External Commercial Borrowings (ECB) refer to commercial loans in the form of bank loans, buyers’ credit, suppliers’ credit, securitized instruments (e.g. floating rate notes and fixed rate bonds) availed of from non-resident lenders with minimum average maturity of 3 years.
InIndia, raising of ECB loans regulates by the provision of Foreign Exchange Management Act. The relevant/basic provisions governing raising of such ECB loans by the Companies isIndiais produced below: (RBI Master Circular of ECB Guideline No.2009-10/27 Master Circular No 7/2009-10 datedJuly 1,2009)
- ECB can be raised only for investment such as import of capital goods, new projects, modernization/expansion of existing production units in real sectors (Manufacturing/infrastructure).
- The Indian Company shall raise ECB from Foreign collaborator/Investor and other international Banks and Financial Institutions.
- For ECB up to USD 5 million – minimum equity of 25 percent should be held directly by the lender.
- For ECB more than USD 5 million – minimum paid up 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.
- ECB up to USD 20 million or its equivalent in a financial year with minimum average maturity of three years.
- All-in-cost includes rate of interest, other fees and expenses in foreign currency except commitment fee, pre-payment fee, and fees payable in Indian Rupees. However, the payment of withholding tax in Indian Rupees is excluded for calculating the all-in-cost.
- Utilization of ECB proceeds is not permitted:-
- For on-lending or investment in capital market or acquiring a company (or a part thereof) in India by a corporate.
- In real estate sector.
- For working capital, general corporate purpose and repayment of existing Rupee loans.
- Borrowers may enter into loan agreement complying with ECB guidelines with recognized lender for raising ECB under Automatic Routewithout prior approval of RBI. The borrower must obtain a Loan Registration Number (LRN) from the Reserve Bank of India before drawing down the ECB.
- For allotment of loan registration number, borrowers are required to submit Form 83, in duplicate, certified by the Company Secretary (CS) or Chartered Accountant (CA) to the designated AD bank. One copy is to be forwarded by the designated AD bank to the Director, Balance of Payments Statistics Division, Department of Statistical Analysis and Computer Services (DESACS), Reserve Bank of India, Bandra-Kurla Complex, Mumbai – 400 051 [Note: copies of loan agreement , offer documents for FCCB are not required to be submitted with form 83).
- The borrower can draw-down the loan only after obtaining the loan registration number from DESACS, Reserve Bank ofIndia.
- Borrower are required to submit ECB-2 Return certified by the designated AD bank on monthly basis so as to reach DESACS, RBI within seven working days from the close of month to which it relates.
