In today’s interconnected global economy, businesses often look beyond borders for funding. External Commercial Borrowings (ECBs) are one such avenue through which Indian companies can raise money from foreign sources. These instruments help companies access capital at competitive rates while also helping integrate India into the global financial system.
External Commercial Borrowings are commercial loans widely used by eligible resident entities who raise ECBs from recognised non-resident entities. ECBs should adhere to the criteria like minimum maturity period, maximum all-in-cost ceiling, permitted and non-permitted end-uses, etc
Borrowings from overseas have to be in compliance with the applicable ECB guidelines / provisions contained in the Foreign Exchange Management (Borrowing and Lending in Foreign Exchange) Regulations, 2018 issued vide Notification No. FEMA 3 (R)/2018-RB dated December 17, 2018, as amended from time to time.
The ECB can be raised in INR or any freely convertible Foreign Currency. ECBs can be raised under the automatic route as well as the approval route, under the ECB framework.
Transactions on account of External Commercial Borrowings (ECB) and Trade Credit (TC) are governed by clause (d) of sub-section 3 of section 6 of the Foreign Exchange Management Act, 1999 (FEMA). External Commercial Borrowings are commercial loans raised by eligible resident entities from recognized non-resident entities and should conform to parameters such as minimum maturity, permitted and non-permitted end-uses, maximum all-in-cost ceiling, etc.
External Commercial Borrowings have opened a new route of borrowing finance and are a great alternative to the Indian borrowing landscape dominated by the banks and NBFCs.
External Commercial Borrowings can be raised either in INR or any freely convertible foreign currency. Two routes are prescribed for raising ECB similar to FDI viz. Automatic Route and Approval Route.
ECB Compliance Framework
| Foreign Currency (FCY) Denominated ECB | INR Denominated ECB | ||||||||||||||||||
Forms of raising ECB | · Bank Loans · Foreign Currency Exchangeable Bonds (FCEBs) · Foreign Currency Convertible Bonds (FCCBs) · Security Instruments (fixed / floating rate bonds / notes, non-convertible or partially convertible or optionally convertible debentures/preference shares) · Trade Credits (Supplier’s credit and Buyer’s credit beyond 3 years) · Financial Lease | · Bank Loans
· Security Instruments (fixed / floating rate bonds / notes, non-convertible or partially convertible or optionally convertible debentures/preference shares)
· Financial Lease
· Trade Credits (Supplier’s Credits and Buyer’s Credits beyond 3 years)
· INR denominated Plain Vanilla Bonds issued overseas (Those that can be placed privately or listed on stock exchanges as per the regulations of the host country)
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Eligible Borrowers | · All the entities that are eligible to receive Foreign Direct Investments (FDI) · Port trusts · SIDBI · Units in SEZ · EXIM Bank of India | · All the entities that are eligible to raise Foreign Currency ECB · Registered entities that are engaged in activities relating to micro-finance i.e., registered Not-for-Profit Companies, societies, cooperatives, trusts, and NGOs
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Eligible Lenders | Lenders resident of FATF or IOSCO compliant nation Multilateral Financial Institutions (e.g., World Bank, IMF, etc.) and Regional Financial Institutions (e.g., European Investment Bank, Asian Development Bank, etc.) where India is a member country. Individuals can be the lenders if they are the foreign equity holders or for subscription to debentures/bonds listed above Subsidiaries or foreign branches of Indian banks can act as recognized lenders only for FCY denominated ECBs (except for FCEBs and FCCBs) Subsidiaries or Foreign Branches of Indian banks can participate as underwriters / arrangers / traders / market makers for overseas issued INR denominated bonds. Issuances by Indian banks are not permitted to be underwritten by the subsidiaries or foreign branches of Indian Banks. (i) For ECB up to USD 5 million – minimum equity of 25 per cent held directly by the lender, (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). Foreign Equity Holder means: Direct foreign equity holder holding minimum direct equity of 25% in the borrowing entity, or Indirect equity holder holding minimum indirect equity of 51%, or Group company having a common overseas parent. | |||||||||||||||||||
