Updated guidelines on raising loans through External Commercial Borrowing (ECB)

The revised guidelines on External Commercial Borrowing are as per the updated circular of RBI as of December 22, 2023.

In simple terms, External Commercial Borrowings (ECB) means commercial borrowings availed (in the form of bank loans, trade credits, and securitized instruments) from external sources (from abroad) with a minimum average maturity of three years. The borrowings under ECB take place in two channels namely automatic route and approved routes. Eligible borrowers like Corporate Importers, Financial Institutions, Housing Finance Companies, Power finance and trading companies, NGOs, and SEZs are allowed to access funds through the ECB. The borrowings for the infrastructure sector and Industrial sector are generally come under automatic route. The rest of the borrowings under ECS are subjected to RBI approval. The Reserve Bank approves ECS proposals from borrowing companies based on utilization of funds, the all-in cost ceiling, and recognized lenders (such as International Banks, IFC, ADB, CDC, International capital markets, export credit agencies, suppliers of equipment, etc.) on a case-to-case basis.

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 framework for raising loans through ECB comprises the two options viz. FCY denomination ECB and Indian Rupee denomination ECB.

Limit and leverage: Under the ECB framework, all eligible borrowers can raise ECB to USD 750 million or equivalent per financial year under the automatic route. Further, in the case of FCY-denominated ECB raised from direct foreign equity holder, the 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.

Framework for FCY (Foreign Currency) denominated ECB

Any freely convertible Foreign Currency can be borrowed. The borrowing can be in the form of 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 leases.         All entities to receive FDI are eligible to raise ECB. In addition to those FDI-eligible entities, Port Trusts; Units in SEZ; SIDBI; and EXIM Bank of India are also eligible to raise ECB.

Framework for INR (Indian Rupee) denominated ECB:

ECB can be raised in the form of 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 can be either placed privately or listed on exchanges as per host country regulations.

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 Organisations can raise ECB.

Eligible Lenders:

The lender should be a resident of a FATF or IOSCO-compliant country, including on transfer of ECB. However,

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

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

iii) 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.

The minimum Average Maturity Period (MAMP)     for ECB will be 3 years. Call and put options, if any, shall not be exercisable before completion of minimum average maturity. However, for the specific categories mentioned below, the MAMP will be as prescribed therein:

For the categories mentioned in (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.

ECB proceeds cannot be used for the following in the negative list. (END-USE)

a) Real estate activities.
b) Investment in the capital market.
c) Equity investment.
d) Working capital purposes, except in the case of ECB mentioned in (b) and (c) above.
e) General corporate purposes, except in the case of ECB mentioned in (b) and (c) above.
f) Repayment of Rupee loans, except in the case of ECB mentioned in (d) and (e) above.
g) On-lending to entities for the above activities, except in the case of ECB raised by NBFCs as given at (c),(d), and (e) above.

Change of currency Borrowing:

Change of Foreign currency of ECB from one freely convertible foreign currency to any other freely convertible foreign currency as well as to INR is freely permitted. However, a change of currency from INR to any freely convertible foreign currency is not permitted.    

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.

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 an unencumbered position.

Conversion into equity: Conversion into equity is freely permitted subject to Regulations applicable for foreign investment in Startups.

All-in Cost ceiling:
Benchmark Rate plus 550 bps spread for existing ECBs linked to LIBOR whose benchmarks are changed to ARR.
For New ECBs: Benchmark rate plus 500 bps spread: For new ECBs.
Indian Rupees: Benchmark rate plus 450 bps spread.

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.

Security: The choice of security to be provided to the lender is left to the borrowing entity. Security can be movable, immovable, intangible assets (including patents, intellectual property rights), financial securities, etc., and shall comply with foreign direct investment / foreign portfolio investment / or any other norms applicable for foreign lenders/entities holding such securities. Further, the issuance of corporate or personal guarantees is allowed. Guarantee issued by a non-resident(s) is allowed only if such parties qualify as lenders under ECB for Startups. However, the issuance of a guarantee, standby letter of credit, letter of undertaking, or letter of comfort by Indian banks, all India Financial Institutions, and NBFCs is not permitted.

Hedging: The overseas lender, in the case of INR-denominated ECB, will be eligible to hedge its INR exposure through permitted derivative products with AD Category – I banks in India. The lender 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.

In case of issue of Corporate or Personal Guarantee, the arrangement shall be subject to the following:

A copy of the Board Resolution for the issue of corporate guarantee for the company issuing such guarantee, specifying the name of the officials authorised to execute such guarantees on behalf of the company or in an individual capacity should be obtained.

Specific requests from individuals to issue personal guarantees indicating details of the ECB should be obtained.

Such security shall be subject to provisions contained in the Foreign Exchange Management (Guarantees) Regulations, 2000, as amended from time to time.

ECB can be credit enhanced/guaranteed/insured by overseas party/ parties only if it/ they fulfil/s the criteria of recognised lender under extant ECB guidelines.

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