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Insight On External Commercial Borrowing (ECB)

March 6, 2013
External Commercial Borrowings (ECB) is an instrument used in India to facilitate the access to foreign money by Indian Corporates. ECB refer to 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 3 years. The brief RBI regulations relating to ECB are detailed below:
Particulars
Automatic Route
Approval Route
Eligible Borrowers
  1. Corporates, registered under the Companies Act except financial intermediaries (such as Banks, Financial Institutions (FIs), Housing Finance Companies (HFCs) and NBFCs) are eligible to raise ECB. Section 25 Companies that are involved in micro finance activities are eligible under this route.
  2. Individuals, Trusts and Non- Profit making Organisations are not eligible to raise ECB.
  3. Units in Special Economic Zones (SEZ) are allowed to raise ECB for their own requirement. However, they cannot transfer or on-lend ECB funds to sister concerns or any unit in the Domestic Tariff Area.
  4. Non-Government Organizations (NGOs) engaged in micro finance activities are eligible to avail of ECB.
  5. Micro Finance Institutions (MFIs) engaged in micro finance activities and registered under the Societies Registration Act, 1860/Indian Trust Act, 1882/conventional state-level cooperative acts/the national level multi-state cooperative legislation/under the new state-level mutually aided cooperative acts (MACS Act) are eligible to avail ECBs.
  6. NGOs engaged in micro finance and MFIs registered as societies, trusts and cooperatives and engaged in micro finance
    1. should have a satisfactory borrowing relationship for at least 3 years with a scheduled commercial bank authorized to deal in foreign exchange in India and
    2. would require a certificate of due diligence on `fit and proper’ status of the Board/ Committee of management of the borrowing entity from the designated AD bank.
The following types of proposals for ECB are covered under the Approval Route.
  1. On lending by the EXIM Bank for specific purposes will be considered on case by case basis.
  2. Banks and financial institutions which had participated in the textile or steel sector restructuring package as approved by the Government are also permitted to the extent of their investment in the package and assessment by Reserve Bank based on prudential norms. Any ECB availed for this purpose so far will be deducted from their entitlement.
  3. ECB with minimum average maturity of 5 years by Non-Banking Financial Companies (NBFCs) from multilateral financial institutions, reputable regional financial institutions, official export credit agencies and international banks to finance import of infrastructure equipment for leasing to infrastructure projects.
  4. Infrastructure Finance Companies (IFCs) i.e. Non-Banking Financial Companies (NBFCs), categorized as IFCs, by the Reserve Bank, are permitted to avail of ECBs, including the outstanding ECBs, beyond 50 per cent of their owned funds, for on-lending to the infrastructure sector as defined under the ECB policy, subject to their complying with the following conditions:
    1. compliance with the norms prescribed in the DNBS Circular DNBS.PD.CCNo.168 / 03.02.089 /2009-10 dated February 12, 2010
    2. hedging of the currency risk in full.
  5. Foreign Currency Convertible Bonds (FCCBs) by housing finance companies satisfying the following minimum criteria:
    1. the minimum net worth of the financial intermediary during the previous three years shall not be less than Rs. 500 crore,
    2. a listing on the BSE or NSE,
    3. minimum size of FCCB is USD 100 million,
    4. the applicant should submit the purpose / plan of utilization of funds.
  6. Special Purpose Vehicles, or any other entity notified by the Reserve Bank, set up to finance infrastructure companies / projects exclusively, will be treated as Financial Institutions and ECB by such entities will be considered under the Approval Route.
  7. Multi-State Co-operative Societies engaged in manufacturing activity satisfying the following criteria
    1. the Co-operative Society is financially solvent and
    2. the Co-operative Society submits its up-to-date audited balance sheet.
  8. SEZ developers can avail of ECBs for providing infrastructure facilities within SEZ, as defined in the extant ECB policy.
  9. Developers of National Manufacturing Investment Zones (NMIZs) can avail of ECB for providing infrastructure facilities within SEZ, as defined in the extant ECB policy.
  10. Eligible borrowers under the automatic route other than corporates in the services sector viz. hotel, hospital and software can avail of ECB beyond USD 750 million or equivalent per financial year.
  11. Corporates in the services sector viz. hotels, hospitals and software sector can avail of ECB beyond USD 200 million or equivalent per financial year.
  12. Service sector units, other than those in hotels, hospitals and software,subject to the condition that the loan is obtained from foreign equity holders. This would facilitate borrowing by training institutions, R &D, miscellaneous service companies, etc.
  13. Corporates which have violated the extant ECB policy and are under investigation by the Reserve Bank and / or Directorate of Enforcement are allowed to avail of ECB only under the approval route.
  14. Cases falling outside the purview of the automatic route limits and maturity period.
Amount and Maturity
  • The maximum amount that can be raised by a corporate other than those in the hotel, hospital and software sectors through ECBs under the automatic route is USD 750 million or its equivalent during each financial year
Corporates in the services sector viz. hotels, hospitals and software sector are allowed to avail of ECB up to USD 200 million or its equivalent in a financial year for meeting foreign currency and/ or Rupee capital expenditure for permissible end-uses. The proceeds of the ECBs should not be used for acquisition of land..
