HINESH R. DOSHI & Co. LLP

HINESH R. DOSHI & CO LLP 10^th September, 2023

INTERNATIONAL DEBT FUNDING: INCLUDING EXTERNAL COMMERCIAL BORROWINGS [ECB]

CA HINESH R. DOSHI

NORTH INDIAN REGIONAL COUNCIL (NIRC)

FEMA Online Series

TABLE

OF CONTENTS

POPULAR FUNDING OPTIONS

HINESH R. DOSHI & Co. LLP

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• External Commercial Borrowing [ECB].
• Non Convertible Debentures
• Partially/Optionally Convertible Preference Shares
• Partially/ Optionally Convertible Debentures.

• Equity Share Capital
• Fully convertible Preference Share capital
• Fully convertible Debentures

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HINESH R. DOSHI & Co. LLP

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REGULATORY OVERVIEW

A.P. DIR Series Circulars

Master Direction No.5/2018-19

Updated on 30^th September, 2022

Section 6 (2) (Capital Account Definition) of FEMA, 1999

(Governing Provisions)

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Notification FEMA 3R(Borrowing or Lending) Regulations, 2018

Being a Capital Account Transaction, it is permissible only as stipulated. In case of doubt, always go for RBI approval

FAQs on ECB – 26^th June 2023

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• Commercial loans
• Raised by eligible resident entities
• From recognized non-resident entities
• Conforming to parameters such as
• minimum maturity,
• permitted end-uses,
• non-permitted end-uses,
• maximum all-in-cost ceiling, etc.

WHAT IS EXTERNAL COMMERCIAL BORROWING [ECB]?

FORMS OF ECB

Bank/ Other Loans

Securitized

instruments

Trade Credits > 3 Y

FCCBs/ FCEB

Financial Lease

3

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STATISTICAL REPRESENTATION

OF

ECB REGISTRATIONS

AUTOMATIC ROUTE

APPROVAL ROUTE

Statistics as at 30^thJune, 2023

(Financial year wise)

As available on RBI website

Amount in US$ Million

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ECB RAISING OPTIONS

INR/ FCY ECB

AUTOMATIC ROUTE

APPROVAL ROUTE

• Up to USD 750 million or equivalent per FY from a borrower.
• FCY ECB from foreign equity holder :- Debt equity ratio of 7:1 to be maintained.
• Above ratio not applicable if o/s amount of all ECB (including proposed) is less than USD 5 million.
• Conforming to all parameters prescribed under this ECB framework.

• Entities not conforming to parameters laid down.
• To make an application to RBI through their AD Bank
• RBI Empowered Committee to consider application
• Final decision by RBI

FAQ 19. Eligible Borrower can simultaneously raise both FCY & INR ECB provided all ECBs in compliance with guidelines

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KEY PARAMETERS (CUMULATIVE)

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Eligible Borrowers

FCY ECB

INR ECB

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All entities which are eligible to receive FDI(*)

Port Trusts

SIDBI

Units in SEZ

EXIM Bank of India

Registered entities engaged in micro finance activities

Registered NPOs

Registered Societies/ Trust/ Cooperatives

Non Governmental Organisation

RESPONSIBILITY IS OF THE BORROWER TO ENSURE BORROWING IS IN COMPLIANCE ECB GUIDELINES

(*) As LLPs are not eligible to receive FDI, they cannot raise ECBs

All entities eligible for FCY denominated ECB

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Recognised Lenders

The Lender

Additionally, the following are also the recognized lenders

Multilateral and Regional Financial Institutions

where India is a member country

Individuals, if they are foreign equity holder (*)

Foreign branches / subsidiaries of Indian banks

If they are foreign equity holders

or for subscription to bonds/ debentures listed abroad;

only for FCY ECB (except FCCBs and FCEBs)

(*) holds minimum 25% directly or 51% indirectly in borrower.

Popular form of Lender : Foreign Parent / Holding Co.

should be resident of FATF (#) or IOSCO compliant country

(#) FATF Black list countries as of June 2023 :

North Korea, Iran & Myanmar

Minimum Average maturity period : Should be 3 years (eg. Import / Local sourcing of Capital goods, Overseas investment in JV / WOS, Modernization, New Project, etc. for other than Manufacturing companies as categorized below)

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However, for the specific categories mentioned below, the MAMP will be as prescribed therein:

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MINIMUM AVERAGE MATURITY PERIOD (MAMP)

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(#) Foreign Equity Holder :

• Direct foreign equity holder – min 25% direct equity holding

• Indirect equity holder - min indirect equity holding of 51%

• Group Company with common overseas parent

*ECB cannot be raised from foreign branches/subsidiaries of Indian banks for clause (b) to (e) above

