External Commercial Borrowings are commercial loans raised by eligible resident entities from recognised non-resident entities. ECB are governed by the Foreign Exchange Management Act (FEMA) Act and RBI rules and regulations. ECB can be raised under the automatic route as well as the approval route, under the ECB framework.
Entities wanting to raise ECB under the automatic route may approach an AD Category-I Bank with their proposal along with a duly filled Form ECB. Post approval by AD Category-I Bank, the application along with Form ECB is sent to RBI for issuance of LRN. Failure to report correctly may lead to penalties under FEMA.
ECBs should adhere to the criteria like minimum maturity period, maximum all-in-cost ceiling, permitted and non-permitted end-uses, etc.
Under the Approval Route, prospective borrowers submit their requests to the RBI through their AD Category-I Banks for review. These cases are evaluated based on the macroeconomic conditions and the merits of each proposal, while ensuring compliance with overall guidelines.
The primary responsibility for ensuring that the borrowing is in compliance with the applicable ECB guidelines is that of the borrower concerned.
ECB can be raised in FCY denominated ECB or INR denominated ECB, there are some conditions attached to it. Any entity taking an ECB in Indian Rupees (INR) is not allowed to change it into a foreign currency loan or take on foreign currency risk in any way, including through derivative contracts or other methods.
Note:
LLPs are not eligible to raise ECBs.
Limit and leverage:
1. All eligible borrowers can raise ECB up to USD 750 million or equivalent per financial year under the automatic route.
2. But, if a company raises a foreign currency (FCY) ECB from its direct foreign equity holder under the automatic route, its ECB liability : Equity ratio cannot exceed 7:1. However, this rule does not apply if the total outstanding ECB, including the new loan, is USD 5 million or less (or its equivalent in another currency).
3. Additionally, the borrowing company must follow any debt-equity ratio rules set by its sectoral or financial regulator.
Parking of ECB Proceeds
ECB proceeds can be parked abroad or in India as follows:
1. Abroad (For Foreign Currency ECB) – Funds can be held in:
• 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;
• Treasury bills and other monetary instruments of one-year maturity having minimum rating as indicated above, and
• Deposits with foreign branches/subsidiaries of Indian banks.
2. Domestically (For Rupee ECB)
• Funds must be repatriated to India and credited to Rupee accounts with AD Category I banks.
• ECB proceeds can be kept in term deposits with AD Category I banks for up to 12 months, but must remain unencumbered.
Reporting in ECB:
1. Any changes in ECB terms, such as amount, interest rate, repayment schedule, etc., must be reported to RBI through a revised Form ECB.
2. Monthly Compliances: Submit Form ECB 2 within 7 working days from the close of month. Changes, if any, in ECB parameters should also be incorporated in Form ECB 2 Return.
