RBI ECB Guidelines

What You Need to Know about ECB for NPAs and Start-Ups?

Borrowing in foreign currency from an external source is a restricted activity governed by RBI.  For many years now I have met many entrepreneurs asking me to help cheaper money from a foreign source.

Most of the entrepreneurs were not aware of ECB guidelines and therefore most were cheated by financial intermediaries. Huge advances were given by the entrepreneurs to these intermediaries in the hope to get cheaper money.

During my meeting with them, many narrated this story. When the ECB was not allowed in the real estate sector, real estate developers were committed cheaper funds. Who doesn’t want cheaper funds? Incidences are many.

Be that as it may, recently RBI relaxed ECB guidelines in Jan 19 and July 19. The scope is now expanded. Entrepreneurs need to know this. Here is a brief understanding of what all you need to know about ECB.

  1. What is ECB?

External Commercial Borrowing is additional borrowing option available to Indian entrepreneurs. Internationally loans are available at cheaper rates than India. Inflation in India is not making it possible to lower lending rates.

In order to compete internationally cost of funds needs to be cheap and competitive with international competitors. ECB allows Indian entrepreneurs to borrow from the international market at a cheaper rate.

Since this entails foreign exchange, RBI controls the entire ECB guidelines. They revise the guidelines from time to time depending upon the need of the Economy.  This is governed by Foreign Exchange Management (Borrowing and Lending) Regulation Act 2018.

ECBs can be availed in any freely convertible foreign currency including Indian currency.

  1. Types

  • Automatic Route

All ECB can be raised under the automatic route if they conform to the parameters prescribed under this framework.

ECB up to USD 750 million or equivalent per financial year, which otherwise are in compliance with the parameters and other terms and conditions set out in the new ECB framework, will be permitted under the automatic route not requiring prior approval of the Reserve Bank.

  • Approval Route

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

  1. Permissible Purposes/ End-use

All entities including start-ups and NPA companies are allowed to borrow under ECB route. It has been decided to permit eligible corporate borrowers to avail ECB for repayment of Rupee loans availed domestically for capital expenditure in manufacturing and infrastructure sector if classified as SMA-2 or NPA, under any one-time settlement with lenders.

There are industry-specific negative list ECB proceeds cannot be utilised, would include the following:

  1. Real estate activities.
  2. Investment in the capital market.
  3. Equity investment.
  4. Working capital purposes, except in the case of ECB mentioned at v(b) and v(c) above.
  5. General corporate purposes, except in the case of ECB mentioned at v(b) and v(c) above.
  6. Repayment of Rupee loans, except in case of ECB mentioned at v(d) and v(e) above.
  7. On-lending to entities for the above activities, except in case of ECB raised by NBFCs as given at v(c), v(d) and v(e) above.
  1. Recognised Lenders:

The lender should be resident of FATF or IOSCO compliant country.

However following entities are also considered as recognised lenders.

Multilateral and Regional Financial Institutions where India is a member country will also be considered as recognised lenders;

Individuals as lenders can only be permitted if they are foreign equity holders or for subscription to bonds/debentures listed abroad; and

Foreign branches/subsidiaries of Indian banks are permitted as recognised lenders only for Foreign Currency ECB.

  1. Eligible Borrowers

All entities eligible to receive FDI are also eligible to raise Foreign Currency ECB loan. (For start Up there are separate guidelines discussed below)

The following entities are also eligible to raise ECB:

  1. Port Trusts;
  2. Units in SEZ;
  3. SIDBI; and
  4. EXIM Bank of India.

Over and above the above entities, the following entities are also eligible to raise loan INR denominated ECBs

Registered entities engaged in micro-finance activities, i.e. registered Not for Profit companies, registered societies/trusts/ cooperatives, and Non-Government Organisations.

  1. Tenure

MAMP for ECB will be 3 years. Call and put options, if any, shall not be exercisable prior to completion of minimum average maturity. However, for the specific categories mentioned below, the MAMP will be as prescribed therein:

Sr.No. Category Minimum Average Maturity Period
(a) ECB raised by manufacturing companies up to USD 50 million or its equivalent per financial year. 1 year
(b) ECB raised from foreign equity holder for working capital purposes, general corporate purposes or for repayment of Rupee loans 5 years
1(c) ECB raised for
(i) working capital purposes or general corporate purposes
(ii) on-lending by NBFCs for working capital purposes or general corporate purposes
10 years
(d) ECB raised for
(i) repayment of Rupee loans availed domestically for capital expenditure
(ii) on-lending by NBFCs for the same purpose
7 years
(e) ECB raised for
(i) repayment of Rupee loans availed domestically for purposes other than capital expenditure
(ii) on-lending by NBFCs for the same purpose
10 years
  1. Cost

Benchmark rate plus 450 bps spread.

Prepayment charge/ Penal interest, if any, for default or breach of covenants, should not be more than 2 percent over and above the contracted rate of interest on the outstanding principal amount and will be outside the all-in-cost ceiling.

  1. Limit/CAP

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 Foreign Currency denominated ECB raised from direct foreign equity holder, 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.

  1. Hedging

Companies are required to mandatorily hedge 70 percent of their ECB exposure in case the average maturity of the ECB is less than 5 years.

Natural hedge, in lieu of financial hedge, will be considered only to the extent of offsetting projected cash flows/revenues in matching currency, net of all other projected outflows.

For this purpose, an ECB may be considered naturally hedged if the offsetting exposure has the maturity/cash flow within the same accounting year.

  1. Parking of ECB

ECB proceeds are permitted to be parked abroad as well as domestically in the manner given below:

Parking of ECB proceeds abroad: ECB proceeds meant only for foreign currency expenditure can be parked abroad pending utilisation. Till utilisation, these funds can be invested in the specified liquid assets

Parking of ECB proceeds domestically: ECB proceeds meant for Rupee expenditure should be repatriated immediately for credit to the Rupee accounts with Authorised Dealer Category I banks in India.

ECB borrowers are also allowed to park ECB proceeds in term deposits with Authorised Dealer Category I banks in India for a maximum period of 12 months cumulatively. These term deposits should be kept in unencumbered position.

ECB Guidelines

  1. ECB: Start-up Guidelines

  • Eligibility: An entity recognised as a Startup by the Central Government as on date of raising ECB.
  • Maturity: Minimum average maturity period will be 3 years.
  • Amount: The borrowing per Startup will be limited to USD 3 million or equivalent per financial year either in INR or any convertible foreign currency or a combination of both.
  • All-in-cost: Shall be mutually agreed between the borrower and the lender. There is no limit as in the case of other eligible borrowers.
  • End-uses: For any expenditure in connection with the business of the borrower.
  1. ECB for NPA and SMA 2 Accounts

An entity which is under a restructuring scheme/ corporate insolvency resolution process can raise ECB only if specifically permitted under the resolution plan.

Eligible corporate borrowers who have availed Rupee loans domestically for capital expenditure in manufacturing and infrastructure sector and which have been classified as SMA-2 or NPA can avail ECB for repayment of these loans under any one-time settlement with lenders.

Eligible borrowers under the ECB framework, who are participating in the Corporate Insolvency Resolution Process under Insolvency and Bankruptcy Code, 2016 as resolution applicants, can raise ECB for repayment of Rupee term loans of the target company.

Such ECB will be considered under the approval route.

Conclusion:

ECB option is now available to many entities which is a welcome step. Start-ups, NPA and SMA 2 accounts, and Microfinance entities too can raise ECB. The issue would be banks willing to engage in smaller deals or with the stressed accounts.

More more info mail me.

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