Foreign Equity Holder to continue till the whole tenure of the ECB

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Borrowing purpose Codes

(Specifically mentioned in Form ECB – Box II)

IC

Import of Capital goods

RL

Local Sourcing of Capital Goods (Rupee Expenditure)

SL

On –lending or sub-lending

RF

Refinancing of earlier ECB

NP

New Project

ME

Modernisation/Expansion of existing units

OI

Overseas investment in JV/WOS

MF

Micro Finance Activity

OT

RB

IF

RC

Others (Specify)

Redemption of FCCBs

Infrastructure Development

Working Capital/ general corporate

purpose

RR

Refinancing of rupee loans

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NEGATIVE LIST / RESTRICTED END USE

The ECB proceeds cannot be utilized for the following:

(*) : Except if conditions are met as mentioned in MAM

1. Chit fund or Nidhi Company

2. Investment in Capital Market including margin trading and derivatives

3. Agricultural or Plantation Activities

4. Real Estate Activity (#) or construction of farm houses

5. Trading in Transferrable Development Rights

7. On-lending to entities for the above activities (2, 4, 6) (*) (mentioned in MD)

(#) Any real estate activity involving own or leased property, for buying, selling and renting of commercial and residential properties or land and

also includes activities either on a fee or contract basis assigning real estate agents for intermediating in buying, selling, letting or managing real estate. However, this would not include,

(i) construction/development of industrial parks/integrated townships/SEZ

(ii) purchase/long term leasing of industrial land as part of new project/modernisation of expansion of existing units and

(iii) any activity under ‘infrastructure sector’

6. Equity Investment (mentioned in MD)

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PERMITTED

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FAQ 22.

Can interest during construction stage be paid out of ECB borrowings?

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• Yes, for ECBs raised for project finance during construction, provided the said components are part of project cost and capitalised by the borrower.

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FAQ 27.

Can ECB proceeds be used by eligible resident borrowers for investment in their overseas JV/WOS as per the extant overseas investment guidelines?

🡪 Yes

NOT PERMITTED

HINESH R. DOSHI & Co. LLP

FAQ 23.

Is reimbursement of expenditure incurred in the past a permissible end use under ECB Framework ?

🡪 No

FAQ 24

Can ECB be availed for making equity Investment or buying goodwill?

🡪 No

UTILISATION OF ECB: RBI FAQs

FAQ 25.

Can ECB be availed for making contribution in LLP.

🡪 No

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All in cost ceiling p.a. - Benchmark Rate

(*) A.P. (DIR) Cir No. 19 dated. 8.12.2021, all banks changed their benchmark from LIBOR to any widely accepted alternative reference rate (ARR) for e.g. SOFR - SECURED OVERNIGHT FINANCING RATE for USD or SONIA (Sterling Overnight Index Average) for GBP

[SOFR -5.05% ; SONIA – 5.18% EURIBOR – 3.96%]

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INCLUSIONS

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• Commitment Fees
• Withholding Tax payable in INR
• Prepayment charge/Penal interest not to exceed 2% over the contracted rate of interest

• Rate of Interest
• Other Fees
• Expenses
• Charges
• Guarantee Fees
• ECA Charges whether in FCY on INR

EXCLUSIONS

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ALL IN COST CEILING

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LIMITS &

Change of Currency of Borrowings

CHANGE IN CURRENCY

CURRENCY

INR-ECB

FCY-ECB

INR to FCY

FCY to FCY

FCY to INR

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INR‐ECB

FCY‐ECB

HEDGING

• Guidelines issued by the concerned sectoral or prudential regulator to be followed for hedging,

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• For Infrastructure space companies
• Requires board approved risk management policy
• Mandatory hedge of 70% of ECB exposure if average maturity < 5 years

• Hedging through permitted derivative products with AD Category I banks in India

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• Foreign investor can also access domestic market through branches / subsidiaries of Indian banks abroad or branches of foreign banks with Indian presence on back to back basis

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OPERATIONAL ASPECTS WITH RESPECT TO HEDGING

1

2

3

Coverage

Required to cover the principal as well as the coupon through financial hedges from date of liability created in the books.

• Tenor & Rollover
• Minimum 1 year periodic rollover to ensure nothing is left out unhedged.

• Natural Hedge
• To be considered to the extent of offsetting projected cash flows / revenues in matching currency net off projected outflows within same accounting year

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ECB LIABILITY-EQUITY RATIO

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PARKING OF ECB PROCEEDS

ABROAD

ECB proceeds meant only for foreign currency expenditure can be parked abroad for utilisation

Deposits or CD or other products offered by banks rated not less than AA (-) by S&P/ Fitch IBCA or Aa3 by Moody’s

Deposits with foreign branches/subsidiaries of Indian banks abroad

Treasury bills and other monetary instruments of one-year maturity having minimum rating as mentioned.

