External Commercial Borrowings ("ECB's) are commercial loans raised by eligible resident entities solely for commercial purposes, from recognised non-resident entities. The Reserve Bank of India ("RBI") has over the years substantially relaxed the ECB Regulatory Framework. These changes have removed a majority of restrictions on eligible borrowers and lenders in addition to clearly establishing end-use restrictions, minimum average maturity rate etc. There are several benefits to availing ECB, such as lower interest rates and greater access to global markets and opportunities. ECB provides a route to borrow large amounts in foreign currencies without necessarily having to give up control thereby keeping the company's stakes undiluted. It is the primary responsibility of the borrower to ensure compliance with the applicable ECB guidelines. Any contraventions of the applicable guidelines will attract penalties or adjudication under the Foreign Exchange Management Act, 1999 ("FEMA"). This article gives an overview of the procedure and parameters of raising ECB in India.

The ECB Regulatory Framework comprises of the following components:

  1. FEMA;
  2. Exchange Management (Borrowing and Lending) Regulations, 2018 as amended from time to time ("ECB Regulations");
  3. Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004 as amended from time to time; and
  4. Master Direction – External Commercial Borrowings, Trade Credits and Structured Obligations ("Master Directions")1.

Procedure of Raising ECB

All ECB can be raised under the automatic route if they conform to the parameters prescribed in the below section. For Government route cases, the borrowers may approach the RBI with an application in the prescribed format i.e. Form ECB for examination through their Authorized Dealer (AD) Category I bank. Such cases are considered keeping in view the overall guidelines, macroeconomic situation and merits of the specific proposals. ECB proposals received in the RBI above a certain threshold limit (refixed from time to time) would be placed before the Empowered Committee ("EC"), and the RBI will take a final decision in the cases taking into account recommendation of the EC. Entities desirous to raise ECB under the automatic route may approach an AD Category I bank with their proposal along with duly filled in Form ECB.

Parameters of Raising ECB Under the Automatic Route

ECB raised under the "automatic route" are required to conform to the following parameters laid down in the Master Direction:

S.No. Parameters FCY Denominated ECB INR Denominated ECB
1. Currency of Borrowing Any freely convertible Foreign Currency. Indian Rupee (INR).
2. Forms of ECB Loans including bank loans; floating/ fixed rate notes/ bonds/ debentures (such as optionally convertible debentures and non-convertible debentures); Trade credits beyond 3 years; Foreign Currency Convertible Bonds ("FCCBs"); Foreign Currency Exchangeable Bonds ("FCEBs") and Financial Lease. Loans including bank loans; floating/ fixed rate notes/bonds/ debentures (such as optionally convertible debentures and non-convertible debentures)/ preference shares (other than fully and compulsorily convertible instruments); Trade credits beyond three (3) years; and Financial lease. Also, plain vanilla Rupee denominated bonds issued overseas, which can be either placed privately or listed on exchanges as per host country regulations.
3. Eligible Borrowers All entities eligible to receive Foreign Direct Investment (FDI) including: a) port trusts; b) units in SEZ; c) SIDBI; and d) EXIM bank of India. All entities eligible to receive FDI including: Registered entities engaged in micro-finance activities, viz., registered not for profit companies, registered societies/trusts/ cooperatives and non-Government organisations.
4. Recognised Lenders The lender should be resident of Financial Action Task Force (FATF) or International Organisation of Securities Commission (IOSCO) compliant country, including on transfer of ECBs.

However, please note that:

a) Multilateral and regional financial Institutions where India is a member country will also be considered as 'recognised lenders';

b) Individuals as lenders can only be permitted if they are foreign equity holders or for subscription to bonds/debentures listed abroad; and

c) Foreign branches / subsidiaries of Indian banks are permitted as recognised lenders only for FCY denominated ECB (except FCCBs and FCEBs).
5. Minimum Average Maturity Period ("MAMP") Minimum average maturity period will be three (3) years.