Limit for Raising ECBs | All the eligible borrowers can raise USD750 million or equivalent in ECB per financial year under the automatic route The liability-equity ratio cannot exceed 7:1 for ECBs in case of raising FCY denominated ECBs from direct foreign equity holder The above ratio is not applicable in case the outstanding, as well as proposed amount of all ECBs, does not exceed USD 5 million or equivalent | |||||||||||||||||||
Negative List | Proceeds from ECB cannot be utilized for the following purposes: Capital Market Investments Real Estate Activities For Working Capital purposes (except if allowed in Minimum Average Maturity Period) Rupee loan repayments (except if allowed in Minimum Average Maturity Period) General corporate purposes (except if allowed in Minimum Average Maturity Period) Equity Investments Lending to other entities for the above activities (except if allowed in Minimum Average Maturity Period) Minimum Average Maturity Period (MAMP) MAMP for ECB is 3 years Call and put options shall not be exercisable before completion of MAMP | |||||||||||||||||||
Minimum Average Maturity Period (MAMP) |
For the categories (b) to (e): ECB cannot be raised from subsidiaries or foreign branches of Indian banks. MAMP as prescribed above shall be complied with in all the circumstances. | |||||||||||||||||||
All-In Costs | All-in-costs for ECB are as under: For Existing FCY ECBs linked to LIBOR whose benchmarks are changed to ARR .Benchmark Rate + 550 bps spread For New FCY ECBs Benchmark Rate + 500 bps spread For INR ECB Benchmark Rate + 450 bps spread Penal charges / prepayment charges, if any, for breach or default of covenants should not be more than 2% over the contracted interest rate on the outstanding principal amount. It will be outside the all-in-cost ceiling. Benchmark Rate: FCY ECB: 6 months LIBOR rate of different currencies or any of the 6 months interbank rate of interest applicable to the currency in which the borrowing is done. E.g.: EURIBOR INR ECB: Prevailing yield of the Government of India Securities with the corresponding maturity. | |||||||||||||||||||
Under the aforesaid framework, all eligible borrowers can raise ECB up to USD 750 million or equivalent per financial year under the automatic route. Further, in case of FCY denominated ECB raised from direct foreign equity holder, ECB liability-equity ratio for ECB raised under the automatic route cannot exceed 7:1. However, this ratio will not be applicable if the outstanding amount of all ECB, including the proposed one, is up to USD 5 million or its equivalent. Further, the borrowing entities will also be governed by the guidelines on debt equity ratio, issued, if any, by the sectoral or prudential regulator concerned.
ECB proceeds shall be parked overseas until actual requirement in India. ECB proceeds parked overseas can be invested in the following liquid assets
(a) deposits or Certificate of Deposit or other products offered by banks rated not less than AA(-) by Standard and Poor/Fitch IBCA or Aa3 by Moody’s;
(b) deposits with overseas branch of an Authorised Dealer in India; and
(c) Treasury bills and other monetary instruments of one year maturity having minimum rating as indicated above. The funds should be invested in such a way that the investments can be liquidated as and when funds are required by the borrower in India.
Prepayment of ECB up to USD 400 million may be allowed by AD banks without prior approval of RBI subject to compliance with the stipulated minimum average maturity period as applicable to the loan.
ECB proceeds meant for Rupee Expenditure should be repatriated immediately for credit to their Rupee accounts with AD Category I banks in India. ECB borrowers are also allowed to park ECB proceeds in term deposits with AD Category I banks in India for a maximum period of 12 months cumulatively. These term deposits should be kept in unencumbered position.
Any draw-down in respect of an ECB should happen only after obtaining the LRN from the Reserve Bank. To obtain the LRN, borrowers are required to submit duly certified Form ECB, which also contains terms and conditions of the ECB, in duplicate to the designated AD Category I bank. In turn, the AD Category I bank will forward one copy to the Director, Reserve Bank of India, Department of Statistics and Information Management, External Commercial Borrowings Division, Mumbai. Copies of loan agreement for raising ECB are not required to be submitted to the Reserve Bank.
