Overview

External commercial borrowings are commercial loans provided by foreign institutional investors. These loans have a lower interest rate than the interest rates offered by commercial banks in India. Therefore, companies and public sector undertakings (PSUs) prefer to opt for ECBs.

Since the ECB can only be used for specific commercial purpose, the borrower must use the funds provided by foreign investors carefully. Therefore, it is necessary to consider the business needs and the long-term goals of the organization before opting for the ECB. Non-compliance with the provisions of ECB will attract penalty.

As these borrowings can only be used for commercial specific purpose, end-use is required. This means that the borrowed ECB can only be used for the purpose mentioned in the end-use.

Who Regulates External Commercial Borrowings?

The Reserve Bank of India and FEMA are regulatory bodies and legislation related to external commercial lending. In addition, the Foreign Exchange Management (Lending and Lending in Foreign Exchange) Regulations 2000, Foreign Exchange Management (Lending and Lending in Rupees) Regulations 2000 regulate the ECB.

A notification was passed by the Reserve Bank of India in 2018 & ndash; The Foreign Exchange Management (Borrowing and Borrowing) Regulations 2018 provide scope for the RBI in consultation with the Government of India to make some changes.

Eligibility criteria

Eligible borrowers-The following entities can raise money through ECBs:

• Manufacturing and development sector;
• SIDBI- Small Industries Development Bank of India;
• Units in Special Economic Zones (SEZs);
• Shipping and airlines companies;
• Export-Import Bank of India (Exim Bank) (only under the approval route)
• Non-Banking Financial Companies (NBFCs);
• Companies in the infrastructure sector;
• Holding companies;
• Core Investment Companies (CICs);
• Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (INVITs) coming under the regulatory framework of the Securities and Exchange Board of India (SEBI);
• NBFCs-Micro Finance Institutions (NBFCs-MFIs), Not for Profit companies registered under the Companies Act, 1956/2013, Societies, trusts and co-operatives (registered under the Societies Registration Act, 1860, Indian Trust Act, 1882 and State-level Co-operative Acts/Multi-level Co-operative Act/State-level mutually aided Co-operative Acts respectively), Non-Government Organisations (NGOs) which are engaged in microfinance activities;
• Companies engaged in miscellaneous services viz. research and development (R&D), training (other than educational institutes), companies supporting infrastructure, companies providing logistics services;
• Developers of Special Economic Zones (SEZs) or National Manufacturing and Investment Zones (NMIZs);

Eligible lenders- Who provide ECBs

• International banks;
• International capital markets;
• Multilateral financial institutions (such as IFC, ADB, CDC, etc.);
• Export credit agencies;
• Suppliers' of equipment;
• Foreign collaborators and
• Foreign equity holders (other than erstwhile OCBs).

Procedure

External commercial lending can be done through automatic route or approval / government route.

Automatic Route-

• Any corporate who needs an external commercial borrowing should approach the concerned/ designated authorised dealer. An authorised dealer can be a bank, fully-fledged money changer or any other person. The application should be sent to the following address:

Principal Chief General Manager,
Foreign Exchange Department, Reserve Bank of India,
Central Office, External Commercial Borrowings Division,
Mumbai – 400 001.

• The borrower must get the LRN (Loan Registration Number) from the Reserve Bank of India before taking the external commercial borrowings.
• For getting the LRN- the applicant has to submit in duplicate Form 83 with all the documents.
• Form 83 has to be certified by a Chartered Accountant or Company Secretary.
• The form has to be forwarded to the designated bank.
• One copy has to be submitted to the designated bank following address :

Director, Balance of Payments Statistics Division,
Department of Statistics and Information Management (DSIM),
Reserve Bank of India,
Bandra-Kurla Complex,
Mumbai – 400 051.

• The borrower can attract loan only after obtaining LRN from DSIM, Reserve Bank.
• Borrowers are required to submit monthly ECB-2 returns certified by the authorized bank to reach the Reserve Bank of Statistics and Information Management (DSIM), within seven working days of the month from which it is concerned.
• Borrower must submit Form ECB to RBI
• After checking the application, RBI will allow.

Approval Route- Under this route, the permission is required by the RBI. This is done through the authorised dealer.

Route under ECB

Under the RBI regulations for foreign investment in India, there are two routes. Automatic route and approval / government route. ECB can be done through automatic route and approval / government route. However, under the automatic route, some ECB limits are set. The following are the ECB limits for special areas:

• Infrastructure sector, real & ndash; Industrial area up to USD 750 million.
• Software Development Zone, Hotel, Hospital & ndash; Up to USD 200 million.
• Microfinance activities & ndash; Up to USD 100 million.
• A company or other remaining entities (other than a financial intermediary registered under the Companies Act, may raise up to USD 500 million in a financial year.

If the ECB value goes above the limit, & nbsp; Then approval / government route will have to be taken. Typically, companies can borrow under the automatic route. Approval is required to be taken under the following cases:

• When a service sector company that is not in hotels, hospitals or software services, for example R & amp; D and training institutes.
• SEZ developers (want to provide basic facilities in SEZ) cooperatives, financial institutions or banks. & nbsp;

External commercial lending cannot be used for the following purposes:

• Lending or investing in capital market in India or acquiring a company (or a share) in India by corporate. Investment in Special Purpose Vehicles (SPVs), Money Market Mutual Funds (MMMFs), etc.
• Real estate sector, working capital, general corporate purpose and repayment of existing rupee loans.
• Guarantee (Issuance of Guarantee, Additional Letter of Credit, Letter of Undertaking or Letter of Rest by Banks, Financial Institutions and Non-Banking Financial Companies (NBFCs) are not permitted with ECB related to India).

Required Documents

• Loan Agreement ( Borrowers need to enter into a loan agreement with the Authorised Dealer)
• Loan Registration Number
• Loan Registration Number has to be received from the Reserve Bank before securing the ECB.
• The authorised dealer has to submit the form to the RBI to get the Loan Registration Number.
• For getting the LRN, the Authorised Dealer has to submit form 83 in duplicate which has been verified by a CA or CS.
• ECB -2 Return
• Form- ECB

What is the difference between ECB and FDI?

Foreign direct investment is a form of equity investment that is placed in a business or enterprise or an organization. Whereas ECB is a type of commercial loan provided by a foreign company or lender. The rate of interest related to the ECB is low.

What is ECB raising currency?

• The ECB can be raised in Indian Rupees (INR) or any other convertible currency.

• As long as the purpose of the ECB is for commercial use, the ECB is valid

What does commercial purpose mean?

means commercial purpose for general commercial purpose. For example- ECB may be used for general corporate and working capital purposes in recent amendments.

What are the different types of ECBs?

ECB consists of loans, securitized instruments, buyers' and supplier credits, foreign currency convertible bonds (FCCBs). Financial Leases and Foreign Exchange Interchangeable Bonds (FCEBs).

Who are the eligible lenders under ECB framework?

The lender should be for ECB purposes:

A member country of the Financial Action Task Force which has financial institutions can lend under the ECB framework. The following institutions can lend to the ECB.

• International Bank;

• International capital markets;

• Multilateral financial institutions (eg IFC, ADB, CDC, etc.)

• Export Credit Agencies

• Equipment supplier

• Foreign collaborators and

• Foreign equity holders (other than the preceding OCB).