External Commercial Borrowings (ECB) Compliance - FDI Compliance
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ECB Compliance
External Commercial Borrowings (ECBs) refer to commercial loans provided by recognized foreign lenders to eligible Indian borrowers. These funds serve as a means for expansion. The key distinction between ECB and Foreign Direct Investment (FDI) lies in their structure. FDI involves equity ownership, while ECB entails debt raised by Indian borrowers. ECBs can be in the form of bank loans, buyer’s credit, supplier’s credit, securitized instruments, bonds, etc. Here’s a comprehensive guide to ECB compliance requirements.
Benefits of External Commercial Borrowings
ECBs offer a new avenue for financing, complementing India’s banking and NBFC-dominated borrowing landscape. Here are the key benefits:
- Foreign lenders often offer lower interest rates compared to Indian sources, making borrowing more cost-effective.
- ECBs allow capital raising without diluting equity stakes, as they are primarily debt instruments.
- They connect borrowers to global economies and markets.
- They support national growth agendas by channeling funds into high-potential sectors such as SMEs and infrastructure, with the government adjusting ECB limits accordingly.
- Essential documents include the loan agreement,
- LRN from RBI,
- Form-ECB submission,
- Form ECB-2 Return for monthly transaction reporting,
- offer letter details,
- and usage undertaking.
Routes for ECB
ECBs can be raised in either INR or any freely convertible foreign currency, following two routes similar to FDI: Automatic Route and Approval Route. Here’s an overview of these routes and their requirements:
- Automatic Route: Cases are processed by AD Category-I Banks, and borrowers do not need prior RBI approval.
- Approval Route: Requests are submitted to the RBI through AD Banks for examination and approval.
ECB Compliance Checklist – Framework
Foreign Currency (FCY) Denominated ECB:
- Bank Loans
- Foreign Currency Exchangeable Bonds (FCEBs)
- Foreign Currency Convertible Bonds (FCCBs)
- Security Instruments (bonds, notes, debentures, preference shares)
- Trade Credits (Supplier’s credit, Buyer’s credit beyond 3 years)
- Financial Lease
INR Denominated ECB:
- Bank Loans
- Security Instruments (bonds, notes, debentures, preference shares)
- Financial Lease
- Trade Credits (Supplier’s credit, Buyer’s credit beyond 3 years)
- INR Denominated Plain Vanilla Bonds issued overseas
Eligible Borrowers and Lenders
Eligible borrowers include entities eligible for FDI, port trusts, SIDBI, units in SEZs, and EXIM Bank of India. Lenders can be residents of FATF or IOSCO compliant nations, multilateral and regional financial institutions where India is a member, or individuals holding foreign equity in the borrowing entity.
Limit for Raising ECBs
Under the automatic route, eligible borrowers can raise up to USD 750 million or equivalent per financial year. Specific conditions apply based on the type and source of the ECB.
Negative List
- ECB proceeds cannot be used for capital market investments, real estate activities, general corporate purposes (except under specific conditions), equity investments, or lending to other entities for unauthorized activities.
- Minimum Average Maturity Period (MAMP)
- MAMP for ECBs ranges from 1 to 10 years, depending on the purpose and category of borrowing, ensuring a structured repayment timeline.
- All-In Costs
- All-in-costs for ECBs are determined based on the benchmark rate (e.g., LIBOR for FCY ECBs, Government of India Securities yield for INR ECBs) plus applicable spreads. Penalties for covenant breaches are capped at 2% over the contracted interest rate on outstanding principal amounts.
How to Achieve ECB Compliance – Process
For the Automatic Route, applicants approach the designated AD Bank for ECB application submission and Loan Registration Number (LRN) issuance. For the Approval Route, applicants submit detailed proposals to the RBI for consideration by the Empowered Committee, ensuring compliance with macroeconomic guidelines.
FAQs
The primary responsibility to ensure adherence to ECB compliance requirements and guidelines rests with the borrower. Any circumvention or violation of these guidelines under FEMA can lead to penalties under the FEMA, 1999.
LLPs are not eligible to raise Foreign Direct Investments (FDI), and therefore, they cannot raise ECBs.
Entities that have raised INR-denominated ECBs are not permitted to convert these liabilities into foreign currency liabilities. They are also prohibited from assuming foreign currency risk through derivative contracts or other means.
No, non-convertible preference shares are not included in equity for calculating the ‘ECB liability to equity ratio’.
Refinancing a rupee-denominated ECB using fresh foreign currency-denominated ECBs is not allowed.
When filing Form ECB, the following precautions should be observed:
- Draw-down of ECB can only be done after receiving the Loan Registration Number (LRN) from RBI.
- All terms and conditions related to ECB should be accurately reported, with no fields left blank.
- Any changes in ECB parameters, whether under the automatic route or approval route, must be reported promptly using a revised Form ECB to DSIM within 7 days of the change taking effect.
