In this blog post, Pragati Dwivedi, a student pursuing a Diploma in Entrepreneurship Administration and Business Laws by NUJS, analyses external commercial borrowing regulations and FEMA guidelines. 

FEMA guidelines suggest provisions for Indian companies to access funds from abroad by means like External Commercial Borrowings Regulations, Foreign Currency Convertible Bonds, Foreign Currency Exchangeable Bonds, Preference Shares, etc. External Commercial Borrowings (ECB) signifies 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 with a minimum average maturity of three years.[1]

Automatic Route and Approval Route

Borrowers are permitted to park their ECB proceeds either through automatic route or the approval route. A brief on both the means are discussed below:

Automatic Route: Access of funds under the automatic route does not require approval either by the RBI/ GOI. Corporate including hotel, hospitals, software sectors, Infrastructure Finance Companies (IFC) other than financial intermediaries like banks, FI’s, HFC’s and NBFC’s can raise ECB. ECB can be raised from internationally recognized sources like International Banks, International Capital Markets, Multilateral Financial Institutions, etc.

Approval Route: Proposals falling under the approval route category include:-

1. Lending for specific purposes by the EXIM Bank which varies from case to case.
2. Banks and financial institutions engaged or having participated in the textile or steel sector restructuring packages; they work the way approved by the Government.
3. ECB to finance the import of equipment in relation to infrastructure for leasing them out to infrastructure projects, those having a minimum average maturity of five years.
4. NBFCs which are characterized as Infrastructure Finance Companies (IFCs) for the purpose of on-lending to the infrastructure sector as described in the ECB policy by the Reserve Bank of India (RBI) (beyond 50% of their owned funds) which are also subjected to compliance of certain stipulations.
5. Housing Company Bonds issue FCCBs (Foreign Currency Convertible Bonds).
6. RBI notifies Special Purpose Vehicles or SPV or any other entity which are set up to finance infrastructure companies / projects exclusively.
7. The co-operative societies which are financially solvent and are engaged in manufacturing.
8. The SEZ developers that provide infrastructure facilities within SEZ.
9. Corporates that are eligible under the automatic route and are not in the services viz. hotels, hospitals and software sector which can avail of ECB beyond USD 750 million per financial year.
10. Corporates which are in the service sector for availing ECB beyond USD 200 million per financial year.
11. Cases falling outside the purview of the automatic route limits and maturity indicated, etc. ECB can be availed from the recognized lenders as explained under Automatic Route.[2]

End Use Regulations

End Use Regulations as clarified under the Foreign Exchange Management Act. They include:

• For the purpose of raising investment in new projects, for the purpose of modernization/ expansion of existing units in industrial and service sectors including the infrastructure sector; ECB’s can be raised for investment.
• According to the guidelines issued on Indian Direct Investment in Joint Venture or Wholly Owned Subsidiaries (WOS), Overseas Direct Investment in Joint Ventures or Wholly Owned Subsidiaries can be made but subjected to such guidelines.
• In the two-stage process: first stage acquisition of shares in the disinvestment procedure and in the mandatory second stage offer which is done to the public under the Government’s disinvestment programme of Public Sector Unit shares.
• NBFCs categorized as Infrastructure Financing Companies (IFC) are permitted to avail ECBs including outstanding in existing ECBs up to 50% of their owned funds under the Approval Route.
• The lending that is done to the good faith micro finance activity including capacity building by NGOs, self-help groups or for micro-credit, micro finance activities, etc.

Restrictions

Restrictions that are imposed on External Commercial Borrowings (ECB) regulations are as follows:

• The utilization which can be done for on-lending or investment in capital market or acquiring a company (or a part thereof) in India by an investment in real estate sector, by a corporate, general corporate purpose, repayment of existing Rupee loans.
• The issue of standby letter credit, FIs, and NBFCs from India relating to ECB, guarantee, letter of undertaking or letter of comfort by banks,
• The borrower can create security against the ECB. Creation of charge over financial securities and immoveable assets such as shares in favour of the overseas lender is subjected to FEMA regulations under the ECB guidelines.

