The low interest rate on borrowing from various types of entities abroad acts as huge incentives for Companies, SME and various other businesses to take loan from external sources instead of seeking loans from domestic financial institutions. To read about the benefits of taking External Commercial Borrowing, click here.

However, before sanctioning a loan, foreign lenders are likely to insist on some form of security or a personal or corporate guarantee by the promoter / promoting company, to safeguard their interest. This post explains the procedure for creation of security under exchange regulations related to External Commercial Borrowings.

What security does the borrower needs to give while securing loan from external source under ECB?

Charge over the immovable assets and financial securities such as shares in favour of the overseas lender acts as security for securing External Commercial Borrowing(ECB). The procedure for creation of the charge is explained below.

Procedure of creation of charge

Borrower is supposed to take “No Objection”  from an Authorised Dealer bank under the Foreign Exchange Management Act (FEMA), 1999 for creation of charge on immovable assets, financial securities and issue of corporate or personal guarantees in favour of overseas lender.

Conditions to be fulfilled for getting a no-objection certificate

The bank is may grant a “No Objection” only on fulfillment of following conditions by the Borrower:

(i) The External Commercial Borrowing is strictly in compliance with ECB Regulations and guidelines.

(ii) The loan agreement has a specific security clause that makes it mandatory for the borrower to create charge on immovable assets / financial securities / furnish corporate or personal guarantee

(iii) the loan agreement has been signed by both the parties i.e. lender and the borrower

(iv) the borrower has obtained Loan Registration Number (LRN) from the Reserve Bank

(read further to know about registration requirement for securing ECB)

However, in case of charge on immovable assets, fulfillment of certain prior conditions are necessary for the grant of no objection. The conditions are as follow:-

(i) The period of such charge on immovable assets has to be co-terminus with the maturity of the underlying ECB.

(ii) Such ‘no objection’ should not be construed as a permission to acquire immovable asset (property) in India, by the overseas lender / security trustee.

(iii) In the event of enforcement / invocation of the charge, the immovable asset (property) will have to be sold only to a person resident in India and the sale proceeds shall be repatriated to liquidate the outstanding ECB.

Procedure for issuing guarantee

Banks, financial institutions and Non-Banking Financial Institution (NBFC) are generally not permitted to issue guarantee, standby letter of credit, letter of undertaking or letter of comfort for securing the loan under External Commercial Borrowing (ECB) regulations.

However, in case of small and medium enterprises (SME), Textile Companies,RBI under the approval route can consider applications for providing guarantee / standby letter of credit or letter of comfort by  banks, financial institutions relating to ECB on merits subject to prudential norms.

Conditions to be fulfilled for no-objection for guarantee

The ‘no objection’ to the resident ECB borrower for issue of corporate or personal guarantee under FEMA, 1999 may be conveyed after obtaining –

(i) Board Resolution for issue of corporate guarantee from the company issuing such guarantees, specifying names of the officials authorised to execute such guarantees on behalf of the company or in individual capacity.

(ii) Specific requests from individuals to issue personal guarantee in connection with the borrowing, indicating the details of the ECB.

(iii) Ensuring that the period of such corporate or personal guarantee is co-terminus with the maturity of the underlying ECB.

Compliance requirements for creation and enforcement of security

However, creation and enforcement of charge over immovable assets and financial securities (such as shares) would be subject to Regulation 8 of Foreign Exchange Management (Acquisition and transfer of immovable property in India) Regulations, 2000, [FEMA 21/RB-2000 dated May 3, 2000] and Regulation 3 of Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations [Notification No. FEMA 20/RB-2000 dated May 3, 2000], respectively.

Parking of ECB Proceeds before Utilisation

The proceeds obtained under External Commercial Borrowing can be parked overseas until actual requirement in India, or can be kept with the overseas branches / subsidiaries of Indian banks abroad. The fund obtained can also be remitted to India for credit to their Rupee accounts with Authorised Dealer banks in India, until it is required to be utilised for the permitted end use.

Written by Srishti Aishwarya and Abhyudaya Agarwal

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