India: External Commercial Borrowings (ECB) By Start Ups

Last Updated: 9 December 2016
Article by Kumar Deep

Most Read Contributor in India, July 2017


The Reserve Bank of India (RBI) vide Notification1 dated October 27, 2016 had issued Guidelines for Startups to access loans under the External Commercial Borrowing (ECB) framework. This Guideline has been introduced by the RBI with aspire to attract foreign funds by the Startups which can be used by such Startups to leverage their financial health and growth. This Guideline would allow Startups to access foreign currency loan from foreign lenders.

It is worth noting here that the RBI vide A.P. (DIR Series) Circular No. 32 dated November 30, 20152 had announced the revised ECB Framework for other sectors in India. As per said revised Framework ECBs have been segregated broadly into following three tracks:

Track I Medium term foreign currency denominated ECB with Minimum Average Maturity (MAM) of 3/5 years.
Track II Long term foreign currency denominated ECB with MAM of 10 years.
Track II Indian Rupee denominated ECB with MAM of 3/5 years.

 All the parameters and terms and conditions under the revised ECB framework have been in line with the above categories of tracks.

Meaning of External Commercial Borrowings (ECB)

ECB is an instrument used by the companies to facilitate the access to foreign money. In India, ECBs are being regulated by Department of Economic Affairs, Ministry of Finance, Government of India along with RBI. As per ECB Guidelines issued by the RBI, only permitted resident entities are eligible to raise borrowings as ECB from recognized non-resident entities. Such borrowings to be covered under the regime of ECB framework can be in any of the following forms:

  1. Bank loans;
  2. Securitized instruments (e.g. floating rate notes and fixed rate bonds, non-convertible, optionally convertible or partially convertible preference shares / debentures);
  3. Buyers' credit;
  4. Suppliers' credit;
  5. Foreign Currency Convertible Bonds (FCCBs);
  6. Financial Lease; and
  7. Foreign Currency Exchangeable Bonds (FCEBs)

It may be noted that except FCEBs (permitted only under the approval route) all other forms of ECB can be availed of both under the automatic and approval routes.

It is to be noted that ECBs can be used for the specified purpose only as permitted by the RBI and such can not be used for investment in stock market or speculation in real estate.

Definition of Start –ups

As per Notification3 of the Government of India, Ministry of Commerce and Industry, Department of Industrial Policy and Promotion ("DIPP"), number G.S.R. 180(E), dated the 17th February, 2016, published in the Gazette of India, Extraordinary, part II, section 3, sub-section (i), dated the 18th February, 2016, 'startup' shall mean a company in which the public are not substantially interested and which fulfills the following conditions:

  1. incorporated or registered in India not prior to five years;
  2. its turnover for any of the financial years has not exceeded Rs. 25 crore; and
  3. it is working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property;

Therefore for the purpose of Government schemes, Startup means an entity, incorporated or registered in India not prior to five years, with annual turnover not exceeding INR 25 crore in any preceding financial year, working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property. Provided that such entity is not formed by splitting up, or reconstruction, of a business already in existence. Provided further that a Startup shall be eligible for the tax and other benefits only after it has obtained certification from the Inter-Ministerial Board, setup for such purpose.


As per the ECB Framework for Startups, the RBI has permitted Start-ups to borrow up to 3 million USD or equivalent per financial year either in rupees or any convertible foreign currency or a combination of both for a minimum average maturity period of three years. The key highlights of the said framework are enumerated as under:


On the date of raising ECB, an entity should be recognized as a Startup in terms of the criteria provided in the Notification dated 17th February, 2016.


The minimum average maturity period for the ECB raised by Startups shall be 3 years.

Recognised lender:

Under the ECB framework for Statrups, lender / investor (foreign entity) shall be a resident of a country who is either a member of Financial Action Task Force (FATF) or a member of a FATF-Style Regional Bodies; and shall not be from a country identified in the public statement of the FATF as:

  1. A jurisdiction having a strategic Anti-Money Laundering or Combating the Financing of Terrorism deficiencies to which counter measures apply; or
  2. A jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the Financial Action Task Force to address the deficiencies.

However, it has been provided that overseas branches or subsidiaries of Indian banks and overseas wholly owned subsidiary / joint venture of an Indian company will not be considered as recognized lenders under this framework.

Forms of borrowing:

The framework provides that borrowing can be in the form of loans or non-convertible, optionally convertible or partially convertible preference shares only.


As per framework the borrowing should be denominated in any freely convertible currency or in Indian Rupees (INR) 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-I bank in India.

Restriction on amount of borrowing:

The amount of borrowing per Startup will be limited to USD 3 million or equivalent per financial year either in INR or any convertible foreign currency or a combination of both.


The all-in-cost requirements shall be mutually agreed between the borrower and the lender.


Under the framework, ECB proceeds can be utilised for any expenditure in connection with the business of the borrower.

Conversion into equity:

Conversion ECB into equity is freely permitted, subject to Regulations applicable for foreign investment in Startups.


Subject to compliance with the foreign direct investment / foreign portfolio investment and/ or any other norms applicable for foreign lenders / entities to hold securities, the borrower can provide any security in the nature of movable, immovable, intangible assets (including patents, intellectual property rights), financial securities, etc.

Corporate and personal guarantee:

Under the framework, issuance of corporate or personal guarantee is allowed. Further, any Guarantee issued by non-resident(s) is allowed only if such parties qualify as recognized lender under this framework as mentioned hereinabove. However, issuance of guarantee, standby letter of credit, letter of undertaking or letter of comfort by Indian banks, all India Financial Institutions and NBFCs relating to ECB is not permitted under the framework.


The framework provides that, in case of INR denominated ECB, the overseas lender can hedge its INR exposure through permitted derivative products with AD Category – I banks in India. Further, the lender is also permitted to access the domestic market through branches/ subsidiaries of Indian banks abroad or branches of foreign bank with Indian presence on a back to back basis.

Conversion rate :

The framework provides that in case of borrowing in INR, the foreign currency - INR conversion will be at the market rate as on the date of agreement.

Other provisions:

Other provisions relating to parking of ECB proceeds, reporting arrangements, powers delegated to AD banks, borrowing by entities under investigation, conversion of ECB into equity will be in accordance with the provisions provided under the revised ECB framework announced by the RBI vide Circular dated November 30, 2015. Further, the provisions relating to leverage ratio and ECB liability: Equity ratio will not be applicable to such ECB by Startups.

It may be noted that Startups raising ECB in foreign currency, whether having natural hedge or not, are exposed to currency risk due to exchange rate movements and hence are advised to ensure that they have an appropriate risk management policy to manage potential risk arising out of ECBs.


Before the announcement of the said circular by the RBI to allow ECB by Startups, only large Indian corporates were permitted to raise money through ECB. Thus, by allowing the Startups to get funds through ECB route is very imperative decision taken by the RBI. This move is warm welcoming step as the startups are in much need of funds for their growth. The Government is strived to promote startups India campaign through various measures and schemes. In order to promote Startups, the Government had introduced various incentives viz. income tax holiday, capital gains tax exemptions on investments in startups, easier regulations to raise funds from the security market. The ECB Framework for Startups is another progressive move that will definitely benefit large number of Startups. The reason behind that the ECBs are considered to be cheaper than domestic borrowings as the interest rate for ECBs is far lower.

The RBI has kept the conditions and restrictions of the said Guidelines to the minimum so that the Startups will get more benefits from this framework. Is has been observed that large number of Startups are facing problem of unavailability of funds for their survive and growth. Therefore, this action of RBI at this stage is vital and significantly essential for the Startups.


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