External Commercial Borrowings Policy - PowerPoint PPT Presentation

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External Commercial Borrowings Policy


External Commercial Borrowings (ECBs) is a commercial loan availed from non-resident lenders by an Indian entity with a minimum average maturity of 3 years. These types of loans are provided by foreign commercial banks and other institutions. – PowerPoint PPT presentation

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Title: External Commercial Borrowings Policy

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  • As a part of the development policy, India has
    always promoted capital inflows. In other words
    to make domestically investment foreign capital
    is obtained from foreign countries. There are
    some reasons which compelled our government to go
    after foreign capital such as Lack of domestic
    capital and deficit in the current account. There
    are different types of foreign capital and the
    major category is foreign investment including
    FDI (Foreign Direct Investment) and FPI (Foreign
    Portfolio Investment). There are following types
    of foreign capital such as trade credit, NRI
    deposits and ECBs (External Commercial

ECB Policy- An Overview
  • External Commercial Borrowings (ECB) is a
    commercial loan availed from nonresident lenders
    by an Indian entity with a minimum average
    maturity of 3 years. These types of loans are
    provided by foreign commercial banks and other
    institutions. ECBs are defined as money borrowed
    from foreign resources in the form of
  • Commercial bank loans
  • Buyers credit/ suppliers credit
  • Securitized instruments such as floating rate
    notes and fixed rate bonds
  • Credit from official export credit agencies and
    commercial borrowings from Multilateral Financial
  • ECBs have emerged a major form of foreign
    capital like FDI and FII in the post reform
    period. In Country from several years
    contribution of ECBs was between 20 to 35 percent
    of the total capital flows. In large number
    Indian corporate and PSUs have used the ECBs as
    sources of investment. Private sector corporates
    have obtained bulk of the overseas loans or ECBs.
    ECB is easy to obtain fund for the corporates and
    it also helps them to make business/investment
    expansion. For expansion of existing capacity as
    well as for fresh investment, ECBs are being
    permitted by the Government as a source of
    finance for Indian Corporates.

  • For expanding the existing capacity as well as
    for fresh investments government permits the ECBs
    as an additional source of financing.
  • ECB policy seeks to emphasize the priority of
    investing in the infrastructure and core sectors
    such as Power, telecom, Railways, Roads, Urban
    infrastructure etc. and also emphasis on the need
    of capital for Small and Medium scale

Benefits to Borrowers
  • ECB funding helps corporates in paying to
    suppliers in other countries that may not be
    available in India.
  • In comparison to domestic funds, cost of funds
    borrowed from external sources is cheaper.
  • Borrower can diversify the investor base.
  • It provides international market to borrowers. In
    ECB there are internationally recognised sources
    such as banks, export credit agencies, suppliers
    of Equipment, foreign collaborators, foreign
    equity holders, international capital markets

  • With the help of ECBs it provide an opportunity
    to borrow large volume of funds
  • Funds are relatively available for long term
  • In comparison to domestic funds interest rate are
    also lower
  • Since ECBs are in the form of foreign currencies,
    they enable the corporate to have foreign
    currency to meet the import of machineries etc.
  • ECBs can be raised by corporates from
    internationally recognized sources such as banks,
    export credit agencies, international capital
    markets etc.
  • India has a vibrant corporate sector unlike many
    other emerging market economies and many of them
    have overseas operations as well. In India, to
    the corporates, domestic financial market is not
    often able to provide big sized loans at
    competitive rate of interests. For domestic
    companies ECBs have emerged as a valuable source
    of investable resource of funds. Under ECB Policy
    government put restrictions on amount of loan
    that can be obtained by a company, end user
    restrictions, interest rate ceiling for ECBs,
    maturity period etc. Government put ceiling for
    the total amount of ECBs that can be obtained
    through the ECB route during a year by all Indian

External Commercial Borrowings Commercial
Loans, buyer / suppliers credit, securitized
instruments (Bonds, Preference shares etc.) with
a minimum average maturity of 3 years.
Routes to access ECB
External Commercial Borrowing (ECB)
Automatic Route
Approval Route
USD 750 M-Maximum USD 200 M- Hotel, Hospital,
S/W and Miscellaneous Service USD 10 M- NGO in
MF MFI Specified NBFC and SIDBI as per
Approval route applicable - Not covered in
Automatic route
Minimum average maturity 3 or 5 years depending
on the quantum of ECB
Short term debt not encouraged
Automatic Route
Eligible Borrowers
  • Corporates including those in the hotel,
    hospital, software sectors
  • Non-Government Organizations (NGOs) engaged in
    micro finance activities are eligible to avail of
  • Units in Special Economic Zones (SEZ) Units
    (except financial intermediaries, individuals,
  • Companies in Miscellaneous Services i.e. Training
    Activities, RD and Infra Support (except
    Educational Inst., Trading business, Logistic
    Services, Financial Services, and Consultancy
    Services) only from its Direct/Indirect Equity
    Holder/Group Cos
  • Small Industries Development Bank of India
    (SIDBI) can avail of ECB for on lending to MSME
  • Other specified

