECB liability-equity ratio, ECB amount will include all outstanding amount of all ECB (other than INR denominated) and the proposed one (only outstanding ECB amounts in case of refinancing) while equity will include the paid-up capital and free reserves (including the share premium received in foreign currency) as per the latest audited balance sheet. ECB liability-equity ratio is not applicable in case of INR denominated ECB. Even in case of FCY denominated ECB, it is also applicable in case ECB is less the USD 5 million.
Now after ensuring the eligibility, currency, limit and minimum average maturity period of ECB, the next step is to know the procedure of raising. Friends before raising ECB, it is important to enter into loan agreement with foreign lender and it is advisable to incorporate minimum average maturity clause and interest clause in loan agreement. So, after execution of loan agreement between borrower and lender, the next step is to apply to Authorised Dealer Bank (AD Bank) for processing of ECB application for allotment of Loan Registration Number by RBI.
Please take note that any draw-down in respect of an ECB should happen only after obtaining the LRN from the Reserve Bank by filing duly certified Form ECB to the Director, External Commercial Borrowings Division, Department of Statistics and Information Management (DSIM), Reserve Bank of India, Bandra-Kurla Complex, Mumbai – 400 051. It should be ensured that all terms and conditions of the ECB are reported correctly in Form ECB and none of the columns are left blank (such columns which are not applicable for the borrowing or against which ‘nil’ information has to be given, should be suitably covered).
Changes in ECB parameters, whether under the automatic route with the approval of Authorised Dealer Category –I banks or under the approval route with prior approval of the RBI, should also be reported to the DSIM through revised Form ECB at the earliest, in any case not later than 7 days from the changes effected. While submitting revised Form ECB, the changes should be specifically mentioned in the communication. Any failure to comply with reporting guidelines in respect of Form ECB for an ECB may invite penal action under FEMA.
So, after obtaining Loan Registration Number (LRN) from RBI, borrower can make draw down of ECB proceeds. However, post receipt of ECB, one of important compliance that needs to be followed by the borrower till the maturity of ECB is that filing of Form ECB-2 with RBI within 7 days of start of every month for previous month. The borrowers should report actual ECB transactions, correctly and fully, through duly certified Form ECB 2 through the Authorised Dealer Category-I bank to DSIM as per the periodicity specified by the RBI. None of the columns in Form ECB 2 should be left blank (such columns which are not applicable for the borrowing or against which ‘nil’ information has to be given, should be suitably covered). Any failure to comply with reporting guidelines in respect of Form ECB 2, including failure to adhere to periodicity of reporting, may invite penal action under FEMA.
So, friends I hope we are clear about the procedure of receiving External Commercial Borrowings and if there remains any doubt or question related to this topic, you can ask me at my email id [email protected]. Thanks for your patience reading.
Author Bio
one pharma company Pvt Ltd in India ish to borrow. US $48..66m from an US company Pl enlighten me procedure
thanks
cs Dr Vedula Gopinath
Arbitrator
768 Braid CT Gilroy CA 95020 USA
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