  • ECBs upto USD 20 million or equivalent in a financial year should have minimum average maturity period of three years. ECBs upto USD 20 million can have call / put options provided the minimum average maturity period of three years is complied with before exercising the call/put option.
  • ECBs above USD 20 million and upto USD 750 million or equivalent should have minimum average maturity period of five years.
  • NGOs engaged in micro finance activities and MFIs can raise ECB up to USD 10 million or its equivalent during a financial year. However, designated AD bank has to ensure that at the time of drawdown the forex exposure of the borrower is fully hedged.
Eligible borrowers under the automatic route other than corporates in the services sector viz. hotel, hospital and software can avail of ECB beyond USD 750 million or equivalent per financial year. Corporates in the services sector viz. Hotels, hospitals and software sector are allowed to avail of ECB beyond USD 200 million or its equivalent in a financial year for meeting foreign currency and/or Rupee capital expenditure for permissible end-uses. The proceeds of the ECBs should not be used for acquisition of land. Indian companies which are in the infrastructure sector, as defined under the extant ECB guidelines, can avail of ECBs in Renminbi (RMB), subject to an annual ceiling of USD one billion for the entire sector, pending further review.
All in Cost Ceiling All-in-cost includes rate of interest, other fees and expenses in foreign currency except commitment fee, pre-payment fee, and fees payable in Indian Rupees. The payment of withholding tax in Indian Rupees is excluded for calculating the all-in-cost. The all-in-cost ceilings for ECB are reviewed from time to time. All-in-cost includes rate of interest, other fees and expenses in foreign currency except commitment fee, pre-payment fee, and fees payable in Indian Rupees. The payment of withholding tax in Indian Rupees is excluded for calculating the all-in-cost. The all-in-cost ceilings for ECB are reviewed from time to time.
End Use permitted
  • Investment e.g., import of capital goods (as classified by DGFT in the Foreign Trade Policy), by new or existing production units, in real sector - industrial sector including small and medium enterprises (SME), infrastructure sector and specified service sectors, namely, hotel, hospital, software in India.
  • Utilization of ECB proceeds is permitted for first stage acquisition of shares in the disinvestment process and also in the mandatory second stage offer to the public under the Government’s disinvestment programme of PSU shares.
  • Interest During Construction (IDC) for Indian companies which are in the infrastructure sector, where “infrastructure” is defined as per the extant ECB guidelines, subject to IDC being capitalized and forming part of the project cost.
  • For lending to self-help groups or for micro-credit or for bonafide micro finance activity including capacity building by NGOs engaged in micro finance activities.
  • Payment for Spectrum Allocation.
  • Infrastructure Finance Companies (IFCs) i.e. Non Banking Financial Companies (NBFCs) categorized as IFCs by the Reserve Bank, are permitted to avail of ECBs, including the outstanding ECBs, up to 50 per cent of their owned funds, for on-lending to the infrastructure sector as defined under the ECB policy, subject to their complying with the prescribed conditions.
  1. Investment [such as import of capital goods (as classified by DGFT in the Foreign Trade Policy), implementation of new projects, modernization/expansion of existing production units] in real sector - industrial sector including small and medium enterprises (SME) and infrastructure sector - in India.
  2. Overseas direct investment in Joint Ventures (JV)/Wholly Owned Subsidiaries (WOS) subject to the existing guidelines on Indian Direct Investment in JV/WOS abroad.
  3. Interest During Construction (IDC) for Indian companies which are in the infrastructure sector, where “infrastructure” is defined as per the extant ECB guidelines, subject to IDC being capitalized and forming part of the project cost.
  4. In Telecom sector, for spectrum allocation may, initially, be met out of Rupee resources by the successful bidders, to be refinanced with a long-term ECB, under the approval route, subject to the following conditions:
    1. The ECB should be raised within 12 months from the date of payment of the final installment to the Government;
    2. The designated AD - Category I bank should monitor the end-use of funds;
    3. Banks in India will not be permitted to provide any form of guarantees; and
    4. All other conditions of ECB, such as eligible borrower, recognized lender, all-in-cost, average maturity, etc, should be complied with.
  5. The first stage acquisition of shares in the disinvestment process and also in the mandatory second stage offer to the public under the Government’s disinvestment programme of PSU shares.
  6. For Repayment of Rupee loans availed of from domestic banking system: Indian companies which are in the infrastructure sector( except companies in the power sector), as defined under the extant ECB guidelines , are permitted to utilise 25 per cent of the fresh ECB raised by them towards refinancing of the Rupee loan/s availed by them from the domestic banking system, subject to
    1. at least 75 per cent of the fresh ECB proposed to be raised should be utilised for capital expenditure towards a 'new infrastructure' project(s)
    2. in respect of remaining 25 per cent, the refinance shall only be utilized for repayment of the Rupee loan availed of for 'capital expenditure' of earlier completed infrastructure project(s); and
    3. the refinance shall be utilized only for the Rupee loans which are outstanding in the books of the financing bank concerned. Companies in the power sector are permitted to utilize up to 40 per cent of the fresh ECB raised by them towards refinancing of the Rupee loan/s availed by them from the domestic banking system subject to the condition that at least 60 per cent of the fresh ECB proposed to be raised should be utilized for fresh capital expenditure for infrastructure project(s).