Recognized Lenders
  • International Banks
  • International Capital Markets
  • Multilateral Financial Institutions such as IFC,
    ADB, CDC etc.
  • Export credit agencies
  • Suppliers of equipment
  • Foreign collaborators
  • Foreign Equity Holders (min. 25)
  • For ECB beyond USD 5M ECB Liability- Equity
    Ratio 41
  • Indirect Equity Holder- Only if indirect Holding
    in IC is 51
  • Group Co.- ECB from a group company is permitted
    provided both the borrower and the foreign lender
    are subsidiaries of the same parent

  • The maximum amount of ECB which can be raised by
    a corporate is USD 750 million or its equivalent
    during a financial year other than hotel,
    hospital and software sectors, and corporate in
    miscellaneous services sector.
  • USD 200 M- Hotel, Hospital, S/W and Miscellaneous
  • U 10 M- NGO in MF MFI
  • Specified NBFC and SIDBI as per conditions
  • Minimum average maturity 3 or 5 years depending
    on the quantum of ECB
  • Minimum avg. maturity period
  • USD 20 M 3 years
  • Beyond USD 20 up to 750 M 5 years
  • All in Cost Ceiling
  • 3-5 years LIBOR 350 bps
  • Beyond 5 years LIBOR 500 bps
  • (Fixed rate loans swap
  • cost margin)

End Use
  • Real/ Industrial sector (SME)
  • Import of capital goods,
  • New Projects, Expansion/ modernization of
    existing units
  • Overseas Direct Investment in Joint Ventures
    (JV)/ Wholly Owned Subsidiaries (WOS) Payment of
    Interest During Construction (IDC)
  • First stage acquisition of shares in the
    disinvestment process and also in the mandatory
    second stage offer under GOIs disinvestment
  • Payment for obtaining License/ permit for 3G
  • For lending to self-help groups or for micro
    credit by NGOs
  • Repayment of rupee loans by companies in
    infrastructure sector manufacturing and hotel
    sector (with project cost of NR 250 or more)
  • General corporate purpose from foreign direct
    equity holder

End Use (Not Permitted)
  • On lending, Investment in capital market or
    acquiring a company in India
  • Real Estate Sector
  • General corporate purposes
  • Repayment of existing INR Loan

Other permitted end uses
  • Import of capital goods New projects
  • Modernization/expansion of existing projects in
    real sector (industrial sector including SME and
    infrastructure sector)
  • Hotel Sector (fixed capital investment of Rs.
    200 Crore)
  • Convention Centers (fixed capital investment of
    Rs. 300 Crore)
  • Common infrastructure for Industrial Parks, SEZ,
    Tourism Facilities
  • Capital investment for fertilizers
  • Post harvest infrastructure for agricultural and
    horticultural produce including cold storage
  • Soil testing laboratories Cold chain for farm
    level pre-cooling, preservation, storage or
    agricultural and allied produce, marine produce
    and meat
  • ODI in JV/WOS abroad
  • Acquisition of shares in disinvestment process of
    PSU shares
  • IDC for Indian Infrastructure sector
  • Capital expenditure in maintenance and operations
    of toll system
  • Refinancing of Bridge finance availed for import
    of capital goods in infrastructure sector
  • Import of services, technical know-how, payment
    of license fee etc.
  • General corporate purposes from FDEH in
    manufacturing, infrastructure, hotels, hospitals
    and IT sector (minimum average maturity 7 years)
  • Payment of spectrum allocation

  • Guarantee
  • Issuance of guarantee, standby letter of credit,
    letter of undertaking or letter of comfort by
    banks, Financial Institutions and Non-Banking
    Financial Companies (NBFCs) from India relating
    to ECB is not permitted.
  • Pledge of shares by promoters, domestic associate
    companies of the borrower
  • Corporate Guarantee, Personal Guarantee ,
  • Creation of Charge over immoveable assets and
    financial securities is Possible only after
    obtaining no objection from AD bank.
  • Incase of enforcement of charge property will
    be transferred only to person resident in India

