External Commercial Borrowings
Financial Debts from outside India is commonly referred as External commercial Borrowing or ECB in India. The ECB framework is governed by the regulations of the RBI framed under the Foreign Exchange Management Act,1999 (“FEMA”) and the Master Direction-External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers (the “ECB Master Direction”).
A new ECB Framework has been issued vide A.P (DIR Series) Circular No.17 dated 16 January, 2019 ( FEMA 3 (R) ) which is brought into force with immediate effect.
FEMA 3 (R) has introduced some key changes as compared to erstwhile ECB guidelines, which are summarized below:
Erstwhile, the entities Indian entities which were engaged in Import of goods for resale in India were not eligible to raise ECB.
With the amendment in FEMA 3 (R) this restriction has been removed. Under the new definition Eligible Borrower is defined to include all ‘entities’ eligible to receive FDI under FEMA 20 (R).
Accordingly, Indian Companies which are permitted under automatic and approval route of FEMA for receiving foreign investment in India are eligible to raise fund through ECB through their foreign Equity holder.
The lender should be resident of FATF or IOSCO compliant country, including on transfer of ECBs
Following non-resident lenders are recognised lenders under ECB:
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.
7. Overseas branch or subsidiary of Indian bank-However, they are not permitted to participate in refinancing of existing ECB.
Denomination of ECB
ECB can be of (a) Foreign Currency Denominated ECB or (b) INR denominated ECB.
a) Foreign Currency Denominated ECB
In case of Foreign Currency Denominated ECB, forex loss or gain on account of fluctuation on the exchange rate of currency in USD and INR shall remain on borrower.
b) INR denominated ECB
In case of INR denominated ECB then forex loss or gain on account of fluctuation on the exchange rate of currency in USD and INR shall come back on the Lender i.e. providers of loans.
ECB from Direct Foreign Equity Holder and from indirect Foreign Equity Holder
Borrower can avail of ECB from (a) Direct Foreign Equity Holder,the only conditions is that the direct foreign equity holder holds minimum 25% direct equity in in the borrowing entity and in case the ECB is from indirect equity holder then such indirect equity holder holds minimum indirect equity holding of 51%.
ECB Limit and Leverage
ECB can be availed up to USD 750 million or equivalent per financial year under an automatic route.
Further in case the amount of ECB exceeds USD 5 million, (Equivalent to INR 350 Million), then borrowerhas to maintain ECB liability- Equity ratio that shall not exceed 7:1
Interest and other Cost on ECB
Foreign Currency Denominated ECB
In the case of Foreign Currency Denominated ECB the maximum interest & cost that lender may charge on Borrower shall not exceed;
a) 6-month London Interbank Offered Rate (LIBOR) rate of USD or any other 6-month interbank interest rate applicable to the currency of borrowing
b) 450 bps spread
INR denominated ECB
a) Bench mark rate which is prevailing rate of government of India security of corresponding maturity and
b) 450 bps spread
ECB Tenure (Minimum Average Maturity Period; MAMP)
The term of ECB shall with the MAMP of minimum 3 years to maximum 5 years. ECB raised from foreign equity holder lending for meeting working capital needs, general corporate purpose or repayment of rupee loan to have MAMP of five years.
Meaning of MAMP
Minimum Average Maturity’ is weighted average of all disbursements taking each disbursement individually and its period of retention by the borrower for the purpose of ECBs.
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.
It will be optional for borrower availing of ECB to financial hedge against foreign exchange fluctuation exposures on account of repayment of ECB loan and Interest thereon.
In the case of Indian Rupee (INR) Denominated ECB the Lenders are eligible to hedge their exposure in Rupee through permitted derivative products with AD Category I banks in India.
Parking of ECB proceeds domestically
Borrower is allowed to park ECB proceeds in term deposits with AD Category I banks in India for a maximum period of 12 months cumulatively. These term deposits should be kept in unencumbered position.
Changes in terms and conditions of ECB
Changes in ECB parameters in consonance with the ECB norms, including reduced repayment by mutual agreement between the lender and borrower, should be reported to the DSIM through revised Form ECB at the earliest, in any case not later than 7 days from the changes effected. While submitting revised Form ECB the changes should be specifically mentioned in the communication.
Monthly Reporting of actual transactions
Borrower is required to report actual ECB transactions through Form ECB 2 Return (Annex II) through the AD Category I bank on monthly basis so as to reach DSIM within seven working days from the close of month to which it relates. Changes, if any, in ECB parameters should also be incorporated in Form ECB 2 Return.
Late Submission Fee (LSF) for delay in reporting
Delay in reporting of drawdown of ECB proceeds before obtaining LRN or delay in submission of Form ECB 2 returns can now be regularised by payment of late submission fees as detailed below:
S.No Type of Return/Form Period of Delay Applicable LSF
1 Form ECB 2 Up to 30 calender days from due date of submission INR 5,000
2 Form ECB 2/Form ECB Up to three years from due date of submission/date of drawdown INR 50,000 per year
3 Form ECB 2/Form ECB Beyond three years from due date of submission /date of drawdown INR 100,000 per year
Conversion of ECB into equity
Borrower in case unable to repay part or full amount of the principal ECB and full or part amount of Interest on ECB to the Lenders then such unpaid amount is permitted to be converted into equity shares of Borrower subject to the fulfilment of the prescribed conditions