Please note that the call and put option, if any, shall not be exercisable prior to completion of minimum average maturity. However, for the specific categories mentioned below, the MAMP will be as prescribed below:

a) ECB raised by manufacturing companies up to USD 50 million or its equivalent per financial year – one (1) year.

b) ECB raised from foreign equity holder for working capital purposes, general corporate purposes or for repayment of Rupee loans – five (5) years.

c) ECB raised raised for: (i) working capital purposes or general corporate purposes and (ii) on-lending by NBFCs for working capital purposes or general corporate purposes – ten (10) years.

d) ECB raised for: (i) repayment of Rupee loans availed domestically for capital expenditure and (ii) on-lending by NBFCs for the same purpose – seven (7) years.

e) ECB raised for (i) repayment of Rupee loans availed domestically for purposes other than capital expenditure and (ii) on-lending by NBFCs for the same purpose – ten (10) years.

Please note that or the categories mentioned at (b) to (e) –

i. ECB cannot be raised from foreign branches / subsidiaries of Indian banks

ii. the prescribed MAMP will have to be strictly complied with under all circumstances.
6. All-in-cost Ceiling per Annum Prepayment charge/ Penal interest, if any, for default or breach of covenants, should not be more than 2 per cent over and above the contracted rate of interest on the outstanding principal amount and will be outside the all-in-cost ceiling.
7. End-Uses (Negative List) The negative list, for which the ECB proceeds cannot be utilised, would include the following:

a) Real estate activities.

b) Investment in capital market.

c) Equity investment.

d) Working capital purposes, except in case of ECB mentioned at 5b) and 5c) above.

e) General corporate purposes, except in case of ECB mentioned at 5b) and 5c) above.

f) Repayment of Rupee loans, except in case of ECB mentioned at 5d) and 5e) above.

g) On-lending to entities for the above activities, except in case of ECB raised by NBFCs as given at 5c), 5d) and 5e) above.
8. Exchange Rate Change of currency of FCY denominated ECB into INR denominated ECB can be at the exchange rate: a) prevailing on the date of the agreement between the parties concerned for such change or b) at an exchange rate, which is less than the rate prevailing on the date of agreement, if consented to by the ECB lender. For conversion to Rupee, the exchange rate shall be the rate prevailing on the date of settlement.
9. Hedging Provision The entities raising ECB are required to follow the guidelines for hedging issued, if any, by the concerned sectoral or prudential regulator in respect of foreign currency exposure. Infrastructure space companies shall have a Board approved risk management policy. Further, such companies are required to mandatorily hedge 70 per cent of their ECB exposure in case the average maturity of the ECB is less than five (5) years. The designated AD Category-I bank shall verify that 70 per cent hedging requirement is complied with during the currency of the ECB and report the position to RBI through Form ECB 2. The following operational aspects with respect to hedging should be ensured:

a) Coverage: The ECB borrower will be required to cover the principal as well as the coupon through financial hedges. The financial hedge for all exposures on account of ECB should start from the time of each such exposure (i.e. the day the liability is created in the books of the borrower).

b) Tenor and rollover: A minimum tenor of one year for the financial hedge would be required with periodic rollover, duly ensuring that the exposure on account of ECB is not unhedged at any point during the currency of the ECB.

c) Natural Hedge: Natural hedge, in lieu of financial hedge, will be considered only to the extent of offsetting projected cash flows / revenues in matching currency, net of all other projected outflows. For this purpose, an ECB may be considered naturally hedged if the offsetting exposure has the maturity/cash flow within the same accounting year. Any other arrangements/ structures, where revenues are indexed to foreign currency will not be considered as a natural hedge.

 Overseas investors are eligible to hedge their exposure in Rupee through permitted derivative products with AD Category I banks in India. The investors can also access the domestic market through branches / subsidiaries of Indian banks abroad or branches of foreign banks with Indian presence on a back to back basis.
10. 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.


It is no doubt that the relaxations and changes that have been introduced in the ECB Regulatory Framework have helped yield increased access to the overseas market. ECB is emerging to become one of the primary investment vehicles in India; helping companies and the Indian economy to become significantly profitable.

Footnote

1. FED Master Direction No.5/2018-19 dated March 26, 2019, updated as on April 12, 2021.

Originally published 12 August, 2021

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.