This blog post by Divya Kathuria, a student of Raffles University, provides an overview of the subsidiaries that are eligible to lend money by way of an ECB. 

What is ECB?

ECB stands for External Commercial Borrowings and to put it as simply as possible; money borrowed in India from foreign or external sources and the purpose of borrowing that money is for using it in commercial activities. These are the loans from non-resident lenders. So, the definition of ECB has the following ingredients:

• Money is borrowed.
• The borrowed money is from foreign sources.
• The borrowed money is to be used for commercial activities in India.

It is important to note that all the above-mentioned ingredients have to be cumulatively present to call a borrowing as ECB. Also, before getting on to who are the eligible lenders by way of ECB; let us be acquainted with certain basics of ECBs.

What are the Different Foreign Sources?

ECB can be raised by borrowers from internationally recognized sources such as:

1. International banks (to provide commercial bank loans),
2. International capital markets,
3. Multilateral Financial Institutions (such as IFC, ADB, CDC, etc.)/ Regional Financial Institutions and Government owned Development Financial Institutions,
4. Export Credit Agencies,
5. Suppliers of Equipment,
6. Foreign Collaborators and
7. Foreign Equity Holders (other than erstwhile Overseas Corporate Bodies).[1]

Regulations

ECB guidelines and policies are regulated by various government departments that are, Department of Economic Affairs, Ministry of Finance besides Reserve Bank of India. The policy deals with the eligibility criteria of the organizations that can access the international financial markets, the funds that can be availed through ECBs for every type of entity, their maturity periods, how those funds have to be used that is, their end use and also, conversion of ECBs into equity.

The Reserve Bank of India has now recently permitted issuance of rupee-denominated bonds overseas as well (“RDBs”) by its circular dated September 29, 2015, as the investment and repayment of RDBs in the rupee, will enable the transfer of currency risks from the borrower to the investors.

Advantages for a Company to Apply for an ECB

• Cheaper funds: It is cheaper than the domestic debts because of the lower interest rates.
• Large availability of funds: The international market is a better option as there is an abundant availability of funds and helps in satisfying large requirements because the availability of funds is large as compared to domestic funds.
• Foreign Currency funds: Companies always need funds in foreign currency to expand their business abroad and therefore, this might prove fruitful for this purpose as well. Also, the borrower gets freedom from the exchange risks.

Routes for ECBs

Any borrower who wants to access ECB can do so under two routes, namely:

1. The automatic route
2. The approval route.

A corporate, other than a financial intermediary, registered under the Companies Act, 1956 or 2012 can access ECB under the automatic route up to US Dollar $ 500 million in a financial year both for rupee expenditure as well as for foreign currency expenditure for permissible end-uses.[2]

However, the ECBs not covered under automatic route can be accessed through approval route on the case by case basis by RBI.

This policy is mainly operationalised through circulars of RBI.

Who can Lend in the New Framework?

 The Reserve Bank of India (RBI) issued a Circular dated 30 November 2015 which made a new framework for External Commercial Borrowings (ECB) and replaced the existing guidelines issued about at least ten years ago. The main aim of the new framework is to liberalize and further improve and encourage the long-term ECBs denomination not only in foreign currency but also, denominations in INR.

For this purpose, RBI has categorized various kinds of ECBs very innovatively. These have been categorized as ‘Track I’, ‘Track II’ and ‘Track III’ under the new framework. Also, there have been various amendments made in respect of other ECBs having an average maturity of fewer than ten years.

Track I

It includes those companies which have Minimum maturity criteria as:-

1. Three years for ECB up to USD 50 million or its equivalent.
2. Five years for ECB beyond USD 50 million or its equivalent.

Borrowers are:-

• Companies in manufacturing, and software development sectors.
• Shipping and airlines companies.
• Small Industries Development Bank of India (SIDBI).
• Units in Special Economic Zones (SEZs).
• Export-Import Bank of India

The recognized Lenders are:-

1. International banks.
2. International capital markets.
3. Multilateral financial institutions (such as IFC, ADB, etc.) / regional financial institutions and Government owned (either wholly or partially) financial institutions.
4. Export credit agencies.
5. Suppliers of equipment.
6. Foreign equity holders.
7. Overseas long-term investors such as:
   1. prudentially regulated financial entities;
   2. Pension funds;
   3. Insurance companies;
   4. Sovereign Wealth Funds;
   5. Financial institutions located in International Financial Services Centres in India
8. Overseas branches/subsidiaries of Indian banks (added recently)

Track II

It includes ECBs which have Minimum Average Maturity period of 10 years irrespective of the amount.

The borrowers are:-

1. All entities listed under Track I.
2. Companies in the infrastructure sector.
3. Holding companies.
4. Core Investment Companies (CICs).
5. Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (INVITs) coming under the regulatory framework of the Securities and Exchange Board of India (SEBI).

Recognized lenders under this category are all entities listed under Track I except for overseas branches / subsidiaries of Indian banks.

Track III

It also includes ECBs which have Minimum Average Maturity period of 10 years irrespective of the amount that is, same as Track I.

The borrowers are:-

1. All entities listed under Track II.
2. All Non-Banking Financial Companies (NBFCs).
3. NBFCs-Micro Finance Institutions (NBFCs-MFIs), Not for Profit companies registered under the Companies Act, 1956/2013, Societies, Trusts and cooperatives (registered under the Societies Registration Act, 1860, Indian Trust Act, 1882 and State-level Cooperative Acts/Multi-level Cooperative Act/State-level mutually aided Cooperative Acts respectively), Non-Government Organisations (NGOs) which are engaged in microfinance activities¹.
4. Companies engaged in miscellaneous services viz. research and development (R&D), training (other than educational institutes), companies supporting infrastructure, companies providing logistics services.
5. Developers of Special Economic Zones (SEZs)/ National Manufacturing and Investment Zones (NMIZs).

The recognized lenders are:-

All entities listed under Track I but for overseas branches / subsidiaries of Indian banks. In the case of NBFCs-MFIs, other eligible MFIs, not for profit companies and NGOs, ECB can also be availed from overseas organizations and individuals.

Conclusion

This major set of revised guidelines on ECB has been announced to boost the overseas flow of funds in a liberalized regime with few end-use restrictions unlike earlier. These will also lower down the risk of the borrower. The major advantage is that the Indian entities can avail for ECB through INR denominated bonds and then, the lenders will bear currency risk. Through this new framework, the main intention appears to be to attract the lenders overseas, and that is the reason to cut cost for short-term overseas borrowings.

References:

[1] ‘EXTERNAL COMMERCIAL BORROWINGS & TRADE CREDITS,’ http://iibf.org.in/documents/ecb-and-trade-credit.pdf

[2] http://www.finmin.nic.in/the_ministry/dept_eco_affairs/ecb/ecb_index.asp?pageid=2, Ministry of Finance, Government of India, ‘ External Commercial Borrowings.’