This article is written by Falaq Patel, 4^th year, BBA-LLB, Symbiosis Law School, Hyderabad.

External Commercial Borrowings or ECBs are commercial loans raised by eligible resident entities from recognised non-resident entities which must conform to parameters laid down by the Reserve Bank of India along with the Foreign Exchange Management Act. Such parameters include minimum maturity period, permitted and non-permitted end uses, maximum all-in-cost ceiling, etc. These parameters are applicable in toto and not to be done away with on a standalone basis.

In essence, ECB was introduced by the RBI in order to help India tackle the macro-economic crises in the market faced due to fluctuating currency values to stabilize the oscillating rupee. ECB acts as a facilitator to entities operating in India to clear their debts by borrowing from non-resident entities in foreign currency, most of which are foreign commercial banks and other recognised institutions mentioned in RBI’s recent notification dated Jan 16, 2019.

This notification declares a new framework for external commercial borrowings as an ongoing effort to liberalise and rationalise the ECB policy announced earlier vide notification dated April 27, 2018, while working with the Government of India to promote ease of doing business.

The significant changes brought to the ECB framework are as follows –

Reclassification of Tracks provided for ECB in the Master Directions provided RBI–

The said modification resulted in the merging of Track I and Track II as ‘Foreign Currency denominated ECB’ (FCY) and merging Track III and rupee-denominated bonds framework (as added in the notification dated January 16, 2019) as ‘INR denominated ECB’. This bifurcation leads to the formation of two broad categories of foreign currency debt and rupee debt raised overseas.

The list of eligible borrowers and lenders expanded –

Easing the classification to make it more compatible with the provisions made for new entries in borrowers and Masala Bonds as a part of the rupee denominated ECB, the list of eligible borrowers is expanded to include all entities which are eligible to receive foreign direct investment. This is a significant change which enables the previously barred Limited Liability Partnerships (LLPs), trading entities, etc. to avail ECB.

Meanwhile, an entity being a resident of a country which is compliant with Financial Action Task Force (FATF) or International Organization of Securities Commission (IOSCO) becomes a Recognised Lender under the new framework. Furthermore, the list even comes to include multilateral and regional financial institutions where India is a member country, related party lending for Masala Bonds and even individuals who are foreign equity holders or subscribed to bonds/debentures listed abroad.

A conclusive list is provided in here.

Minimum average maturity period (MAMP) relaxed –

As opposed to the earlier provisions for MAMP ranging from 1/3/5 years for medium term, 10 years for long term and 3/5 years for Rupee denominated ECB; the revised framework provides for a 3 year minimum average maturity period across all tracks and forms irrespective of the total amount raised through ECB with a stark exception for Manufacturing sector companies raising up to USD 50 million or its equivalent and ECBs availed from foreign equity holders to be utilised for working capital purposes or repayment of rupee loans etc.; the MAMP is 1 year and 5 years respectively.

All-in-Cost Ceilings –

The ceiling for all costs including rate of interest, other fees, expenses, charges, guarantee fees, Export Credit Agency (ECA) charges, whether paid in foreign currency or Indian Rupees (INR) but will not include commitment fees and withholding tax payable in INR, etc. are fixed at a benchmark rate of 450 basis point plus.

It also includes cases of fixed rate loans, the swap cost plus spread should not be more than the floating rate plus the applicable spread. Additionally, for Foreign Currency Convertible Bonds (FCCBs) the issue related expenses are set not to exceed 4 per cent of issue size and in case of private placement, and not to exceed 2 per cent of the issue size, etc. Various components of all-in-cost have to be paid by the borrower without taking recourse to the drawdown of ECB/ TC, i.e., ECB/TC proceeds cannot be used for payment of interest/charges.

Liberalisation of borrowing limit –

The new framework has also raised the ECB for eligible borrowers up to USD 750 million or equivalent per financial year as opposed to the sector-wise limits imposed in the erstwhile notification. Further, in case of FCY denominated ECB raised from direct foreign equity holder, the ECB liability-equity ratio for ECBs raised under the automatic route cannot exceed 7:1 barring those ECBs the outstanding amount of which is up to USD 5 million or equivalent.

Provision for Late Submission Fee –

The new framework has also introduced a late submission fee for delay in reporting of the drawdown of ECB proceeds before obtaining the LRN or delay in submission of Form ECB. The fee ranges from Rs. 5,000-50,000 per year, or Rs. 1 lakh per year, depending on the delay.

While these relaxations and inclusions are commendable for helping borrowers keep up with their businesses through foreign and national currency funding from non-resident entities, there are some limitations that can be highlighted, such as –

1. The expanded list of borrowers, while including entities eligible for FDI along with the existing borrowers, bars other businesses, such as casinos, chit funds, Nidhi companies, real estate businesses and companies not open to private sector investment – railways, atomic energy, etc.
2. The End-Use restrictions prohibit companies availing ECBs from using the funds raised in the capital market, real estate, construction or development of SEZs, industrial parks, integrated townships, setting up a chit fund or Nidhi company, agricultural or plantation activities, trading in Transferable Development Rights (TDR), etc. While the revised framework is set up to contribute to the government’s agenda of ease in doing business, it does seem to setback these entities from flourishing through ECB facilities.
3. With the new and broad framework for FCY borrowings, the RBI will not be able to distinguish between long term and short term loans, narrowing refinancing options. This entails causing a risk to dollar refinancing which became a means for refinancing domestic rupee loans for meeting the debt capital requirements of an in case of long term ECB.
4. The new framework is also silent on structured obligations for trade credit which were included in the erstwhile ECB regulations making it unclear if the same remains relevant or shelved.

Nonetheless, the new framework is a step forward in the feat to improve the ease of doing business in India and providing a regulated inflow of money in the market. Provisions for hedging, start-up ECBs, Standard Operating Procedure (SOP) for untraceable entities, provision for converting ECB into equity, etc. not only make external commercial borrowings a favourable means for fundraising but can also prove to be instrumental in liberalising the Foreign Portfolio Investment framework. It is also opposite that the RBI continues to revise and reassess the regulations to ensure maximum relevancy and efficiency in governing the external commercial borrowings from time to time.