Key provisions of latest RBI/FED/2018-19/15 – FED Master Direction No.5/2018-19 dated March 26, 2019 in relation to External Commercial Borrowing

1. Meaning of ECB

♠ Generally External Commercial Borrowings (ECB) refer to commercial loan availed by eligible resident entities from non-resident lenders i.e. from foreign sources.

♠ A source of funds for financing expansion of existing capacity as well as for fresh investment.

♠ It is an instrument used in India to facilitate the access to foreign money by India corporation and PSUs

2. Ways of raising ECB

  • Routes for ECB
    • Automatic Route
      • If company passes all Govt. prescribed norms, it can raise money without any prior approval of RBI.
      • In this case, Documents are verified by AD Category-1 Banks.
    • Approval Route
      • For some pre-specified sectors, explicit permission of the RBI/Govt. to be taken before borrowing through Approval Route
      • In this case, Co. need to send their request to RBI through AD

3. ECB Framework

  • Options for Raising ECB

1. Foreign Currency Denominated ECB

2. Indian Currency Denominated ECB

Common Terms of both the Options:

1. Minimum average maturity period (MAMP) will be 3 years. However, if the ECB is raised from foreign equity holder and utilized for working capital purposes, general corporate purposes or repayment of Rupee loans, MAMP will be 5 years. The call and put option shall be exercisable after completion of MAMP.

2. All-in-cost ceiling per annum shall be benchmark rate plus 450 basis points spread.

3. Prepayment charge/ Penal interest for default shall be up to maximum of 2% and will be outside the all-in-cost ceiling.

4. The negative list, for which the ECB proceeds cannot be utilised, would include the following:

    • Real estate
    • Capital Market investment
    • Equity investment
    • Working Capital  purpose*
    • General corporate purpose*
    • Repayment of rupee loan*
    • On-lending to entities for the above activities

*except from foreign equity holder

Different Term for both the options under ECB Framework :

Parameters Foreign Currency  Denominated ECB Indian Rupee  Denominated  ECB
Currency of Borrowings Any freely convertible Foreign Currency Indian Rupee (INR)
Forms of ECB Loans including bank loans; floating/ fixed rate notes/ bonds/ debentures (other than fully and compulsorily convertible instruments); Trade credits beyond 3 years; FCCBs; FCEBs and Financial Lease Same as Foreign currency ECBs except FCCBs; FCEBs and Financial Lease.

Plain vanilla Rupee denominated bonds issued overseas, can also be issued under INR ECB

Eligible Borrower All entities eligible to receive FDI. Following entities are also eligible

Port Trusts; Units in SEZ;  SIDBI; and EXIM Bank of India

a) All entities eligible to raise FCY ECB; and

b) Registered entities engaged in micro-finance activities, viz., registered NPOs, societies/trusts/ cooperatives and NGOs.

Change of Currency of borrowing Change of currency of ECB from one freely convertible foreign currency to any other freely convertible foreign currency as well as to INR is freely permitted Change of currency from INR to any freely convertible foreign currency is not permitted.
Hedging Infrastructure Co.  are required to hedge at least 70 % of ECB Exposure, if MAMP is less than 5 years. The overseas investors are eligible to hedge their exposure in Rupee through permitted derivative products with AD bank.

5. Other aspects of ECB framework

1. All eligible borrowers can raise ECB up to USD 750 million or equivalent per financial year under automatic route.

2. Indian Banks/ FIs/ NBFCs are not permitted issue any kind of Guarantee in relation to ECBs.

3. The primary responsibility for ensuring that the borrowing is in compliance with the applicable guidelines is that of the borrower concerned. Any contravention of the applicable provisions of ECB guidelines will invite penal action under the FEMA.

4. ECBs can also be converted into Equity subject to certain conditions of ECB framework.

5. AD Category I banks are permitted to allow creation/cancellation of charge on immovable assets, movable assets, financial securities and issue of corporate and/or personal guarantees in favour of overseas lender

  • The underlying ECB is in compliance with the extant ECB guidelines,
  • There exists a security clause in the Loan Agreement
  • No objection certificate, as applicable, from the existing lenders in India has been obtained in case of creation of charge.

6. Key terms used in ECBs

1. All-in-Cost: It includes rate of interest, other fees, expenses, charges, guarantee fees, ECA charges, whether paid in foreign currency or INR but will not include commitment fees and withholding tax payable in INR.

2. Authorised dealer: Means a person authorised as an authorised dealer under subsection (1) of section 10 of the FEMA, 1999 (42 of 1999).

3. Benchmark rate: Benchmark rate in case of FCY ECB refers to 6-months LIBOR rate of different currencies or any other 6-month interbank interest rate applicable to the currency of borrowing, for eg., EURIBOR. Benchmark rate in case of Rupee denominated ECB/TC will be prevailing yield of the Government of India securities of corresponding maturity.

4. Designated Authorised Dealer Category I Bank: It is the bank branch which is designated by the ECB/TC borrower for meeting the reporting requirements including obtaining of the LRN/LIN from the Reserve Bank, exercising the delegated powers under these guidelines and monitoring of ECB/TC transactions.

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