External Commercial Borrowing (ECB) – A Guidance Note

External Commercial Borrowing (ECB) is the loan in India made by non-resident lenders in foreign currency or in INR to Indian borrowers who are eligible to avail the ECB. The purpose of the loan is commercial. The ECB is extended by external sources, i.e. from any recognized entity outside India.

The norms of getting the ECB has been simplified now and is popular as it is normally availed on easy terms.

There are certain regulations which needs to be followed for availing the ECB. This article is a summery of the ECB regulations, which must be considered before you plan to avail the ECB from a foreign lender.

The advantages of availing the ECB are-

• Low Interest rates as compared to domestic funds
• Opportunity to avail large volume of funds
• The funds are available for relatively long terms
• Corporates can raise ECB from internationally recognised sources such as banks, export credit agencies, international capital markets etc.
• ECB can be in the form of foreign currencies. Hence they enable the corporate with foreign currency, to meet the import costs of machineries etc.

Criteria to follow before you avail ECB-

1. Currency– ECB can be availed in any convertible foreign exchange as well as in INR. The ECB availed in foreign currency is called Foreign currency denominated ECB and the once availed in INR is known as INR denominated ECB.

2. Eligible Borrower– the condition has been simplified and now any entities which are eligible to avail FDI (foreign Direct Investment), are eligible to avail the ECB.

3. Eligible lender– –The lender must be from a Country which is FATF or IOSCO compliant, including on transfer of ECB. In case the lender is an individual, he must be a shareholder in the borrowing company or he is permitted for subscription to bond or debentures listed abroad.

4. Minimum average period of maturity– The Minimum average maturity period is 3 (three) years.

However, in the following cases, average minimum maturity period differ as under-

i. ECB for working capital purposes, general corporate purposes, for repayment of Rupee loans is 5 (five) years.

ii. The Minimum average maturity period is 10 (ten) years if the purposes of the ECB are for Working capital, general corporate purposes and on-lending by NBFCs for working capital

5. Maximum permission limit for All -In -Cost ceiling – All in cost is 500 bps over the bench mark rate. The rate is per annum. The bench mark has been defined in case of foreign currency ECB as to refer to a widely accepted interbank rate or Alternative Reference Rate (ARR) of 6 (six) month tenor as applicable to the loan currency.

Other cost– Any other charges such as prepayment charge, penal rate etc if any, should not be more than 2 percent, this is outside the all-in cost ceiling.

6. End-Use (negative list) – There is a small negative list, for which the ECB cannot be availed. The list to include as under-

a) Activities related to Real estate.

b) Capital market investment.

c) Investment in equity.

d) For the purpose of Working capital (exception – ECB raised by foreign equity holders, on lending by NBFCs for working capital or general corporate purposes.

e) On-lending to entities for the above activities (exception-NBFCs raising ECB for on lending) raised

7. Exchange rate- It is freely allowed to change the currency of the ECB from one foreign currency to another foreign currency and also into INR.

The currency of ECB can be changed from any foreign currency to INR and the rate of exchange shall be the rate prevailing on the date of the agreement for such change executed between the parties concerned or at an exchange rate,

8. Amount of ECB- The limit to raise ECB per financial year is upto USD 750 million under the automatic route.

Procedure for obtaining a Loan Registration   Number

Any draw-down with respect to ECB loan, should happen only after obtaining the Loan Registration Number (LRN) from RBI. To get the LRN, borrowers are to submit a duly signed ECB form, certified by a professional, along with the ECB agreement and other documents. The form ECB is to be submitted in Duplicated. The borrower needs to approach the designated AD Category I Bank.

Monthly return in Form ECB-2

The borrowers are required to report the actual ECB transactions by Form ECB- 2 Return through the AD category I Bank Monthly, within seven working days from the close/ end of the month to which it relates. Changes if any, in the ECB parameters should also be incorporated in Form ECB 2 Return.

Frequently Asked Questions (FAQs) 

Q 1. How does one report the actual transaction?

In the monthly return ECB 2.

Q 2. What is the concept of the Foreign Equity holder in an ECB Transaction?

Foreign Equity Holder means:

1) A direct Foreign Equity Holder holding a minimum 25% equity in the borrowing company.

2) An indirect Foreign Equity Holder holding a minimum 51% equity in the borrowing company.

3) A group company with a common overseas parent.

Q 3. What is the meaning of all in cost?

All in cost includes the rate of interest, other fees, and expenses. Charges, guarantee fees, Export Credit Agency (ECA) charges, whether paid in foreign currency or INR but also does not involve commitment fees and withholding tax payable in INR. In the case of fixed rate loans, the swap cost plus spread should not be more than the floating rate plus the applicable spread.

All in Cost Ceiling- Benchmark rate plus 450 bps spread.

Q 4. Who are the eligible borrowers under the ECB framework?

All entities eligible to receive FDI. Further, the following entities are also eligible to raise ECB:

1) Port Trusts;

2) Units in SEZ;

3) SIDBI;

4) EXIM Bank of India;

5) Registered entities engaged in micro finance activities, viz., registered Not for Profit companies, registered societies/trusts/cooperatives and Non-Government Organizations (For INR ECB)

Q 5. Who are eligible lenders under the ECB framework?

The lender should be resident of the FATF or IOSCO compliant country, including on transfer of ECB.

Disclaimer: This article has been prepared in good faith on the basis of information available on the date of publication without any independent verification. The Author does not guarantee or warrant the accuracy, reliability, completeness or currency of the information in this publication nor its usefulness in achieving any purpose. The Author will not be liable for any loss, damage, cost or expenses incurred or arising by reason of any person using or relying on information in this publication. Readers are requested to consult a professional before taking any action.

(Author – Sonika Bharati, FCS, LL.B. is a Company Secretary in Practice from Delhi and can be contacted at [email protected])