FEMA

External Commercial Borrowing (ECB) under Foreign Exchange Management Act (FEMA) – Part 2:



In the first part, we discussed about the framework of raising ECB under Track I. In this paper, we will discuss the framework of raising ECB under Track II.

Track II: Long Term foreign currency denominated ECB with minimum maturity period of 10 years.

Forms of ECB

ECBs can be raised in any of the following forms:

  1. Loans
  2. Issue of non-convertible, optionally convertible or partially convertible preference shares/debentures
  3. Buyers' credit
  4. Suppliers' credit
  5. Foreign Currency Convertible Bonds (FCCBs) or
  6. 6. Foreign Currency Exchangeable Bonds (FCEBs)

Eligible Borrowers:

Any Indian Company, body corporate or firm can raise money through ECB. Following categories of entities can raise ECB under track II:

  1. Real Estate Investment Trusts (REITs);
  2. Infrastructure Investment Trusts (INVITs);
  3. All the Companies that are mentioned in track I i.e.:
  1. Companies in manufacturing sector
  2. Software development sector
  3. Shipping and Airlines Companies
  4. Units in Special Economic Zones (SEZs)
  5. Companies in infrastructure sector
  6. Certain categories of NBFCs.

Recognised Lenders:

Following non-resident lenders are recognised lenders of ECB under Track II:

All the recognised lenders under Track I except overseas branches or subsidiaries of Indian banks are recognised lenders under Track II. They are:

  1. International Banks
  2. International Capital Markets
  3. Multilateral Financial institutions
  4. Export Credit Agencies
  5. Suppliers' of Equipment
  6. Foreign Equity Holder - Foreign Equity Holder would mean direct equity holding of minimum 25% in borrowing Company OR indirect equity holder with minimum indirect equity holding of 51% OR group Company with common parent Company.

These lenders proposing to extend ECB to Indian borrower have to furnish a certificate of due diligence from overseas bank and is subject to regulations of host country which should clearly mention:

  1. The lender maintains account with the bank since minimum of 2 years;
  1. The lending entity is organised as per local laws and it held in good esteem by business community and
  2. There is no criminal action pending against it.

This host country must adhere to Financial Action Task Force (FATF) guidelines on Anti-money laundering, combating the financing of terrorism.

Permitted End-use of funds:

The ECB proceeds under Track II can be used for ALL purposes except the following:

  1.         Real estate activities;
  2.         Investing in Capital markets;
  3.         Using the proceeds of equity investments domestically;
  4.         On-lending to other entities with any of the above activities;
  5.         Purchase of Land.

The respective conditions mentioned for end-use prescription under track I will also be

applicable under Track II.

Minimum Average Maturity period:

Under Track II, Indian eligible borrower can accept ECB from non-resident recognised lender with minimum maturity period of 10 years irrespective of the amount.

All-in-cost ceiling:

Under Track II, the maximum spread over the benchmark allowed is 500 basis points per year. Penal interest, in case of default or breach of agreement, should not be more than 2% over the contracted rate of interest.

Debt-Equity ratio:

For ECB raised from direct equity holder under automatic route, the ECB liability of the borrower towards foreign equity holder should not be more than 4 times the equity contributed by the foreign equity holder. This mean that the debt equity ratio towards the foreign lender should not be more than 4:1. For ECB raised under approval route, this ratio should not be more than 7:1. However, for ECBs raised by the borrower is less

than USD 5 million, these restrictions would not apply.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.