This article is written by Srishti Aishwarya, with inputs from Abhyudaya and Ramanuj.
Have you ever considered borrowing money for a business? In fact, most people have to borrow capital at some point or the other. A well hidden secret is that you can borrow money at a cheaper interest rate if you borrow from a foreign lender, usually. At half the interest as compared to India, sometimes.
If you compare the interest rates in developed countries and India, it will be obvious to you how profitable can it be for an Indian business to borrow money from from Japan, EU or USA as compared to any domestic lender.
However, the spoiler is that apart from finding a willing borrower from another country, you have to deal with heavy regulations on commercial borrowing by Indian government, primarily administered through RBI. The terminology used for this sort of foreign loans is External Commercial Borrowing. We shall cover in this post who are eligible for such borrowing, and what are the conditions and regulations that RBI impose on these transactions. Please feel free to write to us at [email protected] if you have further questions.
What is External Commercial Borrowing (ECB)?
Commercial loans in the form of bank loans, buyers’ credit, suppliers’ credit, securitized instruments (e.g. floating rate notes and fixed rate bonds, non-convertible, optionally convertible or partially convertible preference shares) availed of from non-resident lenders is referred to as External Commercial Borrowings (ECB).
Which laws govern ECB?
Section 6(3)(d) of the Foreign Exchange Management Act ,1999 and Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000 governs External Commercial Borrowing (ECB).
Apart from that consolidated RBI Master Circular No. 8 of 2010-11 that is updated annuallyregulates External Commercial Borrowing.
We have mentioned seven key concepts you need to know about a law before you can think of taking a loan from an international source.
1. Routes to access External Commercial Borrowing(ECB)
ECB can be accessed via two routes that is Automatic Route and Approval Route. Automatic route will only require a filing, while approval route will require the approval of RBI as well. We explain the maximum amount that can be borrowed, the persons eligible to borrow and lend, and the purpose for which the money can be borrowed under each of the routes below.
a. Automatic Route
Under Automatic Route borrower can enter into a loan agreement without prior approval from Reserve Bank of India(RBI), however, the loan agreement has to be registered under RBI.
i. Who can borrow under Automatic Route?
- – Service sectors comprising of hotel, hospital, software corporations registered under the Companies Act, 1956.
- – Units in Special Economic Zones for their own business requirement
- – NGOs that are engaged in micro finance activities
- – Infrastructure Finance Companies (IFCs)
ii. Who cannot borrow under Automatic Route?
Financial intermediaries such as banks; financial institutions (FIs); Housing Finance Companies (HFCs) and Non Banking Financial Companies (NBFCs) that are exclusively involved in financing of infrastructure sector for on-lending to borrowers up to 50 per cent of their owned funds under the automatic route cannot borrow under External Commercial Borrowing(ECB). Apart from that individuals, trusts and Non- Profit making organizations are not eligible for grant of money under ECB Regulations. However, NGOs can borrow money from overseas organizations and individuals that are qualified to receive money under External Commercial Borrowing (ECB) Regulations.
iii. Who can lend money under Automatic Route?
· International Banks
· International Capital Markets
· Multilateral Financial Institutions
· Export Credit Agencies
· Suppliers of Equipment
· Foreign Collaborators
· Foreign Equity Holders
iv. Maximum Amount that can be borrowed
Companies that are in the service sector such as hotels, hospitals and software companies can borrow up to maximum of US $100 million for import of capital goods and for rupee or foreign currency capital expenditure. However, companies in sectors other than these can borrow up to maximum of US $500. As far as micro finance NGOs are concerned, they can borrow up to US $5 million.
v. Permitted End Use
Loan taken under External Commercial Borrowing can be used for:-
– Investments, such as import of capital goods, new projects,modernization/ expansion of existing production units in real sector, industrial sector including Small and Medium Enterprise (SME) and infrastructure in India
– Overseas direct investment in joint ventures or wholly owned subsidiaries
– First stage acquisition of shares in disinvestment process and in the mandatory second stage offer to the public
· Lending to self help groups by NGOs engaged in microfinance
· Onetime payment for spectrum allocation by eligible borrowers in the telecommunication sector
· On- lending by International Foreign Investment Corporations to infra
vi. End Use Not- Permitted
Funds received under ECB cannot be used for:
– On-lending or investment in capital market or acquiring a company (or a part thereof) in India by a corporate.
– Utilisation in Real estate,
– Working capital, general corporate purpose and repayment of existing Rupee loans.
b. Approval Route
Under Approval Route, prospective borrower submits an application to RBI in the prescribed form through authorized dealer (AD) as specified by RBI.
i. Who has to borrow under Approval Route?
Generally, all the financial institutions engaged in infrastructure financing and institutions not specified in Automatic Route are supposed to borrow money under approval route. Institutions that borrow money under approval route are:
– Financial Institutions (FIs) that deals exclusively with infrastructure and export finance.
