EXTERNAL COMMERCIAL BORROWING

OBJECTIVE OF THE SESSION

• Understanding the ECB Framework
• ECB Process and FEMA Compliance
• Practical Aspects and Common Issues

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BACKGROUND & EVOLUTION OF ECB FRAMEWORK

• Limited availability of long-term domestic funds in the 1990s.

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• Need for low-cost global financing.

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• To regulate foreign borrowings and manage external debt.

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• FEMA (Borrowing or Lending in Foreign Exchange) Regulations, 2000
• Track-based ECB Framework (2015)
• Foreign Exchange Management (Borrowing and Lending) Regulations, 2018
• RBI Master Direction – ECB, Trade Credit & Structured Obligations (2019).

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IMPORTANT TERMS USE IN ECB

AD Bank: RBI-approved ECB handling bank.

Automatic Route: ECB without RBI approval.

Approval Route: ECB with RBI permission.

Avg. Maturity: Minimum ECB loan period.

LRN: RBI’s unique ECB registration number.

Form ECB: ECB application form

ECB-2: Monthly ECB Return.

FC-GPR: Form for ECB-to-equity conversion.

Foreign Equity

Holder: A non-resident entity holding at least equity in Company

Parking: Temporary holding of ECB funds.

Hedging: Risk cover against forex fluctuation.

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DEFINITION OF EXTERNAL COMMERCIAL BORROWING

External Commercial Borrowings (ECBs) are commercial loans availed by eligible resident entities in India from recognized non-resident lenders, in foreign or Indian currency, under the regulatory framework prescribed by the Reserve Bank of India (RBI) and Foreign Exchange Management Act, 1999 (FEMA).

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WHAT IS COMMERCIAL LOAN

• INSTRUMENTS COVERED AS ECB (FCY):
• Loans including bank loans;
• floating/ fixed rate notes/ bonds/ debentures (other than fully and compulsorily convertible instruments);
• Trade credits beyond 3 years; FCCBs; FCEBs and Financial Lease.

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• INSTRUMENTS COVERED AS ECB (INR):
• Loans including bank loans;
• floating/ fixed rate notes/bonds/ debentures/ preference shares (other than fully and compulsorily convertible instruments);
• Trade credits beyond 3 years; and Financial Lease.
• Also, plain vanilla Rupee denominated bonds issued overseas, which can be either placed privately or listed as per host country regulations.

�ELIGIBLE BORROWERS�

• All entities eligible for FDI,

the following entities are also eligible to raise ECB:

Port Trusts, SEZ units, SIDBI, EXIM Bank of India

• Where ECB in INR Denominated following are also Eligible:-

Registered entities engaged in micro-finance activities, viz., registered Not for Profit companies, registered societies/trusts/ cooperatives and Non-Government Organizations.

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Note:- Note: LLPs do not qualify as per ECB FAQ no.5

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WHY LLP ARE EXCLUDE FORM ELIGIBLE BORROWER�

FDI definition as per FDI Policy

‘Foreign Direct Investment’ means investment through capital instruments by a person resident outside India in an unlisted Indian company; or in ten per cent or more of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company

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Foreign Investment:

‘Foreign Investment’ Means any investment made by a person resident outside India on a repatriable basis in capital instruments of an Indian company or to the capital of an LLP company

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RECOGNIZE LENDER

• From FATF or IOSCO compliant jurisdictions
• Multilateral/regional financial institutions where India is a member country will also be considered as recognized lenders
• Individuals only if they are foreign equity holders or invest via listed bonds
• Foreign branches/subsidiaries of Indian banks only for FCY ECB (except FCCBs and FCEBs).

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Foreign Equity Holder means direct foreign equity holder with minimum 25% direct equity holding in the borrowing entity, (b) indirect equity holder with minimum indirect equity holding of 51%, or (c) group company with common overseas parent.