Changes in ECB parameters in consonance with the ECB norms, including reduced repayment by mutual agreement between the lender and borrower, should be reported to the DSIM through revised Form ECB at the earliest, in any case not later than 7 days from the changes effected. While submitting revised Form ECB the changes should be specifically mentioned in the communication.
The borrowers are required to report actual ECB transactions through Form ECB- 2 Return through the AD Category I bank on monthly basis so as to reach DSIM within seven working days from the close of month to which it relates. Changes, if any, in ECB parameters should also be incorporated in Form ECB 2 Return.
Any borrower, who is otherwise in compliance of ECB guidelines, can regularize the delay in reporting of drawdown of ECB proceeds before obtaining LRN or delay in submission of Form ECB 2 returns, by payment of late submission fees as detailed in the following matrix:
The process for raising ECB is as under:
Automatic Route:
Chief General Manager-in-Charge,
Foreign Exchange Department, Reserve Bank of India,
Central Office, External Commercial Borrowings Division,
Mumbai – 400 001.
Director, Balance of Payments Statistics Division,
Department of Statistics and Information Management (DSIM),
Reserve Bank of India,
Bandra-Kurla Complex,
Mumbai – 400 051.
Under the approval route, the borrowers shall approach the RBI with an application in Form ECB. The cases shall be subject to the macro-economic situation, overall guidelines, and merits of the proposal.
The proposals received by the RBI shall be placed before the Empowered Committee set up by the RBI if they cross a certain threshold limit. The Empowered Committee will make recommendations to the RBI considering which the RBI shall make the final decision.
Documents required for ECB
Following documents are required for ECB compliance:
RBI mandates timely filings and disclosures to ensure transparency in cross-border borrowing.
The Form ECB-1 needs to be Filed before drawdown of the loan and the same needs to be submitted to Authorized Dealer (AD) Bank along with the basic details such as details of borrower, lender, amount, currency, purpose, etc. RBI allots a Loan Registration Number (LRN) upon verification.
A monthly reporting format and the same must be submitted to the RBI through the AD bank by the 7th working day of the following month.
FLA Must be filed by companies receiving FDI or having outstanding ECB
ECB FORMS TO BE FILED WITH AD BANK:
The form ECB needs to be Filed before drawdown of the loan and Submitted to Authorized Dealer (AD) Bank with the basic details such as contains details of borrower, lender, amount, currency, purpose, etc.
Post submission of Form ECB-1 the RBI allots a Loan Registration Number (LRN) upon verification.
A monthly reporting format and the same must be submitted to the RBI through the AD bank by the 7th working day of the following month.
The ECB-2 includes details such as:
FORM ECB-3
Form ECB-3 is used in the case of early repayment or refinancing of an ECB.
The form ECB-3 is required to be submitted at the time of early repayment or refinancing of an existing ECB. The borrower needs to file the same via their AD Bank
The form ECB-3 contains the following details
FORM ECB-4
ECB-4 is a one-time form used when the ECB has been fully repaid and closed. It’s essentially a closure report, It provides the following records:
The form ECB needs to be submitted after the full repayment of ECB. The same needs to be filed by the borrower through the AD Bank to RBI for record closure.
Form | Purpose | When to file | Filed by |
ECB-1 | Needs to be filed before drawdown of loan for creation of LRN |
| Borrower to RBI Via AD Bank. |
ECB-2 | Monthly reporting of ECB transactions | By 7th working day of the next month | Borrower to RBI Via AD Bank. |
ECB-3 | Report early repayment or refinancing | At the time of such event | Borrower to RBI Via AD Bank. |
ECB-4 | Closure report of ECB | After full repayment | Borrower to RBI Via AD Bank. |
A. BASIC QUERIES
Master Direction No. 5 on ‘External Commercial Borrowings, Trade Credits and Structured Obligations dated March 26, 2019 may be referred to for guidance on the extant framework on ECB and TC. ECBs and TCs raised under the prior frameworks should continue to be in compliance with the corresponding guidelines applicable at the time of availing the ECBs and TCs.
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.