– Non Banking Finance Companies (NBFC) for External Commercial Borrowings that has minimum average maturity of 5 years to finance import of infrastructure equipment for
leasing to infra projects.
– NBFCs classified as Infrastructure Finance Companies ( IFCs) as such by RBI exclusively involved in financing of infrastructure sector for on-lending to borrowers in the infrastructure sector for ECBs beyond 50 per cent of their owned funds.
– Housing Finance Companies for Foreign Currency Convertible Bonds (FCCB)
– Special Purpose Vehicles (SPV) financing infrastructure companies / projects exclusively
– Multi-state co-operative Societies engaged in manufacture in real sector
– Special Economic Zone (SEZ) developers for providing infrastructure facilities within SEZ. However, ECB is not permissible for development of integrated township and commercial real estate within SEZ.
– Banks and Financial Institutions who had participated in the textile or steel sector restructuring package
– Corporate which have violated the ECB policy and are under investigation by Reserve Bank and / or Directorate of Enforcement can avail ECB only under the
– Corporate that requires more ECB beyond the prescribed limit under the
automatic route in a year
ii. Who can lend money under Approval Route?
All the institutions that lend money under automatic route can lend money under approval route i.e. International Banks and Capital Markets, Multilateral Financial Institutions, Export Credit Agencies, Suppliers of Equipment, Foreign Collaborators and Equity Holders.
iii. Amount that can be borrowed
Approval route allows to borrow more amount than what is allowed under automatic route.
An additional amount of US$ 250 million can be borrowed under Approval route by Corporate in real sector over and above US$ 500 million that is allowed under the automatic route. In case of service sector an additional amount of US $100 is allowed over and above what is allowed under automatic route.
iv. Permitted End Use
End uses that are permitted under automatic route are also permitted under approval route. Apart from the end usage permitted under automatic route, approval route allows the money borrowed to be invested in the housing sector in the development of
integrated townships. Approval route permits the use of borrowed money for premature buy back of Foreign Currency Convertible Bonds (FCCB) untill June 30, 2011 as recommended by RBI. Refinancing of Rupee loans availed of from the domestic banks by eligible borrowers in the power sector and transport sector that is sea port & airport, roads including bridges for the development of new projects is also allowed under approval route.
v. End Use Not Permitted
Utilization of ECB proceeds as also specified in automatic route is not permitted for on-lending or investment in capital market or acquiring a company or a part thereof in India by a corporate except banks and financial institutions eligible under approval route. Utilization of ECB proceeds is also not permitted in real estate, for working capital, general corporate purpose and repayment of existing Rupee loans.
However, to facilitate funding in infrastructure sector refinancing of Rupee
loans availed of from the domestic banks by eligible borrowers in the transport and power sectors for the development of new projects, subject to the conditions stipulated by RBI.
2. Minimum Average Maturity
The minimum average maturity is 3 years for ECB up to US$ 20 million and 5 years for ECB above US$ for the fund received under automatic route as well as approval route.
Under approval route, minimum average maturity is 10 years for the additional amount of US$ 250 million which is received over & above US$ 500 million under the automatic route.
3. All-in-cost Ceilings
All in cost ceilings includes interest, fees and expenses in foreign exchange and excludes commitment fee, prepayment fee, fees payable in Indian rupees and excludes payment of withholding tax.
All in cost ceiling should not 300 basic points over six month London Interest Bank Offer Rate (LIBOR) or other appropriate reference rate that is applicable for maturity of 3-5 years. For maturity above 5 years, all in cost ceilings should not exceed 500 basis points over six month LIBOR or other appropriate reference rate applicable. Here basic points denotes interest rate. 100 basic points means one percent
ECB is preferred by investors because of ECB is for a fixed period which can be as short as three years and there are fixed returns. Since its favourable for investors, ECB are easily available to borrowers plus the interest rate is fixed. Hence corporations and institutions seeking loan prefers to go for external commercial borrowing instead of internal borrowing. Keep watching this space to know about the compliance requirement and other components of ECB.
Compliance and Filing Requirements
It is imperative for the borrower to utilise the fund obtained under External Commercial Borrowing in accordance with ECB guidelines and RBI regulations. The designated Authorised Dealer bank is also required to ensure that raising /utilization of ECB is in compliance with ECB guidelines at the time of certification.
Borrowers are required to submit Form 83 to report loan agreement detail.The form has to be certified by the Company Secretary (CS) or Chartered Accountant (CA) and submitted to the designated Authorised Dealer bank. Thereafter borrower will get Loan Registration Number from RBI after which it can draw down loans.
Borrowers are supposed to submit details regarding actual transaction and utilisation of the ECB by filing ECB-2 Return Form. The form has to be certified by the designated Authorised Dealer and submitted to RBI within seven working days before the close of every month. Violation of the provisions of the regulations is dealt with by the Reserve Bank of India through compounding of contraventions under Section 15 of FEMA 1999.
For procedure relating to creation of security or issue of guarantee in relation to ECB, see here.
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