External Commercial Borrowings (ECB) are commercial loans raised by eligible resident entities from recognised non-resident entities in conformity to certain parameters set by Reserve Bank of India (RBI).
Government of India first introduced the ECB Policy to facilitate access to overseas loan market by Indian resident entities. Over the years it has further opened up the debt market with the intent of improving the ease of doing business in India and attracting potential foreign currency inflows. Thus ECBs have emerged as a key channel to tap foreign capital by Indian entities.
During the evolution of ECB Framework, RBI has systematically relaxed the conditions for availing ECBs which has made it possible even for small and medium enterprises to access overseas loan market. One such relaxation was allowing eligible entities to raise ECB up to USD 5 million without the requirement of maintaining any minimum ECB liability-equity ratio. Another relaxation recently brought in was to allow Start-ups to raise ECB up to USD 3 million per year without the requirement of ECB liability-equity ratio. However, these two possible opportunities appear to be not being tapped by eligible small and medium entities as ECB is generally perceived as a facility available only for large corporates to access foreign capital market.
Salient features of the current ECB Framework are briefly explained below for a general understanding of the facility.
Currency of borrowing
ECB can be raised in any freely convertible foreign currency as well as in Indian Rupees (INR). In the case of foreign currency denominated ECB, the borrowers shall have to keep their foreign currency risk managed as stipulated in the ECB Framework. Change of currency of ECB from one convertible foreign currency to any other convertible foreign currency as well as to INR is freely permitted. However, change of currency from INR to any foreign currency is not permitted.
Forms of ECB
The ECB Framework enables permitted resident entities to borrow from recognized non-resident entities in the following forms:
- Loans including bank loans
- Securitized instruments such as floating rate notes and fixed rate bonds, and non-convertible, optionally convertible or partially convertible debentures. Securitization is a financial arrangement that consists of issuing securities that are backed by a pool of assets.
- Buyers’ credit: It is a short-term loan facility extended to an importer by an overseas lender such as a bank or financial institution to financethe purchase of goods. It is a very useful financing method in international trade as it gives importers access to cheaper funds compared to what may be available locally.
- Suppliers’ credit: It is an offer of credit that is extended to an importer by an overseas seller or supplier. Credit of this type allows the importer to receive the products needed at the moment, paying for them later in accordance with the terms and conditions agreed upon with the supplier.
- Foreign Currency Convertible Bonds (FCCBs): FCCB means a bond issued by an Indian company expressed in foreign currency, and the principal and interest in respect of which is payable in foreign currency, with an option to convert them into equity share of the issuer company.
- Foreign Currency Exchangeable Bonds (FCEBs): FCEB is a bond expressed in foreign currency, the principal and interest in respect of which is payable in foreign currency, issued by a company but exchangeable into equity share of another company called offered company which is a sister company of the issuing company.
- Financial Lease: It is an alternative solution to borrowing, which is an agreement between two parties (Lessorand Lessee) whereby lessor purchases the asset and transfers largely all the rights, risks and rewards to the lessee against a periodically fixed rental. In the case of ECB, the eligible Indian resident entity can approach foreign leasing companies to acquire high value assets such as plant and machinery and import them to India through an arrangement of financial lease.
The following entities can avail foreign currency denominated ECB:
- Indian companies which are eligible to receive foreign direct investment (FDI);
- Limited Liability Partnerships (LLP): Certain LLPs which are eligible to receive FDI may be allowed to raise ECB;
- ‘Investment vehicles’ registered and regulated under relevant Indian regulations and are eligible to receive FDI;
- Port Trusts;
- Units in Special Economic Zones (SEZ);
- SIDBI; and
- EXIM bank of India.
In addition to the entities which are eligible to avail foreign currency denominated ECB, the following entities are eligible to avail Indian Rupee denominated ECB:
- Registered entities engaged in micro-finance activities;
- Registered Not-for-Profit companies; and
- Registered societies/trusts/ cooperatives and Non-Government Organisations (NGO).
An eligible borrower under ECB Framework can borrow only from the recognised lenders specified under ECB Framework, which are the following:
- Resident entities of the Financial Action Task Force (FATF) or the International Organization of Securities Commissions (IOSCO) compliant countries;
- Multilateral and Regional Financial Institutions where India is a member country;
- Individuals if they are foreign equity holders or subscribers to bonds/debentures listed abroad; and
- Foreign branches/subsidiaries of Indian banks only for foreign currency denominated ECB (except FCCBs and FCEBs).
Security for raising ECB
Indian resident entities can offer immovable assets, movable assets, financial securities and issue of corporate and/or personal guarantees in favour of overseas lender as security for securing the ECB, subject to satisfying themselves with the extant ECB guidelines.
With time, RBI has relaxed the restrictions on end-use of ECBs raised and it is now permitted for working capital requirements, general corporate purposes, repayment of rupee loans and on-lending purposes, subject to limit and leverage requirements detailed in the ECB Framework. However, ECB cannot be raised for the following purposes:
a) Real estate activities;
b) Investment in capital market; and
c) Equity investment.
The cost of funds is usually cheaper from external sources if borrowed from economies with a lower rate of interest. Availability of larger market can help companies satisfy larger requirements from global players in a better manner as compared to what can be achieved domestically. ECB has made it easy even for small and medium Indian eligible entities to access foreign capital and meet their business needs. ECBs can be obtained in most of the cases through an authorised bank without any prior approval from RBI. Even in cases where prior approval is required, the application for approval can be processed through an authorised bank.
With favourable overseas conditions such as low interest rates and liquidity, ECB is a very attractive option for Indian resident entities to raise funds from overseas market. It is an untapped option by small and medium companies, Start-ups and registered societies/trusts/cooperatives. They should also explore the opportunity of ECB to raise funds for fast tracking their projects. The on-going efforts of the Government of India to rationalise and liberalise multiple regulations to attract potential foreign capital has resulted in substantial easing of the regime for debt funding by foreign entities.
Author: CA. Selastin A, FCA