The corporates by and large procure funding through equity, debt or a combination of both. The External Commercial Borrowing ("ECB") deals with the debt branch of the funding wherein the corporates obtain funding from foreign body corporates. The primary reason attributable for undertaking ECB funding is associated to factors such as lower rate of interest on returns, less regulatory compliances etc.

The Reserve Bank of India ("RBI") vide its notification dated December 12, 20181 , liberalized the norms pertaining to external commercial borrowing and notified Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 (" Amended ECB Regulations"). Since these Amended ECB Regulations did not provide complete procedure for undertaking the ECB transaction therefore most of the provisions contained in the Amended ECB Regulations referred for framework which the RBI is required to frame in consultation with and Indian Government and accordingly, RBI vide master circular dated January 16, 20192 ("Master Circular") revamped, the procedure for undertaking ECB transaction and, compliance requirements concerning ECB transactions.

Significant Changes in ECB Regime introduced through the Master Circular

  1. Eligible borrowers: All entities which are eligible to raise foreign direct investment are eligible borrowers.
  2. Recognized lenders: The eligible lender shall be a resident of FATF or IOSCO compliant, however following category of lenders can also be considered as recognized lenders;

    1. multilateral or Financial Institution where India is a member country;
    2. individuals, as foreign equity holders (holding 25% direct stake or 51% indirect stake in the borrower), or as subscribers of bonds listed outside India, further following can also be recognized as eligible lenders;
    3. foreign branches/subsidiaries of Indian banks :

      1. can raise foreign currency denominated ("FCY") ECBs;
      2. can participate as underwriters, arrangers, market-makers, traders for Indian rupee ("INR") ECB subject to prudential norms compliance, however underwriting is not allowed by branches or subsidiaries of Indian banks in case the issuance is done by the Indian banks.
    OBSERVATION: The new ECB framework liberalized the category of lenders to include anyone as recognized lender as long as the lender is the resident is FATF or IOSCO compliant with some exceptions.
  3. Forms of ECBs: The new ECB regime has done away with the complex requirement of track system and categorized ECB into two forms i.e. Foreign currency denominated ("FCY") ECB and Indian Rupee denominated ("INR") ECB.
  4. Minimum average maturity period ("MAMP") : The changes brought into MAMP via new ECB regime are as follows:

    1. Uniform MAMP of 3 years across the board;
    2. Retention of the earlier MAMP of 1 year for the manufacturing sector;
    3. Specific class: for general corporate purposes or repayment of rupee loan, MAMP will be 5 years.
    The ECB framework casts a mandatory obligation on the parties of the ECB transaction to exercise the put or call option only after expiry of the MAMP.
  5. End-uses/Negative list: There is no change in the negative list for which the ECB can not be utilized.

    New Addition: The new addition introduces carve out in case of negative end use i.e. ECB proceeds can be utilized for working capital purpose, general corporate purpose and repayment of rupee loan availed from foreign equity holder.
  6. All-in-cost- the definition of all-in-cost remains unchanged with some additions namely,

    1. Issue related expenses should not exceed 4% of the issue size in case of FCCBs and
    2. Issue related expenses should not exceed 2% of the issue size in case of private placement
  7. Hedging provision: The Master Circular modifies the hedging requirement for infrastructure sector to 70% (earlier hedging requirement for infrastructure was 100%, with MAMP less than 5 years). The operational aspects, such as coverage requirement, tenor and natural hedging in relation to hedging, remains unchanged.
  8. Power of AD Category-1 Bank in case of prepayment of ECB: The erstwhile ECB framework gave power AD Category- 1 Bank to allow prepayment of ECBs in case of fulfillment of MAMP but the extant ECB Framework is silent if such power is still vested with the AD Category-1 Bank.
  9. Conversion of ECB into equity in phases: The Master Circular envisages additional reporting requirement through Form FC-GPR in case of conversion of ECB into equity in phases.
  10. Limits and Leverage:

    1. Limits: The erstwhile framework enumerated individual limits for raising ECBs in a financial year under the automatic route for different sectors
      for instance:
      limit in case of software development sector is
      The extant framework provides for a uniform limit of
    2. Leverage: The erstwhile framework specified the leverage limit for issuance of rupee denominated bonds in relation to the financial institutions, subject to governance by sectoral regulator.

