RBI Guidelines on External Commercial Borrowing (ECB)

External Commercial Borrowing (ECB) refers to loans and borrowings raised by Indian companies from foreign lenders. These borrowings can be used for purposes such as expanding existing operations, modernizing infrastructure, or investing in new projects. ECBs allow Indian businesses access to international funding at potentially lower interest rates compared to domestic borrowings. However, since these are cross-border transactions, they are closely regulated by the Reserve Bank of India (RBI) and the Ministry of Finance to ensure proper use and safeguard against financial instability.

Key Terms You Should Know

To navigate the ECB framework effectively, it is essential to understand some important terms associated with it.

Authorized Dealers

Authorized Dealers (ADs) are entities approved by the RBI under Section 10 of the Foreign Exchange Management Act (FEMA), 1999 to deal in foreign exchange. They help facilitate international financial transactions and ensure compliance with FEMA. There are three categories:

• AD Category I includes major commercial banks and financial institutions with the broadest authority to handle foreign exchange.

• AD Category II includes certain financial institutions and cooperative banks, but with more limited functions.

• AD Category III includes entities specifically licensed to deal in foreign currency bills of exchange and related instruments.

Eligible Borrowers

The RBI has divided borrowers into three different tracks, each with its own eligibility criteria.

• Track 1 includes core sectors such as manufacturing and software development companies, as well as shipping and airline companies. Certain financial institutions are also included in this category.

• Track 2 builds upon Track 1 and also includes Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (INVITs).

• Track 3 adds even more flexibility by including entities from Track 2, along with Non-Banking Financial Companies (NBFCs) and some non-profit organizations.

Eligible Lenders

Similar to borrowers, lenders are categorized across the three tracks. Generally, eligible lenders include international banks, multilateral institutions, capital market investors, and government-owned financial institutions. However, slight variations in criteria exist depending on the track chosen for the borrowing.

ECB Routes and Types of Borrowing Instruments

There are two main routes through which companies can raise ECBs:

• The Automatic Route allows companies to raise ECBs without prior approval from the RBI, provided they meet all prescribed criteria. In this route, the application is reviewed and processed by an Authorized Dealer (usually the company's bank).

• The Approval Route is used when the borrowing terms fall outside the limits of the automatic route. In such cases, prior approval from the RBI is necessary.

Companies can raise ECBs in various forms, such as traditional foreign loans, securitized instruments, buyers’ and suppliers’ credit, Foreign Currency Convertible Bonds (FCCBs), Foreign Currency Exchangeable Bonds (FCEBs), and even through financial leases, depending on the nature of the transaction.

Important Terms and Conditions

To raise funds through External Commercial Borrowing (ECB), companies must strictly comply with the terms and conditions laid down by the Reserve Bank of India (RBI). These conditions are essential to ensure that the borrowing is done responsibly and in accordance with regulatory norms. Below are the key terms that need to be followed while opting for ECB:

• The Minimum Average Maturity Period (MAMP) refers to the minimum time over which the loan must be repaid. This period usually ranges from 1 to 10 years depending on the type of borrower and end-use of the funds.

• The All-in-Cost Ceiling refers to the maximum interest and fees that a borrower can pay. It is linked to a benchmark rate plus a specified spread, which varies depending on the type of ECB.

• There are also End-Use Restrictions that dictate how ECB funds can be used. The funds cannot be utilized for investment in real estate, capital markets, equity investment, general corporate purposes (with exceptions), working capital (with exceptions), or to repay rupee loans (again, with some exceptions).

• Under the automatic route, an Indian company can borrow up to USD 750 million (or its equivalent) in a financial year. Borrowings can be made in any freely convertible foreign currency. While conversion to INR is permitted, a borrower cannot raise ECB in INR and later convert it to a foreign currency.

• Regarding security, companies can provide collateral such as movable and immovable property, financial securities, or even corporate and personal guarantees. However, all forms of security must comply with FEMA guidelines.

• There is also a requirement to maintain an appropriate Debt-Equity Ratio, particularly when borrowing from a foreign equity holder. The ratio must comply with the limits set by the applicable regulatory authority.

• If a company is under investigation for violations of FEMA, it may still be allowed to raise ECB, but it must make proper disclosures and comply with RBI requirements.

The ECB Process - Steps to Follow:

First Step: Raising an ECB involves a structured process. The first step is to verify eligibility. The borrowing company must ensure that both the lender and the borrower meet all the conditions prescribed by the RBI and FEMA regulations.

Second Step: The company must decide the terms of the ECB. This includes determining the currency in which the funds will be raised, the maturity period, interest rate (ensuring it falls within the permitted all-in-cost ceiling), and the purpose of the loan to ensure it aligns with the end-use guidelines.

Third Step: After agreeing on the terms, the parties must execute a loan agreement. The agreement should clearly outline the loan amount, applicable interest rate, repayment schedule, use of proceeds, security or guarantees, and any other terms mutually agreed upon.

Fourth Step: The borrowing company must then register the ECB with the RBI. This is done by submitting Form ECB and Form 83 through the company’s Authorized Dealer Bank. Additionally, the company is required to submit Form ECB-2 on a monthly basis, detailing fund utilization, drawdowns, and repayments.

Throughout the process, the Authorized Dealer Bank plays a crucial role in ensuring the company complies with all RBI guidelines and regulatory obligations.

Conclusion:

External Commercial Borrowing (ECB) offers Indian companies an excellent opportunity to access international funding at competitive rates, making it a powerful tool for business expansion and strategic growth. However, raising ECB involves navigating a detailed regulatory framework set by the Reserve Bank of India (RBI), which includes strict eligibility criteria, usage restrictions, and reporting requirements.

It is important to note that RBI’s guidelines and terms related to ECB are subject to change from time to time, based on evolving economic conditions and policy updates. Therefore, staying compliant and up to date with these regulations is crucial to avoid any legal or financial setbacks.

To ensure a smooth and compliant ECB process, it is always advisable to consult a knowledgeable and experienced professional team. At Prolead Financial Solutions, we assist businesses in structuring and managing ECB transactions end-to-end, ensuring full compliance with RBI norms and helping you make informed financial decisions.