External commercial borrowing is also known as commercial loans widely used by eligible resident entities. External commercial borrowing helps Indian organizations to raise funds in foreign currencies from outside India.
ECB stands for external commercial borrowing is an instrument that aids Indian organizations to raise funds from outside India by foreign countries. This type of external commercial borrowing is legally permitted by the Indian government for corporate bodies to raise funds and expand the company's current capacity. ECB can also be used for fresh investment. These are similar to ECB and include Foreign Currency Convertible Bonds (FCCBs) and Foreign Currency Exchangeable Bonds (FCEBs).
External commercial borrowing falls under commercial loans that include securitized instruments, bank loans, buyer credit, supplier credit, and bonds availed from lenders.
It can be availed through an automatic or approval route.
Automatic Route: In the automatic route, the cases are examined by the Authority Dealer Category-I
Approval Route: With the approval route, the prospective borrowers are requested to send their approaches to RBI through their authorized dealers for examination.
ECB can be availed in easily convertible foreign currency as well as in Indian rupees or any other currency as specified by the Reverse Bank of India.
The following are some of the benefits associated with external commercial borrowing as follows:
The entities engaged in the following categories are eligible:
The borrowing amount of startups has been set at a limit of USD 3 million or equivalent per financial year. While eligible borrowers/category of borrowers may raise ECB up to USD 750 million or equivalent per financial year.
As defined in the ECB policy, the lender should be a resident of a FATT or IOSCO-compliant country. Multilateral, Regional, and Government-owned financial institutions where India is a member of the country are also considered eligible lenders.
Borrowers would need the following documents to keep in handy before application:
Borrowers need to meet certain eligibility requirements created by the government for availing of finance under the automatic route. Such regulations include the size of the amount, type of industry, end-use of the funds..etc. Companies that wish to raise funds through ECB under the approval route; companies must fall under certain pre-specified sectors to get RBI’s or government explicit permission prior to raising funds through external commercial borrowing. Even formal guidelines and circular has been published by the Reverse Bank of India for the specification of norms and regulations.
The funds borrowed through ECB are used for business expansion, but borrowers cannot use these for repaying existing loans, onward lending, or investing in real estate.
Also read: - Multi-Purpose Personal Loan for Business Owners