Borrowings from overseas have to be in compliance with the applicable ECB guidelines / provisions contained in the Foreign Exchange Management (Borrowing and Lending in Foreign Exchange) Regulations, 2018 issued vide Notification No. FEMA 3 (R)/2018-RB dated December 17, 2018, as amended from time to time.
The primary responsibility for ensuring that the borrowing is in compliance with the applicable ECB guidelines is that of the borrower concerned. Structures which bypass/ circumvent ECB guidelines in any manner and / or raising borrowings in any other manner which is not permitted / disguising borrowing under the wrap of other kind of transactions and / or contravening provisions of Foreign Exchange Management (Borrowing and Lending in Foreign Exchange) Regulations, 2018 would also invite penal action under FEMA.
B. ELIGIBILITY FOR RAISING ECB
As LLPs are not eligible to receive FDI, they cannot raise ECBs.
C. CURRENCY OF ECB
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 or assuming foreign currency risk is any manner by either entering into a derivative contract or otherwise.
D. RECOGNISED LENDERS/ INVESTORS
The foreign equity holders as defined at Paragraph 1.11 of the Master Direction No. 5 on ‘External Commercial Borrowings, Trade Credits and Structured Obligations dated March 26, 2019 (MD) are eligible to lend for the end-uses given at Paragraph 2.1.viii(d), 2.1.viii(e) and 2.1.viii(f) of the MD. For end-uses, other than those in the negative list, recognised lenders are given at Paragraph 2.1.iv of the MD.
No, all ECB guidelines including those related to minimum equity holding, are to be fulfilled during the whole tenure of the ECB and not only at the time of contracting of ECB.
Indian banks cannot subscribe to RDBs issued overseas in primary market but can be arrangers/ underwriters/ market makers/ traders subject to compliance with prudential norms.
No. AD banks should ensure that persons resident in India do not have any exposure to borrowings by eligible entities under this framework either directly or indirectly except foreign branches/ subsidiaries of Indian banks abroad or any other permitted entities. Further, establishing borrowing structures/modalities which contravene the guidelines shall render themselves liable for penal action as prescribed under FEMA.
Yes.
E. AVERAGE MATURITY PERIOD
You may refer to https://rbidocs.rbi.org.in/rdocs/Content/PDFs/12EC160712_A6.pdf for illustration purposes.
The formula to calculate the average maturity period is:
Balance loan amount * No. of days balance with the borrower / Total loan amount * 360
No.
Yes, however, the ECB should have minimum average maturity period of 5 years.
F. LEVERAGE CRITERIA AND BORROWING LIMIT
Yes, apart from ECB raised for refinancing where the proposed ECB amount may not be taken into account to avoid double counting.
No.
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. However, refinancing of ECB amount will not be considered for arriving at individual limit per financial year. Also, the limit will be restored at the beginning of new financial year.
Yes. Any debit balance in the profit and loss account as per the latest audited balance sheet of the Eligible Borrower should be deducted from the equity for computing the ECB liability-equity ratio.
Yes, as long as the ECBs are in compliance with the ECB guidelines for the respective currencies as per RBI guidelines. The individual limit will include all ECBs raised, whether in foreign currency or INR.
Yes, provided the enhanced amount does not breach the applicable annual limit for the automatic route for the current financial year and the other parameters of the ECB are in compliance with the existing ECB guidelines also. Since this would be considered as change in terms for the same ECB, no separate LRN is required for the enhanced amount.
G. ALL-IN-COST
All-in-cost should be within the applicable ceiling at all times, e.g., breach of all-in-cost ceiling in the first year and a much lower all-in-cost in the second year so as to comply on an average, is not permitted.
The definition of all-in-cost prohibiting use of ECB proceeds for payment of interest/charges is not applicable to ECBs raised for project finance and utilised for payment of guarantee fees (like ECA Premium) and interest during construction, provided the said components are part of project cost and capitalised by the borrower.
H. END-USES
The reimbursement of expenditure incurred in the past is not a permissible end-use under the ECB framework.
No. Equity investment either directly or indirectly (through purchase of goodwill) is not permitted.
