For large projects in India, financial assistance may be obtained from a foreign country through External Commercial Borrowings, which provides an opportunity for the foreign investors to invest in India. IT is a commercial loan with a minimum average maturity period of 3 years. External Commercial Borrowings are the key components of India’s overall external assistance which includes external assistance, buyer’s credit, Non Resident Indian deposits, short-term credit and rupee debt. External Commercial Borrowings is accessed either under Automatic route or Approval route. Under automatic route, the approval of RBI or the Government is not needed, but under approval route prior approval of the RBI and the Government of India is necessary.
This article explains the External Commercial Borrowing policy, procedure and practice under Automatic Route:
Following are the Eligible Borrowers to avail of External Commercial Borrowings under the automatic route;
- Corporate registered under the Companies Act, including those in the hotel, hospital, software sectors etc
- Infrastructure Finance Companies other than financial intermediaries such as banks, housing finance Company, financial institutions and Non Banking Financial Companies
- Units in Special Economic Zones can borrow for their own requirement, They should not transfer or on-lend such funds to sister concerns or units in Domestic Tariff Area.
- To avail External Commercial Borrowings, the Non-Government Organizations which are engaged in micro finance activities. need to fulfill certain conditions like; they should have a satisfactory borrowing relationship with a scheduled commercial bank authorized to deal in foreign exchange in India for at least 3 years and a certificate of due diligence from the designated AD category bank on ‘fit and proper’ status of the Board or Committee of management of the borrowing entity.
Individuals, Non-Profit making organisations and Trusts are not eligible to raise External Commercial Borrowings under automatic route;
International banks, Export Credit Agencies, Foreign Collaborators, Suppliers of equipments, foreign equity holders, multilateral financial institutions or regional financial institutions are the recognized lenders for External Commercial Borrowings under the Automatic Route.
‘foreign equity holder’ to be eligible as “recognized lender” under the automatic route would require minimum holding of paid-up equity in the borrower company as set out below;
- For ECB up to USD 5 million a minimum paid-up equity of 25 per cent held directly by the lender
- For ECB more than USD 5 million a minimum paid-up equity of 25 per cent held directly by the lender and debt-equity ratio not exceeding 4:1
- Overseas organizations and individuals may provide ECB to NGO engaged in micro finance activities but they need to furnish a certificate of due diligence from an overseas bank in the prescribed format.
Maximum limit to raise ECB during a financial year:
- Corporate other than those in the hotel, hospital and software sectors-USD 500 million or its equivalent.
- Corporate in the services sector viz. hotels, hospitals and software sector- USD 100 million or its equivalent for meeting foreign currency and/ or Rupee capital expenditure for permissible end-uses.
- Non Government Organisations engaged in micro finance activities – ECB up to USD 5 million or its equivalent.
- ECB up to USD 20 million or its equivalent in a financial year with minimum average maturity of three years.
- ECB up to USD 20 million or its equivalent and up to USD 500 million or its equivalent with a minimum average maturity of five years.
- ECB up to USD 20 million or equivalent can have call/put option provided the minimum average maturity of three years
Following are the Permitted End Use of External Commercial Borrowing proceeds:
- Investment in real sector and industrial sector including specified service sectors like hotel, hospital and software, small and medium enterprises, infrastructure sector in India.
- First stage acquisition of shares in the dis-investment process and in the mandatory second stage offer to the public under the Government’s dis-investment programme of PSU shares.
- Spectrum Allocation payments.
End-uses not permitted for investment in capital market or acquiring a company, general corporate purpose, working capital, repayment of exiting loans and Real estate sector
Procedure to raise External Commercial Borrowings:
- Borrowers may enter into loan agreement complying with the ECB guidelines with recognised lender for raising ECB under Automatic Route without the prior approval of the Reserve Bank. The borrower must obtain a Loan Registration Number 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 or Chartered Accountant 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 Statistics and Information Systems, Reserve Bank of India.
- The borrower can draw-down the loan only after obtaining the Loan Registration Number from Department of Statistics and Information Systems, Reserve Bank of India.
- Borrowers are required to submit ECB-2 Return certified by the designated AD bank on monthly basis so as to reach Department of Statistics and Information Systems, Reserve Bank within seven working days from the close of month to which it relates.
To conclude; The primary responsibility to ensure that ECB raised / utilised are in conformity with the ECB guidelines and the Reserve Bank regulations / directions is that of the borrower concerned and any contravention of the ECB guidelines will be viewed seriously and will invite penal action under FEMA 1999.