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Schedule A Demo

ECB / ECB 2 / Revised Form ECB

Transactions on account of External Commercial Borrowings (ECB) and Trade Credit (TC) are governed by sub-section 2 of section 6 of the Foreign Exchange Management Act, 1999 (FEMA) and Foreign Exchange Management (Borrowing and Lending) Regulations, 2018, notified vide Notification No. FEMA 3R/2018-RB dated December 17, 2018, as amended from time to time.

External Commercial Borrowings are commercial loans raised by eligible resident entities from recognised non-resident entities and should conform to parameters such as minimum maturity, permitted and non-permitted end-uses, maximum all-in-cost ceiling, etc. The parameters given below apply in totality and not on a standalone basis.

The framework for raising loans through ECB (hereinafter referred to as the ECB Framework) comprises the following two options:

S. No.
Parameters
FCY denominated ECB
INR denominated ECB
i
Currency of borrowing
Any freely convertible Foreign Currency
Indian Rupee (INR)
ii
Forms of ECB
Loans including bank loans; floating/ fixed rate notes/ bonds/ debentures (other than fully and compulsorily convertible instruments); Trade credits beyond 3 years; FCCBs; FCEBs and Financial Lease.
Loans including bank loans; floating/ fixed rate notes/bonds/ debentures/ preference shares (other than fully and compulsorily convertible instruments); Trade credits beyond 3 years; and Financial Lease. Also, plain vanilla Rupee denominated bonds issued overseas, which can be either placed privately or listed on exchanges as per host country regulations.
iii
Eligible borrowers
All entities eligible to receive FDI. Further, the following entities are also eligible to raise ECB:
  • Port Trusts;
  • Units in SEZ;
  • SIDBI; and
  • EXIM Bank of India.
  • All entities eligible to raise FCY ECB; and
  • Registered entities engaged in micro-finance activities, viz., registered Not for Profit companies, registered societies/trusts/ cooperatives and Non-Government Organizations.
    • iv
    Recognised lenders
    The lender should be resident of FATF or IOSCO compliant country, including on transfer of ECB. However,
    a) Multilateral and Regional Financial Institutions where India is a member country will also be considered as recognised lenders;
    b) Individuals as lenders can only be permitted if they are foreign equity holders or for subscription to bonds/debentures listed abroad; and
    c) Foreign branches / subsidiaries of Indian banks are permitted as recognised lenders only for FCY ECB (except FCCBs and FCEBs). Foreign branches / subsidiaries of Indian banks, subject to applicable prudential norms, can participate as arrangers /underwriters /market-makers/traders for Rupee denominated Bonds issued overseas.
    However, underwriting by foreign branches/subsidiaries of Indian banks for issuances by Indian banks will not be allowed.
    v
    Minimum Average Maturity Period (MAMP)
    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 MAMP(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 Year(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 Year(d) ECB raised for
    (i) repayment of Rupee loans availed domestically for capital expenditure
    (ii) on-lending by NBFCs for the same purpose7 Year(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 purpose10 Year

    for the categories mentioned at (b) to (e) –
    (i) ECB cannot be raised from foreign branches / subsidiaries of Indian banks
    (ii) the prescribed MAMP will have to be strictly complied with under all circumstances.

    vi
    All-in-cost ceiling per annum
    Benchmark Rate plus 550 bps spread: For existing ECBs linked to LIBOR whose benchmarks are changed to ARR.
    Benchmark rate plus 500 bps spread: For new ECBs.
    Benchmark rate plus 450 bps spread
    All-in-cost ceiling has been temporarily increased by 100 bps for ECBs raised till December 31, 2022. The enhanced all-in-cost ceiling shall be available only to eligible borrowers of investment grade rating from Indian Credit Rating Agencies (CRAs). Other eligible borrowers may raise ECB within the existing all-in-cost ceiling as hitherto.
    vii
    Other costs
    Prepayment charge/ Penal interest, if any, for default or breach of covenants, should not be more than 2 per cent over and above the contracted rate of interest on the outstanding principal amount and will be outside the all-in-cost ceiling.
    viii
    End-uses (Negative list)
    The negative list, for which the ECB proceeds cannot be utilised, would include the following:
    a) Real estate activities.
    b) Investment in capital market.
    c) Equity investment.
    d) 7Working capital purposes, except in case of ECB mentioned at v(b) and v(c) above.
    e) General corporate purposes, except in case of ECB mentioned at v(b) and v(c) above.
    f) Repayment of Rupee loans, except in case of ECB mentioned at v(d) and v(e) above.
    g) 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.
    ix
    Exchange Rate
    Change of currency of FCY ECB into INR ECB can be at the exchange rate prevailing on the date of the agreement for such change between the parties concerned or at an exchange rate, which is less than the rate prevailing on the date of the agreement, if consented to by the ECB lender.
    For conversion to Rupee, the exchange rate shall be the rate prevailing on the date of settlement.
    x
    Hedging provision
    The entities raising ECB are required to follow the guidelines for hedging issued, if any, by the concerned sectoral or prudential regulator in respect of foreign currency exposure. Infrastructure space companies shall have a Board approved risk management policy. Further, such companies are required to mandatorily hedge 70 per cent of their ECB exposure in case the average maturity of the ECB is less than 5 years. The designated AD Category-I bank shall verify that 70 per cent hedging requirement is complied with during the currency of the ECB and report the position to RBI through Form ECB 2. The following operational aspects with respect to hedging should be ensured:
    a. Coverage: The ECB borrower will be required to cover the principal as well as the coupon through financial hedges. The financial hedge for all exposures on account of ECB should start from the time of each such exposure (i.e. the day the liability is created in the books of the borrower).
    b. Tenor and rollover: A minimum tenor of one year for the financial hedge would be required with periodic rollover, duly ensuring that the exposure on account of ECB is not unhedged at any point during the currency of the ECB.
    c. Natural Hedge: 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. Any other arrangements/ structures, where revenues are indexed to foreign currency will not be considered as a natural hedge.
    Overseas investors are eligible to hedge their exposure in Rupee through permitted derivative products with AD Category I banks in India. The investors can also access the domestic market through branches / subsidiaries of Indian banks abroad or branches of foreign banks with Indian presence on a back to back basis.
    xi
    Change of currency of borrowing
    Change of currency of ECB from one freely convertible foreign currency to any other freely convertible foreign currency as well as to INR is freely permitted.
    Change of currency from INR to any freely convertible foreign currency is not permitted.
    Note: The ECB framework is not applicable in respect of investments in Non-Convertible Debentures in India made by Registered Foreign Portfolio Investors. Lending and borrowing under the ECB framework by Indian banks and their branches/subsidiaries outside India will be subject to prudential guidelines issued by the Department of Banking Regulation of the Reserve Bank. Further, other entities raising ECB are required to follow the guidelines issued, if any, by the concerned sectoral or prudential regulator