No, it is not permitted.
Refinancing of Rupee denominated ECB with Foreign Currency denominated ECB is not permitted.
Yes. ECB proceeds can be utilized for overseas investment as permitted under the overseas investment guidelines.
For the purpose of ECB, on-lending by borrowers who are engaged in the business of on-lending is not treated as working capital. Additionally, the borrowers shall need to adhere to the guidelines issued by the concerned sectoral or prudential regulator in this regard.
Yes.
I. REFINANCING OF ECB
Yes, provided that the borrower continues to be eligible to raise ECB under the extant ECB framework, all-in-cost is lower than the all-in-cost of existing ECB, residual maturity is not reduced and the new ECB is in compliance with the extant ECB framework as well.
Yes.
Yes. However, the new ECB lenders should also be foreign equity holders as defined in the ECB framework and subject to applicable refinancing guidelines.
Any entity raising INR ECB (including issuance of Rupee denominated bonds overseas) is not permitted to convert the liability arising out of such ECBs into a foreign currency liability in any manner or assume foreign currency risk in any manner by either entering into a derivative contract or otherwise.
Yes. The prescription is that of a minimum mandatory hedge.
Users may refer to Master Direction on Risk Management and Inter-bank dealings dated July 5, 2016, as amended from time to time.
K. Reporting
Any draw-down in respect of an ECB should happen only after obtaining the Loan Registration Number (LRN) from RBI by filing duly certified Form ECB to the Director, External Commercial Borrowings Division, Department of Statistics and Information Management (DSIM), Reserve Bank of India, Bandra-Kurla Complex, Mumbai – 400 051. 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 (such columns which are not applicable for the borrowing or against which ‘nil’ information has to be given, should be suitably covered). Changes in ECB parameters, whether under the automatic route with the approval of Authorised Dealer Category –I banks or under the approval route with prior approval of the RBI, should also be reported to the DSIM through revised Form ECB at the earliest, in any case not later than 7 days from the changes effected. While submitting revised Form ECB, the changes should be specifically mentioned in the communication. Any failure to comply with reporting guidelines in respect of Form ECB for an ECB may invite penal action under FEMA.
The borrowers are required to report actual ECB transactions, correctly and fully, through duly certified Form ECB 2 through the Authorised Dealer Category-I bank to DSIM as per the periodicity specified by the RBI. None of the columns in Form ECB 2 should be left blank (such columns which are not applicable for the borrowing or against which ‘nil’ information has to be given, should be suitably covered). The Form ECB 2 should reach DSIM within seven working days from the close of month to which it relates. Changes, if any, in ECB parameters should also be incorporated in Form ECB 2 suitably. Any failure to comply with reporting guidelines in respect of Form ECB 2, including failure to adhere to periodicity of reporting, may invite penal action under FEMA.
No, in case no changes are made in terms and conditions of ECB, there is no need to file revised Form ECB (erstwhile Form 83).
The facility for opting for LSF shall be available up to three years from the due date of reporting/ submission. (Ref: A.P. (DIR Series) Circular No.16 dated September 30, 2022).
Yes. LSF is applicable for non-submission of each Form ECB 2, including Nil returns.
L. MISCELLANEOUS
Yes. Extant norms permit both ECB principal and interest to be converted into equity subject to applicable conditions as given under Paragraph 7.4 of the Master Direction No. 5 on ‘External Commercial Borrowings, Trade Credits and Structured Obligations dated March 26, 2019.
Yes. The part conversion of ECB into equity will be freely permitted only when the part amount remaining as ECB complies with all the applicable ECB norms.
No.
AD banks can issue SBLC on behalf of their customers for availing short term trade credit from overseas lenders in foreign currency subject to such SBLCs complying with the provisions contained in Department of Banking Regulation Master Circular No. DBR. No. Dir. BC.11/13.03.00/2015-16 dated July 1, 2015 on “Guarantees and Co-acceptances”, as amended from time to time.
AD banks are required to report all permissions granted by the AD banks/Regional offices of Reserve Bank for settlement of delayed import dues irrespective of the tenures of extension sought.
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