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APPLICABLE LEGAL FRAMEWORK

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• Foreign Exchange Management Act, 1999 (FEMA)
• Foreign Exchange Management (Borrowing and Lending) Regulations, 2018
• RBI Master Directions on External Commercial Borrowings (ECB), 2019
• Foreign Exchange Management (Guarantees) Regulations, 2000
• Companies Act, 2013
• FDI Policy (applicable where equity conversion is contemplated)

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CURRENCY OF ECB�

• ECB can be raised in FCY or INR Denomination
• ECB Denomination – Refers to the currency mentioned in the loan agreement in which funds are borrowed
• ECB can be borrowed in any freely convertible foreign currency
• Repayment can also be made in a different currency if ECB raised in FCY, subject to agreement with the lender and RBI rules
• IF ECB Raised in INR can not be Repaid In foreign Currency

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ECB ROUTES��

AUTOMATIC ROUTE

• No prior RBI approval
• Power to approve ECB to AD Bank only
• ECB up to USD 750 million (for startup USD 3 million) sector‑end‑use permitted under FDI Policy
• ECB liability-equity ratio for ECB raised under the automatic route cannot exceed 7:1

Note :ECB liability-equity not applicable if the outstanding amount is up to 5 million

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APPROVAL ROUTE

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Prior approval of RBI required

PROHIBITED END‑USES�

• Real estate activities
• Capital market investments
• Equity Investments
• Working capital (unless lender is foreign equity holder)
• General corporate purposes (unless lender is foreign equity holder)
• Repayment of rupee loans (unless lender is foreign equity holder)
• On‑lending for the above (except NBFCs)

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ALL IN COST (AIC)

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• All-in-cost all cost associated with ECB such as interest, fees, charges, guarantee fees etc.

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• It excludes commitment fees and withholding tax (if paid in INR).

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• For FCCBs, issue expenses must not exceed 4% (or 2% for private placements) of the issue size.

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• Borrowers must pay all costs from their own funds ECB/TC money cannot be used to pay interest or charges.

ECB LIMITS & ALL‑IN‑COST (AIC)

• AIC Ceiling – Benchmark Rate plus 550 bps spread
• For existing ECBs linked to London Interbank Offer Rate (LIBOR) whose benchmarks are changed to ARR
• Benchmark rate plus 500 bps spread(for New ECB)(5% Indian)
• All-in-cost should be within the applicable ceiling at all times,

EXAMPLE FOR ALL IN COST

• ABC Pvt Ltd raises an ECB of USD 1 million with the following terms:
• Benchmark Rate (SOFR): 5%
• Processing Fee: 1%, Interest: 3%, Commitment fee by bank is 1%

All in Cost = Benchmark rate + 500 bps spread

4% = 5% + 5%

4% = 10%

AIC is with in Limit

MINIMUM AVERAGE MATURITY (MAMP)

EXAMPLE FOR MAMP CALCULATION

LOAN AGREEMENT ESSENTIALS��

• Drawdown schedule & tenor
• Interest rate
• Repayment milestones
• Avg Maturity Period
• Waiver/foreclosure option
• Obligations of the borrower
• Conversion options (if eligible under FDI)
• Governing law & jurisdiction
• Heading condition

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DRAFT LOAN AGREEMENT�

DRAFT LOAN AGREEMENT�

DRAFT LOAN AGREEMENT�

DRAWDOWN SCHEDULE �

• Drawdown Period refers to the timeframe within which the borrower can avail/disburse the sanctioned loan amount under the ECB agreement.
• Amount of ECB must be received with in Drawdown period
• Any Changes in drawdown period must approve from AD Bank in Form ECB

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SUMMARY SHEET (SS) FOR FORM ECB�

FORM ECB-2

FORM ECB-2

FORM ECB-2

FORM ECB-2

FORM ECB

FORM ECB

FORM ECB

PENALTY FOR NON-COMPLIANCE

CONVERSION OF ECB INTO EQUITY

• Permitted only if inline with FDI rules
• Require lender consent & embedded in loan terms
• Must comply section 62(3) of the Companies Act 2013
• Must be reported in Form ECB (or revised form) to RBI
• Company must comply applicable pricing guidelines
• In case of full conversion FCGPR to be filed with RBI
• In case of partial conversion FCGPR and ECB Return to be filed with RBI

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FAQ ON ECB BY RBI

• Where can one get the details of extant External Commercial Borrowings (ECB) and Trade Credits (TC) framework?

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• Whose responsibility is it to ensure compliance with ECB guidelines?
• Are LLPs eligible to raise ECBs?

