What is a startup?
A startup is an entity registered as a Private Limited Company (registered under Companies Act 2013) or Limited Liability Partnership (registered under Limited Liability Partnership Act 2008) or Partnership Firm(registered under Partnership Act 1932), working towards innovation, development or improvement of product or processes or services or a business model accelerating employment opportunities. The aforesaid entity shall be considered as a startup for ten years from the date of registration, and the turnover of the entity in any of the financial years since incorporation/registration shall not exceed one hundred crore rupees.
To obtain recognition of Startup the eligible entity has to apply for the incorporation/registration under the respective Laws thereafter shall make an online application over the mobile app or portal set up by the Department for promotion of industry and internal Trade (DPIIT) along with the following documents:-
1. A copy of the certificate of registration or incorporation
2. A write up of the nature of the business emphasizing, how it is working towards innovation, product development or processes or services or accelerating employment opportunities or wealth creation.
DPIIT may after calling for further documents or information or further inquiry as it considered fit, register the eligible entity or reject it with reasons.
An entity formed by splitting or reconstruction of an existing business shall not be considered as a startup.
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What is External commercial borrowings (ECB)
ECB or External commercial borrowings are loans, in the form of buyer’s credit, suppliers credit, securitized instruments availed from foreign lenders by Indian borrowers. ECB can also be converted into equity.
Issuance of any type of guarantee by Banks and other Financial Institutions are not permitted under ECB. But the issuance of Corporate and personal guarantee is allowed.
Types of External commercial borrowings (ECB)
There are two types of ECB, one is Foreign currency denominated ECB and the other is Indian Currency denominated ECB.
Eligible Borrowers for ECB
Following are the eligible borrowers under the FCY denominated ECB
1. All borrowers eligible to raise FDI
2. Units in SEZ
3. EXIM Bank of India
4. SIDBI
5. Port Trusts
Following are the eligible borrowers under IC denominated ECB
1. All entities eligible to raise FC denominated ECB mentioned above
2. Entities registered for microfinance activities viz non-governmental Organizations, registered Trusts/ Cooperative societies, registered Not for Profit Companies.
Procedure for raising External commercial borrowings
There are two routes for raising ECB, automatic route and approval route. The first step towards raising ECB is to apply for Loan Registration Number (LRN). In case of the automatic route, the entity desires to raise ECB shall submit duly filled ECB form in duplicate to AD Category I bank, in turn, the AD Category I Bank will forward a copy of the application to the RBI, Department of Statistics and Information, ECB division, Bandra Kurla Complex, Mumbai-400051. Copies of the loan agreement are not required to be submitted with ECB form. In the case of the approval route, the entity shall submit the ECB form to the RBI through its AD Category I Bank. Such cases shall be considered, seeing the overall guidelines, macroeconomic situation and merits of each proposal.
Monthly Reporting
The borrower has to report actual transactions of ECB by submitting ECB-2 form every month through AD Category I Bank, to reach DSIM within seven days of closing of a month to which it relates.
ECB compliances by a startup
AD Category I Banks are permitted to allow startups to raise ECB under automatic route subject to the following norms.
Eligibility: An entity recognized as a startup by the Central Government on the date of raising ECB.
Maturity: Minimum average maturity period will be 3 years
Recognized lender: Lender/Investor shall be a resident of a FATF compliant country. However, foreign branches/subsidiaries of Indian banks and overseas entities in which Indian entity has made Overseas Direct Investment as per the extant Overseas Direct Investment policy will not be considered as recognized lenders under this framework.
Forms: The borrowing can be in the form of loans or non- convertible, optionally convertible or partly convertible preference shares.
Currency: The borrowing should be denominated in any freely convertible currency or Indian Rupees or a combination thereof. In case of borrowing in INR, the non-resident lender should mobilize INR through swaps/outright sale undertaken through an AD Category Bank l bank in India
Amount: the borrowing per startup will be limited to USD 3 million or equivalent per financial year either in INR or any convertible foreign currency or combination of both.
All in cost: Shall be mutually agreed between the borrower and lender
End-uses: For any expenditure in connection with the business of the borrower
Conversion into equity: Conversion into equity is freely permitted subject to the foreign direct investment guidelines applicable to startups.
Security: The choice of the security to be provided to the lender is left with the borrowing entity. The security can be movable, immovable, intangible assets (including patents, intellectual property rights) financial securities, etc, and shall comply with Foreign Direct Investment/ Foreign portfolio investment or any other norms applicable for foreign lenders/entities holding such securities.
Hedging: The overseas lender, in case of INR denominated ECB, will be eligible to hedge, its INR exposure through permitted derivative products with AD Category I banks in India. The lender can also access the domestic market through branches/subsidiaries of Indian banks abroad or branches of a foreign bank with Indian presence on a bank to bank basis.
Conversion rate: In the case of borrowing in INR, the foreign currency – INR conversion will be the market rate as on the date of the agreement.
Other provisions: Other provisions like parking ECB proceeds, reporting arrangements, the power delegated to AD Category bank, borrowing by entities under investigation, conversion of ECB into equity will be as included in the ECB framework. However, provisions on the leverage ratio, ECB Liability: equity ratio will not be applicable.
Author Bio
Thank you. Your article is informative and knowledge refreshing. But one question, does BC (Buyers credit) really come under ECB, as we don’t get LRN nor file ECB 2 for BC transactions…
Regards
CS Santosh