The framework of External Commercial Borrowings (ECB)

Definition:

External Commercial Borrowings (ECB) refer to commercial loans [in the form of bank loans, buyers’ credit, suppliers’ credit, securitized instruments (e.g. floating rate notes and fixed-rate bonds)] availed from non-resident lenders with a minimum average maturity of 3 years.

ECBs are commercial loans raised by eligible resident entities from recognized non-resident entities and should conform to parameters such as minimum maturity, permitted and non-permitted end-uses, maximum all-in-cost ceiling, etc. The parameters apply in totality and not on a standalone basis.

Types of ECB:-

        ECB can be raised as:

1. Loans, eg., bank loans, loans from equity holders, etc.
2. Capital market instruments, e.g.,
3. floating-rate notes / fixed-rate bonds / securitised instruments
4. non-convertible, optionally convertible or partially convertible preference shares
5. FCCB*
6. FCEB**
7. Buyers’ credit/suppliers’ credit
8. Financial lease

However, the ECB framework is not applicable in respect of the investment in Non-convertible Debentures (NCDs) in India made by Registered Foreign Portfolio Investors

*A foreign currency convertible bond (FCCB) is a type of corporate bond issued by an Indian company in an overseas market in a currency different from that of the issuer. Investors have the option of redeeming their investment on maturity or converting the bonds into equity any time during the currency of the bond. The repayment of the principal is in the currency in which the money is raised.

**In case of a foreign currency exchangeable bond (FCEB), investors have the option of converting the bonds into the equity of the offered company. The company issuing FCEB shall be part of the promoter group of the offered company and shall hold the equity shares being offered at the time of issuance of FCEB.

Two routes for accessing ECB:

            ECB can be accessed under two routes, viz.,

• Automatic Route: For the automatic route, the cases are examined by the Authorised Dealer Category-I (AD Category-I) banks., and
• Approval Route: Under the approval route, the prospective borrowers are required to send their requests to the RBI through their ADs for examination

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As per RBI/2018-19/109 A.P (DIP Series) circular dated January 16, 2019 revised ECB guidelines are set out:

  External Commercial Borrowings (ECB) Policy – New ECB Framework

1.  Eligible Borrowers: It includes all entities eligible to receive FDI. Additionally, Port Trusts, Units in SEZ, SIDBI, EXIM Bank, registered entities engaged in micro-finance activities, viz., registered not for-profit companies, registered societies/trusts/cooperatives, and non-government organizations can also borrow under this framework.
2. Recognised Lenders:
   The lender should be a resident of FATF or IOSCO-compliant country, including on transfer of ECBs. However,
   • Multilateral and Regional Financial Institutions where India is a member country will also be considered as recognized lenders;
   • Individuals as lenders can only be permitted if they are foreign equity holders or for subscription to bonds/debentures listed abroad; and
   • Foreign branches/subsidiaries of Indian banks are permitted as recognized lenders only for FCY ECB (except FCCBs and FCEBs). Foreign branches/subsidiaries of Indian banks, subject to applicable prudential norms, can participate as arrangers/underwriters/market makers/traders for Rupee denominated Bonds issued overseas. However, underwriting by foreign branches/subsidiaries of Indian banks for issuances by Indian banks will not be allowed.
3. Minimum Average Maturity Period:

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The Minimum Average Maturity Period (MAMP) will be 3 years.

However, manufacturing sector companies may raise ECBs with MAMP of 1 year for ECB up to USD 50 million or its equivalent per financial year. Further, if the ECB is raised from foreign equity holders and utilized for working capital purposes, general corporate purposes, or repayment of Rupee loans, MAMP will be 5 years. The call and put option, if any, shall not be exercisable prior to completion of minimum average maturity Peroid.

4. End-uses (Negative list)

            The negative list, for which the ECB proceeds cannot be utilized, would include the following:

1. a) Real estate activities.
2. b) Investment in the capital market.
3. c) Equity investment.
4. d) Working capital purposes except for foreign equity holders.
5. e) General corporate purposes except for foreign equity holders.
6. f) Repayment of Rupee loans except for foreign equity holders.
7. g) On-lending to entities for the above activities.

5. Reporting Requirements: Borrowings under ECB Framework are subject to the following reporting requirements apart from any other specific reporting required under the framework:

5.1. Loan Registration Number (LRN): Any draw-down in respect of an ECB should happen only after obtaining the LRN from the Reserve Bank. To obtain the LRN, borrowers are required to submit duly certified Form ECB, which also contains terms and conditions of the ECB, in duplicate to the designated AD Category I bank. In turn, the AD Category I bank will forward one copy to the Director, Balance of Payments Statistics Division, Department of Statistics and Information Management (DSIM), Reserve Bank of India, Bandra-Kurla Complex, Mumbai – 400 051. Copies of the loan agreement for raising ECB are not required to be submitted to the Reserve Bank.

5.2. 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.

5.3. Monthly Reporting of actual transactions: The borrowers are required to report actual ECB transactions through Form ECB 2 Return (Annex II) through the AD Category I bank on a monthly basis so as to reach DSIM within seven working days from the close of the month to which it relates. Changes, if any, in ECB parameters should also be incorporated in Form ECB 2 Return.

5.4. Late Submission Fee (LSF) for the delay in reporting:

5.4.1. Any borrower, who is otherwise in compliance of ECB guidelines, can regularize the delay in reporting of drawdown of ECB proceeds before obtaining LRN or delay in submission of Form ECB 2 returns, by payment of late submission fees as detailed in the following matrix:

5.4.2. The borrower, through its AD bank, may pay the LSF by way of demand draft in favor of “Reserve Bank of India” or any other mode specified by the Reserve Bank. Such payment should be accompanied by the requisite return(s). Form ECB and Form ECB 2 returns reporting contraventions will be treated separately. Non-payment of LSF will be treated as a contravention of reporting provision and shall be subject to compounding or adjudication as provided in FEMA 1999 or regulations/rules framed thereunder.

5.5. Standard Operating Procedure (SOP) for Untraceable Entities: The following SOP has to be followed by designated AD Category-I banks in case of untraceable entities who are found to be in contravention of reporting provisions for ECBs by failing to submit a prescribed return(s) under the ECB framework, either physically or electronically, for past eight quarters or more.

1. Definition: Any borrower who has raised ECB will be treated as ‘untraceable entity’, if entity/auditor(s)/director(s)/ promoter(s) of entity are not reachable/responsive/reply in negative over email/letters/phone for a period of not less than two quarters with documented communication/ reminders numbering 6 or more and it fulfills both of the following conditions:

• Entity not found to be operative at the registered office address as per records available with the AD Bank or not found to be operative during the visit by the officials of the AD Bank or any other agencies authorized by the AD bank for the purpose;

• Entities have not submitted Statutory Auditor’s Certificate for the last two years or more;