External Commercial Borrowing

External Commercial Borrowing (ECB) is a lending product that helps organizations and Indian firms to raise funds from outside the country in foreign currencies. Indian corporates are authorized by the government of India to uplift funds with the help of External Commercial Borrowing to assist companies in expanding their current capacity. It can also be used to bring in fresh investment. 

The sources related to External Commercial Borrowing include Foreign Currency Exchangeable Bonds (FCEBs) and Foreign Currency Convertible Bonds (FCCBs). 

 Although the main purpose for the issuance of FCCBs is to boost capital, ECBs assign to the commercial finance that may include bank loans, securitized instruments, buyer’s credit, supplier’s credit, and bonds that are provided by the banks to the non-Indian residents.  

Such entities should be in accordance with the given parameters - 

• Minimum maturity
• Permitted end-uses
• All-in-cost Ceiling, etc.

These funds can be raised either through an automatic route or an approval route. The Reserve Bank of India has made some eligibility regulations for getting these finances under the automatic route. These regulations are primarily related to the industry type, amounts, and end-use of the funds, etc...  

An organization that wants to raise funds by External Commercial Borrowings has to fulfill such eligibility criteria defined by the Reserve Bank of India (RBI), and thereafter funds can be raised without any approval.  

For ECB, the Reserve Bank of India has provided formal guidelines and circulars for the specification of criteria for these borrowings.  

Advantages of ECB 

• The businesses of India can take sufficient benefit of low-interest rates obtained in the US and Euro zone, by increasing ECB from such countries.

• By getting ECB, the shares of the company are not diluted, and the individuals can boost funds without giving up control because debtors do not have any voting rights in the company.

• For big projects with income in foreign currency, External Commercial Borrowing gives a good route to take a large amount in foreign currency and enhance the profitability of the project & strength of the balance sheet.

• Through ECB, the domestic borrowers can avail access to a global market & exposure to global opportunities.

• Since the markets are huge when raising funds by ECB, the organization can fulfill large requirements from international players as compared with what can be obtained through domestic players.

• The investor base can be varied by the individual.

• ECB gives access to the global markets so that an individual has great exposure to worldwide opportunities.

• Companies should become increasingly profitable by ECB.

• External Commercial Borrowing provides benefits to the economy. Additionally, with the government of India the liquidity is directed into the sector, therefore increase in its growth potential. For example, a significant percentage of funding from the ECB can be authorized by the Indian government for the small, and medium enterprises and infrastructure industry. This assists the overall growth development of the country.

Disadvantages of ECB 

• Funds lifted by the External Commercial Borrowing (ECB) are likely to have risks related to foreign exchange rates, as the borrowing & paying back must be done in foreign currency.

• However, ECB can be provided at a lower rate of interest, there are a set of restrictions and guidelines that should be followed by the banks and an applicant, which is regulated by the Reserve Bank of India. Therefore, it leads to an increase in documentation and consent might be a burden for business.

• The individual shall not be able to refinance their entire existing rupee loan by ECB.

• If an individual has excess liquidity, the External Commercial Borrowing will not be prepaid before the completion of the minimum average duration.

Interest rates on the ECB 

If the External Commercial Borrowing is taken from an equity holder, the rate of interest should be bilaterally decided. 

For instance, the lender keeps the interest rate very competitive to support the individual. And if the lender is a bank, then the interest rate is based on the credit assessment and ECB period.  

Generally, banks charge a rate that ranges between LIBOR + 2% to LIBOR + 4.5%. 

Different Types of Borrowings under ECB  

• Loans including Bank Loans
• Securitized Instruments
• The credit of buyers and Credit of suppliers
• FCCB and FCEB
• Financial Lease
• Non-convertible, partially convertible, or optionally convertible Preference shares and Debentures

Who Will be the Lenders of ECB? 

There are many eligible banks for trade credits, usually non-resident lenders from whom buyers can boost funds from abroad in freely convertible foreign currencies and India Rupee. They are mostly banks & financial bodies, foreign equity holders, overseas suppliers, joint venture partner, & financial institutions in International Services Centers in India.  

Not all banks are active in India for ECB. Only large private sector banks, large Public Sector Banks (PSBs), and Multinational Corporation Banks (MNC) are actively involved in the ECB.  

As per the new framework of RBI, there has been an enlargement of the list of recognized banks including entities that have a long-term interest in India. 

Insurance funds, foreign regulated financial entities, sovereign wealth funds, pension funds, and other related long-term investors are involved in the list of recognized lenders for the long-term funding in India.  

According to the current trend of banks, 70% of ECBs are from the JV partner or the parent company. Availing ECB from a lender is subject to a similar amount of due diligence as taking any Rupee loan. Therefore, it might be the reason that the shares of a bank in the entire External Commercial Borrowing are relatively smaller.