    Limit and leverage:

    All eligible borrowers can raise ECB up to USD 750 million or equivalent per financial year under the automatic route.  The automatic route limit stands increased from USD 750 million or equivalent to USD 1.5 billion or equivalent. This relaxation is available for ECBs to be raised till December 31, 2022. Further, in case of FCY denominated ECB raised from direct foreign equity holder, ECB liability-equity ratio for ECB raised under the automatic route cannot exceed 7:1. 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. 

    Issuance of Guarantee, etc. by Indian banks and Financial Institutions: Issuance of any type of guarantee by Indian banks, All India Financial Institutions and NBFCs relating to ECB is not permitted. Further, financial intermediaries (viz., Indian banks, All India Financial Institutions, or NBFCs) shall not invest in FCCBs/ FCEBs in any manner whatsoever.

    Parking of ECB proceeds: ECB proceeds are permitted to be parked abroad as well as domestically in the manner detailed 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 following liquid assets (a) deposits or Certificate of Deposit or other products offered by banks rated not less than AA (-) by Standard and Poor/Fitch IBCA or Aa3 by Moody’s; (b) Treasury bills and other monetary instruments of one-year maturity having minimum rating as indicated above and (c) deposits with foreign branches/subsidiaries of Indian banks abroad.
    • Parking of ECB proceeds domestically: ECB proceeds meant for Rupee expenditure should be repatriated immediately for credit to their Rupee accounts with AD Category I banks in India. ECB borrowers are also allowed to park ECB proceeds in term deposits with AD Category I banks in India for a maximum period of 12 months cumulatively. These term deposits should be kept in unencumbered position.

    Reporting requirements.:

    • LRN (Loan Registration Number): Any draw-down in respect of an ECB should happen only after obtaining the LRN from the Reserve Bank. To obtain the LRN, borrowers are required to submit duly certified Form ECB, which also contains terms and conditions of the ECB, in duplicate to the designated AD Category I bank. In turn, the AD Category I bank will forward one copy to the Director, DSIM, External Commercial Borrowings Division.
    • Changes in terms and conditions of ECB should be reported to the DSIM through revised Form ECB at the earliest, in any case not later than 7 days from the changes effected. 
    • The borrowers are required to report actual ECB transactions through Form ECB 2 Return through the AD Category I bank on monthly basis so as to reach DSIM within seven working days from the close of month to which it relates.
    • Late Submission Fee (LSF) for delay in reporting:
    Type of Reporting Delay
    LSF Amount
    Form ECB, Form ECB-2, Revised Form ECB or any other return which captures flows or returns which capture reporting of non-fund transactions or any other transactional reporting
    [7500 + (0.025% × A × n)]

    Notes:

    a) “n” is the number of years of delay in submission rounded-upwards to the nearest month and expressed up to 2 decimal points.

    b) “A” is the amount involved in the delayed reporting.

    c) LSF amount is per return. However, for any number of Form ECB-2 returns, delayed submission for each LRN will be treated as one instance for the fixed component. Further, ‘A’ for any ECB-2 return will be the gross inflow or outflow (including interest and other charges), whichever is more.

    d) Maximum LSF amount will be limited to 100 per cent of ‘A’ and will be rounded upwards to the nearest hundred.

    e) Where an advice has been issued for payment of LSF and such LSF is not paid within 30 days, such advice shall be considered as null and void and any LSF received beyond this period shall not be accepted. If the applicant subsequently approaches for payment of LSF for the same delayed reporting, the date of receipt of such application shall be treated as the reference date for the purpose of calculation of “n”.

    Disclaimer: The information contained in this Article is intended solely for personal non-commercial use of the user who accepts full responsibility of its use. The information in the article is general in nature and should not be considered to be legal, tax, accounting, consulting or any other professional advice. We make no representation or warranty of any kind, express or implied regarding the accuracy, adequacy, reliability or completeness of any information on our page/article. 

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