List of Prohibitory Sector/End-Use Restrictions under External Commercial Borrowings (ECB) Framework

External Commercial Borrowings (ECB) are an important source of foreign funding for Indian entities. However, the Reserve Bank of India (RBI) has laid down specific guidelines restricting the end-use of ECB proceeds to ensure prudent use of external debt and financial stability. These restrictions apply to all borrowers, with limited exceptions.

Prohibited End-Uses of ECB Proceeds

1. Real Estate Activities
   ECB funds cannot be used for:
   1. Purchase or sale of real estate or land (except for industrial purposes as permitted).
   1. Construction, leasing, or renting of commercial/residential properties.
   1. Real estate brokerage or related services.
2. Investment in Capital Markets
   Utilization of ECB funds for:
   1. Investment in shares, debentures, mutual funds, or any other capital market instruments is strictly prohibited.
3. Equity Investment
   ECB proceeds cannot be used for:
   1. Acquiring equity stakes in other companies, whether in India or abroad.
4. Working Capital Requirements
   Use of ECB for:
   1. Operational expenses such as salaries, rent, and raw material purchases is generally prohibited, except in specific cases involving foreign equity holders.
5. General Corporate Purposes
   1. ECB proceeds cannot be deployed for undifferentiated corporate expenses, unless the borrowing is from eligible foreign equity holders under specific conditions.
6. Repayment of Rupee Loans
   1. Repayment of existing domestic rupee loans using ECB proceeds is generally disallowed, with exceptions provided for certain eligible foreign equity holder borrowings.
7. On-lending or Inter-Corporate Loans
   1. On-lending the ECB funds to other entities, especially for any of the above-listed prohibited purposes, is not permitted.

Permitted Exceptions to End-Use Restrictions

1. Borrowings from Foreign Equity Holders
   ECB proceeds may be used for:
   1. Working capital needs.
   1. General corporate purposes.
   1. Repayment of rupee loans,
      Provided:
   1. The lender is a foreign equity holder with a minimum 25% direct equity or 51% indirect equity holding in the borrower.
   1. The ECB has a minimum average maturity of 5 years.
2. Non-Banking Financial Companies (NBFCs)
   1. NBFCs are permitted to on-lend ECB funds, but only for specific activities as approved under the ECB framework.
3. Infrastructure and Industrial Projects
   1. ECB proceeds may be used for:
      1. Construction and development of industrial parks, integrated townships, and SEZs.
      1. Purchase or leasing of industrial land for setting up new projects or for modernization/expansion of existing units.
   1. Such usage must comply with conditions outlined in the RBI/FEMA regulations.

Important Regulatory Considerations

• The negative list of end-use restrictions is dynamic and may be updated through notifications or circulars issued by the RBI.
• Eligible borrowers and recognized lenders are clearly defined under the ECB policy framework.
• Authorized Dealer (AD) Category-I banks play a critical role in:
  • Verifying the end-use of ECB funds,
  • Ensuring compliance with regulatory provisions,
  • Reporting transactions to the RBI.

Conclusion:
While ECB offers a valuable channel for accessing foreign capital, borrowers must strictly adhere to end-use guidelines to avoid regulatory breaches. Exceptions are available, but only under well-defined and monitored conditions. Entities planning to raise ECB should consult with their AD bank and review the latest RBI circulars to ensure compliance.

Disclaimer

The information provided herein is for informational purposes only and should not be construed as financial, legal, or tax advice. While efforts have been made to ensure accuracy, the contents are subject to change based on future amendments or judicial decisions. Readers are advised to consult a qualified tax professional or financial advisor before making any decisions based on the above information.

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