Until utilisation, these funds can be invested in the following:

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PARKING OF ECB PROCEEDS

DOMESTICALLY

ECB proceeds meant for Rupee expenditure

Repatriated immediately for credit to their Rupee accounts with AD CAT I banks in India

In term deposits with AD CAT I banks in India for a maximum period of 12 months cumulatively. These term deposits should be kept in unencumbered position.

FAQ 43. Can fixed deposits created out of ECB proceeds, pending utilization, be renewed after completion of maximum permitted period?

🡪 No

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REFINANCING EXISTING ECB

Permitted by raising fresh ECB, provided:

• Outstanding maturity of the original borrowing  is NOT REDUCED.
• all-in-cost of fresh to be LOWER than all-in-cost of existing ECB

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Indian banks are permitted to participate in refinancing of existing ECB, only for highly rated corporates (AAA) and for Maharatna/Navratna public sector undertakings.

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Refinancing of INR ECB with FCY ECB is not permitted.

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Refinancing of ECBs raised under the previous ECB framework (wholly and in part) – permitted subject to adherence to eligibility criteria of existing provisions

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FAQ 32. Refinancing of ECBs raised from foreign equity holders and utilized working capital/general corporate purpose/repayment of Rupees loans is permitted subject to new lenders should also be foreign equity holders & adherence of applicable refinancing guidelines

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Conversion of ECB to Equity

Conversion not to breach applicable sectoral cap under FDI policy

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Permitted Subject To:

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FAQ.41.

Interest accrued on ECB can also be converted into Equity

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SECURITY/ CREATION OF CHARGE

Security

Permissible if clause covered in Agreement

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Creation of Charge

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Movable Property

In case of enforcement/ invocation of charge, the claim of the lender will be restricted to outstanding claim against ECB.

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Financial securities

Pledge of shares of the borrowing company held by the promoters as well as domestic companies of the borrower is permitted.

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Pledge on other financial securities, viz. bonds and debentures, Government securities, Government Saving Certificates, deposit receipts of securities and units of the Unit Trust of India or of any mutual funds

Is permitted.

Immovable Property

Security shall be subject to (the Foreign Exchange Management (Non-debt Instruments) Rules, 2019.);

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Permission should not be construed as permission to acquire immovable property by overseas lender/security trustee;

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In case of enforcement / invocation, property should be sold to Person Resident in India and proceeds shall be repatriated to liquidate the outstanding ECB

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• Shall be considered as contraventions

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• Non compliance to ECB parameters such as:
• eligibility criteria,
• Drawdown without obtaining LRN,
• Non-adherence to reporting requirements etc.

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• Shall be regularized by making an application for compounding to RBI.

Payment made within 6months

(approved extension upto 3 years)

DEEMED ECB

(TC outstanding> 3years)

DEEMED ECB

DEEMED ECB

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REPORTING REQUIREMENTS

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ECB

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FORM ECB - DOCUMENTS REQUIRED

• Loan Agreement covering amount, purpose, interest, drawdown, repayment schedule, security clause, penal interest, etc
• Working of Minimum Average Maturity Period (MAMP) as prescribed by the regulation
• Brief Profile of the Borrower and Lender & Declaration from Borrower and Lender
• CA Certification of Form ECB (Summary Sheet)
• Form ECB duly filled

DSIM – Department of Statistics and Information Management

LRN – Loan Registration Number

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CONSIDERATIONS WHILE AVAILING ECB

* SUBJECT TO CERTAIN TERMS AND CONDITIONS

Permitted End Use as per RBI guidelines

Adhere to Minimum Maturity Period

Drawdown with LRN

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REPORTING REQUIREMENTS

*Subject to certain terms & conditions

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CHANGES IN ECB PARAMETERS

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• Revised Form ECB* for changes in parameters in consonance with ECB Norms should be reported to the DSIM through AD Bank not later than 7 days from the changes effected.

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• While submitting the revised Form ECB, the changes should be specifically mentioned.

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• The above should be with the consent of the Lender(s).

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Form ECB‐ 2 Return

(Certified by CA/CS)

MONTHLY RETURN

ECB - 2

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Through Designated AD Bank to DSIM, RBI

To be submitted (in physical form) within 7 working days from the close of month to which it relates

FAQ 40.

Is LSF applicable to each Form ECB2 and to nil returns as well ?

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🡪 Yes

FAQ 39.

Is LSF Applicable to old ECB 2 returns ?

🡪 No. LSF provisions will be applicable to ECB returns submitted from February 2019 onwards

NIL return – To be filed even if there is no transaction

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FULL CONVERSION

PARTIAL CONVERSION

Within 7 working days from the close of month to which it relates

REPORTING COMPLIANCES

*Once reported, filing of ECB‐2 in the subsequent months is not necessary.

