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.
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.
“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.
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)
(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.
All entities eligible 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.
 Source: Press information by Ministry of Commerce and Industry
 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.