The Foreign Direct Investment(FDI) policy of India governs investment by Non-Residents (NR), Non-Resident Indians(NRI) and Persons of Indian Origin into the capital of the Indian entity by way of Equity or convertible instruments. However, the FDI policy does not govern the infusion of foreign funds to Indian Entities by way of Loan funds/ non-Convertible / debt instruments, termed External Commercial Borrowings(ECB). Put in a simple way, investments into Equity and instruments convertible into equity are covered under the FDI Policy and investments by way of loans or non-convertible instruments are covered under the ECB policy. This article explores the possibility of fund infusion from abroad as repayable loans/ redeemable debt instruments.
External Commercial Borrowing
The Indian Entities (Borrowing entities) are permitted to raise ECB in Foreign Currency as well as in Indian Rupees. The compliance requirements, eligibility norms etc shall change according to the denomination of the currency in which the ECB is being raised.
Loans, including bank loans; floating/ fixed rate notes/ bonds/ debentures (other than fully and compulsorily convertible instruments); Trade credits beyond three years; FCCBs; FCEBs and Financial Lease are covered under the scope of External Commercial Borrowing if the borrowing currency is Freely Convertible Foreign Currency. If the Loan is being availed in Indian Rupees, apart from the instruments covered under the FCY-denominated ECB, the plain vanilla Rupee denominated bonds issued overseas are also included under the scope of the ECB.
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 the case of FCY-denominated ECB raised from direct foreign equity holder, the 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 has a Minimum Average Maturity Period (MAMP) of three years and an All-in-cost ceiling based on the benchmark rate linked to any widely accepted interbank rate or alternative reference rate (ARR) of a 6-month tenor. The All-in-cost includes the rate of interest, other fees, expenses, charges, guarantee fees, and ECA charges, whether paid in foreign currency or INR but will not include commitment fees and withholding tax payable in INR.
Under the ECB framework, the ECB can be raised either under the Approval or automatic routes. Under the approval route, the prospective borrowers are required to send their requests to the Reserve Bank through their AD Banks for examination, and in the case of the Automatic Route, the cases are examined by the Authorised Dealer Category-I (AD Category-I) banks.
Eligibility to receive loan funds from foreign lenders
Indian Entities are eligible to avail of the ECB either in Freely Convertible Foreign Currency or in Indian Rupees. If borrowing currency is a Freely Convertible Foreign Currency, all the entities which are eligible to receive Foreign Direct Investment (Eligible Entities) in the form of Equity/Compulsorily Convertible Preference Shares (CCPS) and Compulsorily Convertible Debentures (CCD) are eligible to raise loan funds from recognised lenders, in compliance with the terms of External Commercial Borrowing Policy (ECB Policy). Apart from those eligible entities, Port Trusts, Units of Special Economic Zones, SIDBI, and Exim Bank of India can also raise funds as ECB. If the borrowing is in Indian Rupee, all the entities mentioned above and the registered entities engaged in micro-finance activities, registered not-for-profit companies, registered societies/trusts/cooperatives and NGOs are also eligible to raise ECB.
Who can lend the money to Indian Borrowing Entities?
A direct foreign equity holder with a minimum 25% direct equity holding in the borrowing entity, or an indirect equity holder with a minimum indirect equity holding of 51%, or a group company with a common overseas parent can lend money to the Indian Borrowing Entity subject to the compliance of the ECB Guidelines. Apart from the Foreign Equity Shareholders, as specified above, Multilateral and Regional Financial Institutions where India is a member country, Foreign branches/subsidiaries of Indian banks are also considered as recognised lenders.
Use of proceeds of ECB.
The ECB framework had given a negative list of items for which the ECB Proceeds should not be utilised, which includes Real estate activities, Investment in the capital market, equity investment, working capital purposes, general corporate purposes, Repayment of Rupee loans, On-lending to entities for the above activities, except in case of ECB raised by NBFCs.
Procedure to avail of ECB
All ECB can be raised under the automatic route if they conform to the parameters prescribed under this framework. For approval route cases, the borrowers may approach the RBI with an application in the prescribed format (Form ECB) for examination through their AD Category I bank. Such cases shall be considered keeping in view the overall guidelines, macroeconomic situation and merits of the specific proposals. ECB proposals received in the Reserve Bank above a certain threshold limit (refixed from time to time) would be placed before the Empowered Committee set up by the Reserve Bank. The Empowered Committee will have external as well as internal members, and the Reserve Bank will take a final decision in the cases taking into account the recommendations of the Empowered Committee. Entities desirous of raising ECB under the automatic route may approach an AD Category I bank with their proposal along with duly filled-in Form ECB.
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 the 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, Bandra-Kurla Complex, Mumbai – 400 051
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 seven days from the changes effected. While submitting the revised Form ECB, the changes should be 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 a monthly basis so as to reach DSIM within seven working days from the close of the month to which it relates. Any changes in ECB parameters should also be incorporated in Form ECB 2 Return.
Bijoy P Pulipra