      The extant framework also sets out that the debt-equity ratio cannot exceed 7:1 for the foreign currency denominated ECB raised from direct foreign equity holder3. It further provides for a carve out i.e. the ratio is not applicable in case the outstanding amount of all ECBs is up to
    Note: It is pertinent to note here that RBI in a step towards rationalization of ECB framework had introduced the debt equity ratio of 7:1 vide notification RBI/2017-18/169 A.P. (DIR Series) Circular No.254 dated April 27, 2018 but this ratio was deleted subsequently.
  11. Regularization in case of non-reporting – The erstwhile and extant framework both provides for the monthly reporting of actual ECB transaction, however, the extant framework moves a step ahead and provides for late submission fees in case of delay in reporting and thereby regularizes the delay in reporting.
  12. Standard Operating Procedure ("SOP") for untraceable entities: The Master Circular introduces the new concept of untraceable entity and defines untraceable entity. The ECB borrower is qualified as an untraceable entity if entity/auditor/director/promoter does not respond to email/letters or phone even after 6 or more remainders for a period of two quarters or more. Such untraceable entity is also required to fulfill both the following condition:

    1. it is found inoperative at the registered address of the company and
    2. entity has not submitted the statutory auditor's certificate for last two years or more.
  13. Unclear provisions : The Master Circular is unclear on certain aspects and below mentioned points requires clarification:

    1. The negative list for end use is inclusive which means any activity can be categorized as prohibited. If so, then how is the extant framework a step towards liberalization of ECB transactions?
    2. It is unclear if the requirement of lender to be a resident of IOSCO or FATA complaint country (as provided in para 2.1 of the Master Circular) is a general rule or merely a category of recognized lender.
    3. Para 10 of the Master Circular allows raising of ECB by entities under restructuring scheme/corporate insolvency resolution process, if specifically permitted by resolution plan. The language of para 10 suggests that the corporate debtor can raise ECB if the resolution plan permits such an arrangement, clarification is required as to how can a corporate debtor raise ECB as per by the resolution plan, as the resolution plan is prepared for the corporate debtor by the resolution applicant.


The money market regulator towards the end of 2018 has brought significant changes into the regime of ECB thereby moving from conservative approach to a liberalized and rationalized approach. The remarkable change brought in by the extant ECB framework is doing away with the cumbersome process of identification of the track system in which the entity falls and thereby moving towards the process of ease of doing business.

The fact that economics plays a vital role in the study of law requires recognition in the present context for reasons attributed to the liberlised changes brought into the legislative framework concerning ECBs. Therefore, attention is drawn to the press release, issued by the Reserve Bank of India on 31st December 2018,5 on India's external debt as at the end of September 2018, wherein it is stated that "India's external debt witnessed a decline of 3.6 per cent over its level at end-March 2018, on account of a decrease in commercial borrowings and non-resident Indian (NRI) deposits. The decrease in the magnitude of external debt was primarily due to valuation gains resulting from the appreciation of the US dollar against the Indian rupee and major currencies .......Commercial borrowings continued to be the largest component of external debt with a share of 37.1 per cent, followed by NRI deposits (23.9 per cent) and short term trade credit (19.9 per cent)."

Acknowledging the fact that the major source of debt financing contributes to the economic growth, the fact that the extant framework is liberalised will be ascertained on publication of the next press release, which will raise curtain to the claim of liberalisation of ECB mechanism.

Further the extant framework is unclear on certain aspects highlighted in the above paragraph and clarification is required for undertaking ECB transaction, therefore, complete view as to whether the extant framework is a step towards liberalised approach is critical to the upcoming notifications.




3. 1. Important Terms used:


1.11 Foreign Equity Holder: It means (a) direct foreign equity holder with minimum 25% direct equity holding by the lender in the borrowing entity, (b) indirect equity holder with minimum indirect equity holding of 51%, or (c) group company with common overseas parent.



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