A Comprehensive Guide to External Commercial Borrowings (ECB)

Overview of External Commercial Borrowings (ECB)

External Commercial Borrowings (ECB) are pivotal in enabling eligible resident entities to access global capital. The framework governing ECB is established under the Foreign Exchange Management Act (FEMA). This article presents an in-depth examination of ECB, covering key aspects like its definition, modes of raising funds, eligible lenders and borrowers, compliance requirements, and procedural guidelines.

Concept of External Commercial Borrowings

External Commercial Borrowings refer to commercial loans secured by eligible resident entities from recognized non-resident lenders as per the provisions outlined in FEMA Notification No. 3R & 8.

Modes of Raising External Commercial Borrowings

Entities may raise ECB through two primary modes:

1. Foreign Currency Denominated ECB
2. INR Denominated ECB
   • Notably, entities borrowing INR denominated ECB cannot convert this liability into foreign currency.

Forms of External Commercial Borrowings

Eligible borrowers can secure ECB via various forms:

• Loans (including bank loans)
• Bonds and debentures (both fixed and floating)
• Trade credits extending beyond 3 years, granted by overseas suppliers or institutions for importing goods under the Foreign Trade Policy
• Foreign Currency Exchangeable Bonds
• Foreign Currency Convertible Bonds
• Financial Leases

Routes of Raising External Commercial Borrowings

Entities can raise ECB through:

• Automatic Route:

  • The AD Category-I Bank reviews applications and grants approvals.
  • Borrowers must submit a proposal with the External Commercial Borrowings form to the AD Category-I Bank.
  • Upon approval, the AD Category-I Bank forwards the application and form to the RBI for a Loan Registration Number (LRN).

• Approval Route:

  • Prospective borrowers submit requests to the RBI via their AD Category-I Banks.
  • These requests are evaluated based on the macroeconomic situation and the specific merits of the proposal.

Eligibility Criteria

Eligible Lenders:

1. Must originate from FATF or IOSCO compliant countries.
2. Includes multilateral or regional financial institutions and individual lenders (foreign equity holders).

Definitions:

• Foreign Equity Holders are classified as:
  • Direct owners with a minimum 25% equity stake in the borrowing entity.
  • Indirect owners with at least 51% equity.
  • Group companies sharing a common overseas parent.

Eligible Borrowers:

• For Foreign Currency Denominated ECB:

  • Entities eligible for Foreign Direct Investment (FDI)
  • Port trusts
  • Special Economic Zone (SEZ) units
  • SIDBI and EXIM Bank of India

• For INR Denominated ECB:

  • Registered entities involved in micro-finance (including not-for-profit organizations and NGOs).

Note: Limited Liability Partnerships cannot raise ECB.

Restrictions on End-Use of Funds

Proceeds from External Commercial Borrowings cannot be utilized for:

• Real estate activities
• Capital market investments
• Working capital or general corporate purposes
• Repayment of domestic rupee loans

Parking of Funds Raised through External Commercial Borrowings

• Foreign Currency Denominated ECB:
  Only funds intended for foreign currency expenditure may be parked until utilization.

  • Options for investment include:
    • Deposits with banks rated AA- or above
    • Treasury bills with one-year maturity via foreign branches of Indian banks.

• INR Denominated ECB:
  Proceeds should be repatriated immediately to a rupee account with AD Category-I banks in India.

Minimum Average Maturity Period (MAMP)

The Minimum Average Maturity Period for ECB is generally set at 3 years. Specific categories have different MAMP requirements:

Category	MAMP
ECB up to USD 50 million for manufacturing	1 year
ECB from foreign equity holder for working capital	5 years
ECB for working capital or general corporate by NBFCs	10 years
ECB for repaying domestic loans for capital expenditure	7 years
ECB for repaying non-capital expenditure loans	10 years

Important Note: For categories (b) to (e), ECB cannot be sourced from foreign branches/subsidiaries of Indian banks, and the MAMP must be strictly adhered to.

Limits on Borrowing

1. Eligible borrowers can raise up to USD 750 million per fiscal year under the automatic route.
2. For foreign currency denominated ECB from direct foreign equity holders, the liability-equity ratio cannot exceed 7:1, unless the total outstanding ECB amount is USD 5 million or below.

Compliance Requirements

Obtaining a Loan Registration Number (LRN)

Before any drawdown of ECB, borrowers must secure an LRN from the RBI. This involves:

• Submitting a duly certified External Commercial Borrowings form to the designated AD Category-I Bank.
• The AD bank will then forward the form to the RBI.

Monthly Reporting:

• Actual ECB transactions must be reported monthly using the ECB-2 form to the AD Category-I Bank, ensuring submission within seven working days post month-end.

Procedural Steps for ECB

1. Obtain LRN:
   Fill the ECB form and submit it in duplicate to the AD Category-I Bank for forwarding to the RBI.

2. Filing the ECB Form:
   Ensure completeness and accuracy when filling out the form, including the following:

   • Dates in the YYYY/MM/DD format.
   • No blanks; indicate 'N.A.' where non-applicable.
   • Attach separate annexes if necessary, and obtain certification from a Chartered Accountant or Company Secretary.

3. Monthly ECB-2 Filing:
   Submit Form ECB-2, while ensuring adherence to submission timelines and procedural guidelines established by the RBI.

Conclusion

Navigating External Commercial Borrowings requires a comprehensive understanding of the regulatory environment, compliance obligations, and procedures. By evaluating eligibility criteria carefully and selecting the appropriate modes and routes, organizations can leverage ECB effectively to fuel growth, expansion, and diversification while effectively managing risk.