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• Master Direction No. 5 on ‘External Commercial Borrowings, Trade Credits and Structured Obligations dated March 26, 2019

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• Borrower Company

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• NO LLP cannot be eligible for FDI can’t raise ECB

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FAQ ON ECB BY RBI

• Can INR denominated ECB be converted into foreign currency ECB?

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• Can the foreign equity(25% or 51%) holder dispose-off the holding once ECB is contracted?
• Can repayment of principal of ECB start before the completion of MAMP?

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• Any entity raising INR denominated ECB is not permitted to convert the liability arising out of INR ECB into foreign currency liability in any manner

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• No, minimum equity holding requirements, must be complied with throughout the entire tenure of the ECB
• Yes allowed

FAQ ON ECB BY RBI

• Does the equity in “ECB liability to Equity ratio” include non-convertible preference capital?
• Should the proposed ECB be added to all outstanding ECBs for arriving at the individual limit for raising of ECBs?

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• No

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• The individual limit for raising ECB under the automatic route will take into account all ECBs raised in the financial year including the proposed one.

FAQ ON ECB BY RBI

• Can ECB be availed of for making equity investment domestically or buying goodwill?
• Can ECB be availed of for making contribution in an LLP?
• Can an eligible borrower raise fresh foreign currency ECB for repayment of existing Rupee denominated ECB?

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• No. Equity investment either directly or indirectly (through purchase of goodwill) is not permitted.
• No, it is not permitted.

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• Refinancing of Rupee denominated ECB with Foreign Currency denominated ECB is not permitted.

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FAQ ON ECB BY RBI

• Can ECB proceeds be used by eligible resident borrowers for investment in their overseas JV/WOS?

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• Do FCNR (B) loans given by AD Category I banks come under the ECB framework?

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• Yes. ECB proceeds can be utilized for overseas investment as per FEMA ODI Regulations.

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• No, foreign currency loans given domestically by AD Category I banks out of the proceeds of FCNR (B) deposits do not come under the ECB framework.

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FAQ ON ECB BY RBI

• Individuals can be recognized lenders if they are foreign equity holders or for subscription to bonds/debentures listed abroad. Should such lenders also be from FATF/IOSCO compliant jurisdictions?
• Is the debit balance in the profit and loss account for losses incurred by the Eligible Borrower, if any, required to be deducted from the free reserve while calculating the ECB liability-equity ratio?

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• Yes allowed

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• Yes

FAQ ON ECB BY RBI

• Does all-in-cost ceiling apply on a continuous basis or can it be calculated even on an average basis?
• In light of the New ECB framework, does the borrower need to file revised Form ECB?
• Is LSF applicable for each Form ECB 2 and to nil returns as well?
• Can the interest accrue on ECB be converted into Equity under the extant norms?

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• All-in-cost should Yes,

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• No, in case no changesYes,made in terms and conditions of ECB, there is no need to file revised Form ECB
• Yes, LSF is applicable for non-submission of each Form ECB 2, including Nil returns.
• Yes as per ECB guidelines

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PRECAUTIONS HAVE TO BE TAKEN AT THE TIME OF FILING OF FORM ECB IN RESPECT OF AN ECB?

• Submit Form ECB within 7 days of signing of loan Agreement
• draw-down in respect of an ECB should happen only after obtaining the Loan Registration Number (LRN) from RBI.
• It should be ensured that all terms and conditions of the ECB are reported correctly in Form ECB and none of the columns are left blank
• File accurate ECB‑2 returns monthly by the 3rd to AD Bank.
• Any changes to terms/end‑use must be reported via revised Form ECB (within 7 days).
• Ensure penal charges are clearly disclosed, non-capitalized, and proportionate.

DO’S & DON’TS SUMMARY�

Do’s

✔ Check eligibility of borrower & lender

✔ Choose correct route

✔ Adhere to end-use rules

✔ Timely file ECB forms & obtain LRN

✔ Maintain MAMP

✔ Hedge forex risk

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DON’TS:

❌ Do not use ECB for prohibited uses

❌ Do not delay ECB filings

❌ Do not exceed USD 750 million / AIC cap

❌ Do not work with non-recognised lenders

❌ Do not mix ECB funds with domestic funds for restricted purposes

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THANK

YOU

Presented by:-

CS Akash Verma

Organised and Conducted by:-

Chronicle Advisors LLP and Team