Prepayments - 

For both the route of ECB such as approval and automatic, the prepayment of ECB up to USD 500 million shall be permitted by the AD banks without any prior approval of the RBI subject to consent with the stated Minimum Average Maturity Period (MAMP) as relevant to the loan.  

Moreover, for the approval route prepayments for the amount exceeding USD 500 million should be considered by the Reserve Bank of India under the approval route. 

Eligible Entities to avail ECBs 

Entities that are eligible to receive External Commercial Borrowings are listed below - 

• Software development
• Manufacturing
• Service sectors
• Hospitals
• Software services
• Trading
• Consultancy
• Infrastructure

ECB Facility for Startups 

                                                                               @contentImg

• Introduction

As specified by the Indian government, an entity can be considered as a start-up - 

1. Up to 5 years from the date of its registration and incorporation.
2. If turnover for any financial year has not more than INR 25 crores.
3. It is working towards the development, deployment, innovation, or commercialization of new products by intellectual property.

• Maturity 

 The minimum average maturity period should be three years. 

• Recognized lender 

A lender can be a resident of a country who is a member of FATF-style regional bodies or a member of the Financial Task Force (FATF).  

• Prohibited recognized lender

1. Overseas subsidiaries or branches of the Indian banks.
2. Overseas fully owned subsidiary or joint venture of the Indian company.

• Forms of Borrowing 

1. Loans
2. Optionally convertible preference shares
3. Non-convertible preference shares
4. Partially convertible preference shares

• Currency of Borrowing

The borrowing can be entitled to any cost-free convertible currency or the Indian rupee or a combination of both.  

And if the borrowing is in Indian rupees, the non-resident bank should arrange INR through outright sales or swaps undertaken by the AD bank of India.  

• Amount 

The borrowing per start-up is inadequate to USD 3 million or similar per financial year whether it is in Indian currency or any convertible foreign currency. 

• All-in-cost

It can be mutually agreed between the lender and the borrower. 

• End-uses 

Authorized end-uses are related to the business of an applicant.  

Reporting Requirements for External Commercial Borrowings 

To raise the ease of doing business in India, the RBI came up with a new framework for the ECB on 16th January 2019, which is a more clear version of the old one that will influence capital flows. 

As a modification, the RBI has enlarged the list of eligible borrowers, reduced the Minimum Average Maturity Period (MAMP), and expanded the list of recognized lenders. 

The borrowers should ensure that the terms and conditions are noted precisely in the ECB form and none of the columns are left vacant.  

Any changes that take place in ECB parameters, whether it is under the automatic route or under the approval route. The changes must be reported to the Department of Statistics and Information Management (DSIM) through the revised form at the earliest to make sure it is submitted before seven days from the changes effected.  

During the submission of the revised form, the changes must be mentioned in a clear and detailed manner in the communication. If you fail to comply with the reporting guidelines with reference to the ECB form may invite penal action under the FEMA.  

Minimum Average Maturity Period (MAMP) 

Conversion of ECB into Equity 

• The conversion should be done under the automatic route.
• The price of shares is as per the fair value which is applicable on the conversion date.
• For part conversion, it should be reported in the monthly ECB-2 return. And for full conversion, the whole portion is to be reported in the form FC-GPR, and ECB 2 return must be done.

Late Submission Fee (LSF) for Delay  

How to Apply for External Commercial Borrowing? 

• Under Automatic Route -

1 The basic documentation includes making loan agreements, filling in ECB forms, making average maturity, request letters, and interest & repayment tenure schedule. 

2. These documents should be audited by the Chartered Accountant or CS of the borrowing company & submitted to the AD bank. 

3. Many departments check out the documents in a bank, and when they find that everything is okay, then the documents will be processed to the Reserve Bank of India.  

4. Generally, under the automatic route, the RBI provides its approval within a few days and issues the Learner Reference Number (LRN).  

5. When LRN is issued, a draw down may take place.  

• Under Approval Route -

1 The basic documentation includes making loan agreements, filling in ECB forms, making average maturity, request letter, interest & repayment tenure schedule and covering letter.  

2. These documents should be audited by the Chartered Accountant or CS of the borrowing company & submitted to the AD bank. 

3. Many departments check out the documents in a bank, and when they find that everything is okay, then the documents will be processed to the Reserve Bank of India. 

4. Generally, under the approval route, the RBI gives its approval within a few months as the Reserve Bank of India verifies it twice. 

5. When LRN is issued, a drawdown may take place. 

6. You can approach financeseva to get the best deal for the finance of External Commercial Borrowing.