Other Provisions

Other relevant regulations in relation to the external commercial borrowings are as follows:

• Borrowers are permitted to remit the funds to India or to either park the ECB proceeds abroad.
• ECB proceeds which are parked in various liquid assets can be invested in Treasury Bills and other monetary instruments of one-year maturity and having minimum rating etc. Whenever the funds are required by the Borrower in India, the funds are invested in such a way that they can be liquidated
• Whenever the ECB funds are pending utilization for permissible end-uses, ECB funds can be repatriated to India for credit to the Borrowers’ Rupee Accounts with banks (AD) in India.
• Prepayment of ECB up to USD 500 million can be made by the AD banks without prior approval of RBI upon compliance of minimum maturity period which applies to the loan.
• A fresh ECB can be raised and can be used for refinancing an existing ECB subjected to the fact that the fresh one is raised at a lower all-in-cost, and the outstanding maturity of the original ECB is maintained.
• For the purpose of making remittances of instalments of principal, interest and other charges in conformity with the ECB guidelines, the designated AD bank has the general permission.
• In compliance and consonance with the ECB guidelines, the Borrowers enter into an agreement with the recognized Lender without the RBI approval and obtain a LOAN REGISTER NUMBER (LRN) from RBI before drawing the ECB as per the procedure laid down in the policy.

Penalties Imposed

FEMA lays down a series of penalties of regulations in relation to the External Commercial Borrowings are not complied with. Section 13 of the Foreign Exchange Management Act (FEMA) deals with the Penalties on Contravention of Provisions under this act:

1. If there is any contravention of any rule, regulation, notification, direction or order of the FEMA Act or there is contravention of any condition which is subjected to the authorisation of the Reserve Bank, the person doing the same shall upon adjudication be liable to a penalty up to thrice the sum involved in such contravention where the amount is quantifiable and in case the amount is not quantifiable up to two lakh rupees which can be extended to five thousand rupees for every day after the first day if the violation continues.
2. The Adjudicating Authority while adjudging any violation under sub-section (1) may in addition to the Any Adjudicating Authority adjudging any contravention under sub-section (1), may if he thinks fit in addition to the penalty he will be subjected to for violation of the act can declare that in addition to the penalty which is imposed, the currency, security or any other money or security in respect of which the violation has been committed be liable to be confiscated by the Central Government and a further direction can be passed that the foreign exchange holdings in respect of which the violation is committed shall be brought back to India.

An explanation to sub-section (2) suggests that the word “property” for the purpose of this sub-section includes deposits in a bank in case the property is converted into such deposits; Indian currency where the property is converted into currency and also if any other property has resulted out of the conversion of the defaulted property in question.

Recent Updates

The government recently held that Reliance Infrastructure, Reliance Natural Resources, and Reliance Communication which are the three firms of the Anil Ambani group violated the overseas debt norms.  RNRL was also supposed to pay a penalty, but as the penalty was not paid, the matter was referred to the Enforcement Directorate. It was held that end-use violations were observed by the Reserve Bank of India in respect of two external commercial borrowing transactions by the Reliance Infrastructure- one of 360 million dollars and another of 150 million dollars.

The instant company had brought the proceeds which are raised through the external commercial borrowings to India, and they had kept them invested in debt mutual funds when the declared end-use was pending utilisation which is in direct and in gross violation of the existing ECB regulations. A total penalty of Rs. 124.68 crore was imposed on Reliance Infrastructure, and since the penalty was not paid in consonance with the regulations of Foreign Exchange Management Act, the violations were referred to the Directorate of Enforcement (DoE) for adjudication.

In order to serve the purpose of the project under the automatic route, RNRL Ltd., issued foreign currency convertible bonds of 300 million dollars out of which 275 million dollars were brought to India in the month of May 2007 and were parked in debt mutual funds pending utilisation. It is also alleged that in August 2008, an amount of Two Hundred and Seventy Five Million Dollars was invested in a wholly owned subsidiary in Singapore. The transaction having a cross-border angle, the Reserve Bank of India does not have a privilege of an investigation. The issue has been referred to the Directorate of Enforcement for undertaking an investigation into the matter. It has been ruled that a company which has been alleged for violation of external commercial borrowing regulation can only access ECB through approval Route.

References:

[1] External Commercial Borrowings and Trade Secrets, RBI M. Circular accessed at http://iibf.org.in/documents/ecb-and-trade-credit.pdf on April 28, 2016.

[2] External Commercial Borrowings and Trade Secrets, RBI M. Circular accessed at http://iibf.org.in/documents/ecb-and-trade-credit.pdf on April 28, 2016.