ECB Policy
  • Authorized Dealer can permit
  • Change in Name Change in Lender Change in End
    Use, Change in All-in-Cost
  • Transfer of ECB, Currency Reschedulement,
    Reduction in amount of ECB
  • Cancellation of LRN

Conversion of ECB into Equity
  • Conditions
  • Activities to be under Automatic Route / FIPB
    approval obtained
  • Sectoral Cap not breached
  • Pricing Listed as per SEBI Unlisted At a Fair
    Value arrived by CA/MB based on IAP on ALP on
    the date of conversion
  • Conversion Rate Maximum at exchange rate
    prevailing on the date of the agreement between
    the parties.
  • Reporting structure
  • Full conversion of outstanding ECB into equity
    Form FC-GPR to AD Form ECB-2 to DSIM within 7
    working days from the close of the month
  • Partial conversion of outstanding ECB into equity
    Form FC-GPR for converted portion Form ECB-2
    to DSIM mentioning converted and unconverted

  • Execution of Loan Agreement(filing is not

Filing of Form 83 duly certified by CA/CS to AD
AD to process the request and send to RBI for LRN
Drawn should take place post allotment of LRN
Filing of Monthly Return in ECB 2 by 7th of next
of Cont
Compounding of Contraventions
Compounding of contraventions means settle an
offence committed by the contravener through
imposition of a monetary penalty without going in
for litigation after the contravener acknowledges
having committed the contravention.
  • To provide comfort by minimizing transaction
    costs, while taking severe view of willful,
    malafide and fraudulent transactions but it is
    not equal to withdrawal of a charge or a
    complaint but an agreement not to pursue the
    legal battle and spare the accused from further

Filling Application
  • Application Form
  • Nature of the contravention
  • Provisions of FEMA under which the transaction
    would be handled
  • While undertaking the transaction which of the
    FEMA provisions were contravened
  • Transaction- Parties involved, Date of the
    transaction and Amount involved
  • DD in favor of RESERVE BANK OF INDIA Payable
    at RO/MUMBAI
  • RBI Office Jurisdiction
  • Regional Offices Central
  • - Delay in AR,FC-GPR
  • Non Allotment/Refund in 180 days
  • Violation of Pricing Guidelines
  • Issue of Ineligible Instruments
  • Issue of securities without RBI/FIPB approval
  • Delay in Filing of FC-TRS-NR/R-R/NR
  • Recording of Transfer by Company without FC-TRS
  • New Delhi
  • Acquisition of IMP in/outside India
  • LO, BO and PO
  • Deposits
  • Mumbai
  • ECB
  • ODI
  • Export, Import and Others

Features of Compounding
  • Voluntary
  • No suo-motto investigation
  • Time Bound completion (Within 180 days)
  • No further proceedings for contravention so
  • Payment of sum of contravention (within 15 days)
  • Once the order is passed, no contravener seek to
    withdraw the order or to hold it as void or
    request a review of the order
  • No appeal against the Order
  • Non payment shall be deemed as no application is
  • No compounding before expiry of 3 years of
    previous order for similar contravention
  • No Compounding of cases where approval of any
    statutory authority/Govt. etc. was required
    unless such approvals has been sought

Ascertainment of Nature of Contravention by RBI
  • Depends on whether the contravention is
  • Technical/ Minor in nature and needs only
    Cautionary Advice.
  • Serious in nature and warrant Compounding
  • Prima facie, involves Money-Laundering, National
    and Security concerns involving serious
    infringement of the regulatory framework
  • However, RBI reserves the right to classify the
    contraventions and no body else has any right to
    classify any contravention as technical suo moto.
  • Decision of Sum of contravention by RBI depends
  • Amount of Gain of unfair advantage made from
  • Amount of Loss to any agency/authority/exchequer
    from contravention
  • Economic benefits accruing to the contravener
    from delayed compliance or compliance avoided
  • Repetitive nature of the contravention, Track
    Record, History of non-compliance of the
  • Contraveners conduct in undertaking the
    transaction, Disclosure of full facts in the
    application and submissions made during the
    personal hearing
  • Any other factor considered relevant and

Contraventions Penalties
  • Application for Condonation
  • Application for compounding
  • Adjudication proceedings
  • Penalty/ Confiscation in case of quantifiable
    offence Up to 3 times, in case of non
    -quantifiable offence Up to Rs. 200,000, in
    case of continuing penalty - Rs. 5000 per day
  • Imprisonment if penalty not paid within
    prescribed time
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