India: External Commercial Borrowing (ECB) Under Foreign Exchange Management Act (FEMA)

Last Updated: 27 November 2017
Article by Malay Damania

External Commercial Borrowings are commercial loans raised by 'eligible resident borrower' from 'recognised non-resident entities' AND should confirm to parameters specified in ECB guidelines such as minimum maturity period, permitted end-use of funds, maximum all-in-cost ceilings etc.

The framework for raising ECB is divided into following THREE Tracks:

TRACK 1 – Foreign currency denominated ECB with minimum average maturity period of 3/5 years

TRACK 2 - Foreign currency denominated ECB with minimum average maturity period of 10 years

TRACK 3 – Indian Rupee denominated ECB with minimum average maturity period of 3/5 years

In this paper, we will discuss the ECB raised under Track 1 hereunder:

Forms of ECB

ECBs can be raised in any of the following forms:

  1. Loans
  2. Issue of non-convertible, optionally convertible or partially convertible preference shares/debentures
  3. Buyers' credit
  4. Suppliers' credit
  5. Foreign Currency Convertible Bonds (FCCBs) or
  6. Foreign Currency Exchangeable Bonds (FCEBs)

Eligible Borrowers:

Any Indian Company, body corporate or firm can raise money through ECB. Following categories of entities can raise ECB under track 1:

  1. Companies in manufacturing sector
  2. Software development sector
  3. Shipping and Airlines Companies
  4. Units in Special Economic Zones (SEZs)
  5. Companies in infrastructure sector
  6. Certain categories of NBFCs.

Recognised Lenders:

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.

These lenders proposing to extend ECB to Indian borrower have to furnish a certificate of due diligence from overseas bank and is subject to regulations of host country which should clearly mention:

  1. The lender maintains account with the bank since minimum of 2 years;
  2. The lending entity is organised as per local laws and it held in good esteem by business community and
  3. There is no criminal action pending against it.

This host country must adhere to Financial Action Task Force (FATF) guidelines on Anti-money laundering, combating the financing of terrorism.

Permitted End-use of funds:

Indian borrower, while raising ECB from recognised lender, is permitted to use the funds strictly in any one of the following purposes:

  1. ECB can be utilised for Capital Expenditure in any of the following form:

    1. Import of Capital Goods including payment for import of services, technical knowhow or license fee if the same are part of these capital goods;
    2. Local sourcing of capital goods;
    3. New project;
    4. Modernisation or expansion of existing project;
    5. Investment in Overseas Company under Overseas Direct Investment (ODI) route;
    6. Acquiring share of public sector undertaking under the divestment program of Government;
    7. Refinancing existing "trade credit" raised for import of capital goods;
    8. Payment of capital goods already shipped or imported but not yet paid;
    9. Refinancing of existing ECB provided the residual maturity period is not reduced.
  1. Units in SEZ can raise ECB only for their own requirements;
  2. Shipping and Airline Companies can raise ECB only for import of vessels and aircrafts respectively;
  3. ECB can be used for general corporate purpose including working capital provided the ECB is raised from direct/indirect equity holder or from group Company for a minimum average maturity period of 5 years.

ECBs for import of second hand capital goods will be considered only under Approval route.

Minimum Average Maturity period:

Indian borrower can accept ECB from non-resident recognised lender with minimum maturity period as below:

  • For ECBs up to USD 50 million or its equivalent-3 years
  • For ECBs beyond USD 50 million or its equivalent-5 years
  • Companies in infrastructure sector-5 years, regardless of amount of borrowing
  • Certain categories of NBFCs-5 years, regardless of amount of borrowing
  • FCCBs or FECBs-5 years regardless of amount of borrowings

All-in-cost ceiling:

The term 'All-in-Cost' is the maximum cost that the borrower is allowed to incur on the ECB and it includes rate of interest, guarantee fees, other fees, expenses, charges etc but does not include commitment fee, pre-payment charges, withholding tax payable in INR. This is generally prescribed by RBI through a spread of certain basis points over last 6 months' LIBOR.

Penal interest, in case of default or breach of agreement, should not be more than 2% over the contracted rate of interest.

Debt-Equity ratio:

For ECB raised from direct equity holder under automatic route, the ECB liability of the borrower towards foreign equity holder should not be more than 4 times the equity contributed by the foreign equity holder. This mean that the debt equity ratio towards the foreign lender should not be more than 4:1. For ECB raised under approval route, this ratio should not be more than 7:1. However, for ECBs raised by the borrower is less than USD 5 million, these restrictions would not apply.

(To be continued in part 2)

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.

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