  7. Bridge Finance: Indian companies which are in the infrastructure sector, as defined under the extant ECB policy are permitted to import capital goods by availing of short term credit (including buyers’ / suppliers’ credit) in the nature of 'bridge finance', under the approval route, subject to
    1. the bridge finance shall be replaced with a long term ECB;
    2. the long term ECB shall comply with all the extant ECB norms; and
    3. prior approval shall be sought from the Reserve Bank for replacing the bridge finance with a long term ECB.
  8. For civil aviation sector in case of working capital, Airline companies registered under the Companies Act, 1956 and possessing scheduled operator permit license from DGCA for passenger transportation are eligible to avail of ECB for working capital. Such ECBs will be allowed based on the cash flow, foreign exchange earnings and the capability to service the debt and the ECBs can be raised with a minimum average maturity period of three years.
The overall ECB ceiling for the entire civil aviation sector would be USD one billion and the maximum permissible ECB that can be availed by an individual airline company will be USD 300 million. This limit can be utilized for working capital as well as refinancing of the outstanding working capital Rupee loan(s) availed of from the domestic banking system. ECB availed for working capital/refinancing of working capital as above will not be allowed to be rolled over. The foreign exchange for repayment of ECB should not be accessed from Indian markets and the liability should be extinguished only out of the foreign exchange earnings of the borrowing company.
Not Permitted Use
  1. Utilisation of ECB proceeds is not permitted for on-lending or investment in capital market or acquiring a company (or a part thereof) in India by a corporate,
  2. Utilisation of ECB proceeds is not permitted in real estate,
  3. Utilisation of ECB proceeds is not permitted for working capital, general corporate purpose and repayment of existing Rupee loans.
  1. Utilisation of ECB proceeds is not permitted for on-lending or investment in capital market or acquiring a company (or a part thereof) in India by a corporate except Infrastructure Finance Companies (IFCs), banks and financial institutions eligible under paragraph I (B) (i) (a), (b) and (d).
  2. Utilisation of ECB proceeds is not permitted in real estate,
  3. Utilisation of ECB proceeds is not permitted for working capital, general corporate purpose and repayment of existing Rupee loans.
Recognised Lenders Borrowers can raise ECB from internationally recognised sources such as
  1. international banks,
  2. international capital markets,
  3. multilateral financial institutions (such as IFC, ADB, CDC, etc.,),
  4. export credit agencies,
  5. suppliers of equipment,
  6. foreign collaborators and
  7. foreign equity holders (other than erstwhile OCBs).
A "foreign equity holder" to be eligible as “recognized lender” under the automatic route would require minimum holding of equity in the borrower company as set out below:
  1. For ECB up to USD 5 million - minimum equity of 25 per cent held directly by the lender,
  2. (ii) For ECB more than USD 5 million - minimum equity of 25 per cent held directly by the lender and debt-equity ratio not exceeding 4:1 (i.e. the proposed ECB not exceeding four times the direct foreign equity holding).
While calculating the ECB liability, free reserves (including the share premium) and outstanding ECB received from the respective Foreign lender shall be reckoned. Overseas organizations and individuals providing ECB need to comply with the prescribed safeguards.
  1. Borrowers can raise ECB from internationally recognised sources such as
    1. international banks,
    2. international capital markets,
    3. multilateral financial institutions (such as IFC, ADB, CDC etc.,)/regional financial institutions and Government owned development financial institutions,
    4. export credit agencies,
    5. suppliers' of equipment,
    6. foreign collaborators and
    7. foreign equity holders (other than erstwhile OCBs).
  2. A'foreign equity holder' to be eligible under this route shall hold-
    • minimum 25% for ECB upto USD 5 Millions
    • minimum 25% for ECB more than 5 Millions and ECB liability-equity ratio not exceeding 7:1.
  3. ECB from indirect equity holders provided the indirect equity holding by the lender in the Indian company is at least 51 per cent;
  4. ECB from a group company provided both the borrower and the foreign lender are subsidiaries of the same parent.
Besides the paid-up capital, free reserves (including the share premium received in foreign currency) as per the latest audited balance sheet shall be reckoned for the purpose of calculating the ‘equity’ of the foreign equity holder in the term ECB liability-equity ratio. Where there are more than one foreign equity holder in the borrowing company, the portion of the share premium in foreign currency brought in by the lender(s) concerned shall only be considered for calculating the ECB liability-equity ratio for reckoning quantum of permissible ECB. For calculating the ‘ECB liability’, not only the proposed borrowing but also the outstanding ECB from the same foreign equity holder lender shall be reckoned. The total outstanding stock of ECBs (including the proposed ECBs) from a foreign equity lender should not exceed seven times the equity holding, either directly or indirectly of the lender (in case of lending by a group company, equity holdings by the common parent would be reckoned).

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