“Explore the impact of FDI restrictions on countries sharing a land border with India and the role of External Commercial Borrowings (ECB) in addressing funding needs. Understand the regulatory landscape, including the amendment to FDI policy and the scrutiny on equity participation. Delve into the eligibility criteria for ECB, recognised lenders, and the present situation for investments from land border-sharing countries. Navigate the complexities of FDI and ECB to make informed financial decisions.”
India has been rapidly emerging as one of the preferred countries for foreign Investment. The inflow of Foreign Direct Investment has increased 20 fold in last 20 years. As per Ministry of Commerce and Industry, India gets the highest annual FDI inflow of USD 83.57 billion in FY21-22.[1]
The year 2020 – 21 were few of the best year for private equity and venture capital industry as it had witnessed the post pandemic overhaul for the foreign investors. The same period had also witnessed one of the most significant restrictions on the receipt of Foreign Direct Investments (FDI) from countries sharing land border with India being notified.
The Government had amended FDI policy vide Press Note 3 (2020) dated 17.04.2020 as a result of which an entity of a country, sharing land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, can invest only under Government approval route. The said press note was enforced through Foreign Exchange Management (Non-Debt Instruments) Amendment Rules 2020 dated 22.4.2020.
While Foreign Investment from Pakistan or Bangladesh were considered under approval even before the press release, the amendment has brought the Foreign Direct Investment from Afghanistan, China, Nepal, and Bhutan and Myanmar too under the approval route.
While foreign investment in equity instruments by countries sharing land border with India was restricted under automatic route, investment in debt instruments of an Indian Company by person resident outside India (other than Foreign Portfolio Investors, Non resident Indians) is not permitted under the Foreign Exchange Management (Debt Instrument) Regulations, 2019. Due to the mentioned restrictions for investment in equity and debt instruments, the investors or parent entities to existing Indian entities are left with only option for receiving quick funding i.e. External Commercial Borrowing.
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What is External Commercial Borrowing?
“External Commercial Borrowings” (ECB) are commercial loans from overseas raised by eligible resident entities. Transactions on account of External Commercial Borrowings (ECB) and Trade Credit (TC) are governed by sub-section 2 of section 6 of the Foreign Exchange Management Act, 1999 (FEMA).
Further, ECB can be either Foreign Currency denominated or Indian Rupee denominated. Both Foreign Currency and Indian Rupee denominated ECBs can be issued in any of the following forms:
i. Loans including bank loans
ii. floating/ fixed rate notes/ bonds/ debentures (other than fully and compulsorily convertible instruments)
iii. Trade credits beyond 3 years
iv. Financial Lease
ECB in the form of preference shares (other than fully and Compulsorily Convertible Preference shares) shall be INR denominated only.
Recognised lenders:
Following shall be considered eligible lender:
1. Multilateral and Regional Financial Institutions where India is a member country
2. Individuals (only if they are foreign equity holders or for subscription to bonds/ debentures listed abroad)
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- Foreign equity holder means:
(a) direct foreign equity holder with minimum 25% direct equity holding in the borrowing entity,
(b) indirect equity holder with minimum indirect equity holding of 51%, or
(c) group company with common overseas parent.
3. 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.
Eligibility for ECB:
All entities eligible[2] to receive Foreign Direct Investment shall be considered eligible Borrowers for the purpose of availing Foreign Currency denominated ECB including:
i. Port Trusts;
ii. Units in SEZ;
iii. SIDBI; and
iv. EXIM Bank of India.
Further all entities eligible to avail foreign currency denominated ECB shall be eligible for availing INR denominated ECB.
FED Master Direction No.5/2018-19 on External Commercial Borrowings provide that all entities eligible to receive FDI shall be eligible to receive FCY denominated ECB and further that all entities eligible to raise FCY denominated ECBs shall be eligible to receive INR denominated ECB. The Criteria for eligibility considers whether the entity is eligible to receive FDI or not, however it does not clarify whether FDI shall be allowed under automatic or approval route.
This could also mean that entities not prohibited to receive FDI shall be eligible to raise funds by way of ECB.
Present Situation for Investment by land border sharing countries:
- The Reserve Bank of India through Authorised Dealer Banks are considering the applications for ECB from countries sharing land border with India (provided the lenders are from FATF and IOSCO countries).
- While the equity participation by person resident or situated in land border sharing countries is under the tight scrutiny of the relevant ministries, the Reserve Bank of India seems to be lenient for considering applications for External Commercial Borrowing. One of the reasons for allowing ECB from land border sharing countries is non transfer of ownership thus preventing the opportunistic takeovers and acquisition of the Indian Companies. Further ECB shall also allow the Indian Companies to meet the urgent funding requirements without providing ownership to entities/ investors situated in countries sharing land border with India.
- The time taken by Reserve Bank of India for considering applications for ECB under automatic route is generally much lesser then the time taken for receiving approval from the ministry for obtaining approval for equity investment thus encouraging the investor and investee to choose the ECB route to meet the funding requirements on urgent and timely basis.
- ECB from equity holder shall be allowed in case the lender holders 25% of the direct equity or 51% of the indirect equity of the borrower. Thus, while ECB could be an option for the existing entities having prescribed equity investment by the non residents from countries sharing land border with India, new entrants/ investors will have to recourse to the government approval route only.
- The object of the ministry seems to monitor the existing and new equity investments from the countries sharing land border with India but not to restrict the fundings for existing Companies carrying of legitimate business. Also the funds availed by way of ECB, Interest payments, parking of the proceeds and the utilisation is closely monitored by the AD bank/ RBI through monthly returns to be submitted by the borrower entity.
[1] Source: Press information by Ministry of Commerce and Industry
[2] Entities eligible to receive FDI: Indian Companies, LLP are considered to be eligible entities to receive FDI as per Schedule I of Foreign Exchange Management (Non Debt Instruments) Rules, 2019.Foreign Investment in Investment Vehicle shall be as per Schedule VIII of the Rules. Foreign Investment in proprietary concern/ partnership firm not engaged in real estate business shall be allowed to non resident Indians on non repatriation basis only.
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