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CONVERSION OF ECB INTO EQUITY

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• Form FC‐ GPR - Online on FIRMS portal
• Form ECB‐2 - ''ECB Wholly Converted to Equity'' should be indicated on top of the ECB‐ 2 form. *

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• Form FC‐ GPR - conversion of shares - Online on FIRMS portal
• Form ECB 2 - remaining portion of ECB - ''ECB Partially Converted to Equity'' should be clearly indicated on top of the ECB‐ 2 form.

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REGULARISATION OF CONTRAVENTIONS

Delay in reporting compliances to be regularised by payment of

“ Late Submission Fee”

Regularisation of contravention by payment of LSF is ONLY for reporting delays.

Any other contravention under ECB shall have to be regularised by making an

application to RBI for compounding the said contravention

“n” is the year number of years of delay in submission rounded – upwards to the nearest month and expressed up to 2 decimal points.

“A” is the amount involved in the delayed reporting.

LSF amount is per return. However, for any number of Form ECB-2 returns, delayed submission for each LRN will be treated as one instance for the fixed component.

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Amount

Eligibility

ECB FOR START UPS

An entity recognized as a Startup by the Central Government as on date of raising ECB

MAMP

Form and

End-use

All-in-costs

Recognized Lender

USD 3 million or equivalent per financial year either in INR or any other convertible foreign

currency or a combination of both

Minimum average maturity period of 3 years

Mutually agreed between the borrower and lender

Lender / investor to be a resident of FATF compliant country

Overseas branches/subsidiaries of Indian banks & overseas WOS/JV of an Indian company - Not permissible

Form - Loans or non-convertible or optionally convertible or partially convertible preference shares.

End Use - For any expenditure in connection with the business of borrower

Currency

Conversion

Denominated in any freely convertible currency or in INR or a combination thereof

Conversion of ECB into equity is freely permitted –rate as per date of agreement

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GENERALLY COMMITTED CONTRAVENTIONS IN ECB

Drawdown of ECB before obtaining LRN

Non-adherence to the MAMP of the loan

Not an eligible borrower/ Availment from non recognised lender

Not a permissible end use

Delay in payment of Trade credits > 3 years

Non adherence to reporting requirements

Breach of All in cost

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TRADE CREDIT FRAMEWORK

Buyers Credit

Trade credit (TC) - credits extended by the overseas supplier, bank, financial institution and other permitted recognized lenders for maturity, as prescribed in Trade Credit framework, for imports of capital goods permissible under the Foreign Trade Policy of the Government of India.

Trade Credit

Suppliers Credit

Refers to loans for payment of imports in India arranged by the importer from overseas bank or financial institution

Relates to the credit for imports in India extended by the overseas supplier

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Amount

Eligibility

Buyers Credit and Suppliers Credit

Person resident in India acting as an importer

Period of TC

All-in-cost ceiling p.a.

Recognized Lender

For Oil/gas refining and marketing, Airline and shipping companies: USD 150 million or equivalent per import transaction

For others : USD 50 million or equivalent per import transaction

For import of capital goods - Upto 3 years form the date of shipment

For import of non-capital goods:

• Upto 1 year from the date of shipment or the operating cycle whichever is less
• For shipyards/shipbuilders - Upto 3 years from the date of shipment

FCY denominated Trade Credit (TC):

For existing TCs linked to LIBOR whose benchmarks are changed to ARR – Benchmark Rate plus 350 bps spread

For new TCs – Benchmark rate plus 300 bps spread

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INR denominated TC: Benchmark Rate plus 250 bps spread

For Buyers Credit: Banks, financial institutions, foreign equity holder(s) located outside India and financial institutions in IFSCs located in India.

For Suppliers Credit: Supplier of goods located outside India

Monthly Reporting

Form TC to be submitted by AD Category I Bank (in MS-Excel file through email) not later than 10^th of the following month.

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• For the purpose of raising TC, importer may offer security of:
• Movable Assets(including financial assets)
• Immovable Assets (excluding land in SEZs)
• Corporate or Personal guarantee

SECURITY FOR TRADE CREDIT

Corporate/Personal Guarantee of Importer

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• Bank guarantee may be given by the AD bank in favour of overseas lender not exceeding amount of TC;
• TC may also be secured by overseas guarantee issued by foreign banks/overseas branches of Indian banks;
• Period – Not to exceed maximum permissible period for TC;
• Issuance of guarantee will be subject to compliance with the provisions contained in Department of Banking Regulation Master Circular on Guarantees and Co-acceptances

Bank Guarantee

HINESH R. DOSHI & CO. LLP

Chartered Accountants

+91-22-66008100/8111

hinesh@hineshdoshi.com

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