External Commercial Borrowings (ECBs) are commercial loans raised by eligible resident entities from recognised non-resident entities which should always conform to the parameters prescribed by Reserve Bank of India (RBI) such as minimum maturity, permitted and non-permitted end-uses, maximum all-in-cost ceiling etc.The ECB framework is governed by the regulations of the RBI framed under the Foreign Exchange Management Act, 1999 (“FEMA“), and the Master Direction – External Commercial Borrowings, Trade Credits and Structured Obligations (the “Master Direction“).
The Master Direction prescribes certain restrictions on the end-use of ECB proceeds. As per the previous framework, ECB proceeds were not permitted to be utilised for:(a) Real estate activities;(b) Investment in capital market;(c) Equity investment;(d) Working capital purposes except from foreign equity holder;(e) General corporate purposes except from foreign equity holder;(f) Repayment of Rupee loans, except from foreign equity holder; and g) On-lending to entities for the above activities.
The RBI has since the advent of ECBs, substantially relaxed the regulatory regime for the same. The changes have removed almost all restrictions on eligible lenders and eligible borrowers and have substantially limited the scope of end-use restrictions.In the year 2016, Start-ups were made eligible to raise funds through ECBs, with considerably narrower end-use restrictions. Start-ups were allowed to utilise ECB proceeds for any expenditure in connection with the business of the Start-up borrower.
In an effort to augment its efforts to liberalise the ECB regime, the RBI issued a circular dated July 30, 2019 (“Circular“) wherein it has relaxed the end-use restrictions for corporates and non-banking financial companies (“NBFCs“). The Circular has now permitted the use of ECB proceeds from recognised lenders (except for foreign branches or overseas subsidiaries of Indian banks) for working capital requirements, general corporate purposes, repayment of rupee loans and on-lending for such purposes. Such end-use will be required to be made subject to limit and leverage requirements detailed in the Master Direction. Following is the synopsis of the changes introduced through the Circular:
Working Capital Purposes and General Corporate Purposes.
Eligible Borrowers have been permitted to raise ECB from recognised lenders (except for foreign branches or overseas subsidiaries of Indian banks) with a minimum Average Maturity Period (“AMP“) of 10 years for working capital purposes and general corporate purposes.The Circular permits NBFCs to on-lend their ECB borrowings with minimum AMP of 10 years for working capital purposes and general corporate purposes.
‘Eligible Borrowers’ are: (a) All entities eligible to receive foreign direct investment (“FDI“); (b) Port trusts; (c) Units in special economic zones; (d) Small Industries Development Bank of India; (e) Export-Import Bank of India; and (f) Registered entities engaged in micro-finance activities, such as registered not-for-profit companies, registered societies, trusts, cooperatives and non-governmental organizations.
Repayment of Rupee Loans Availed Domestically for Capital Expenditure.
The Circular permits Eligible Borrowers to raise ECBs from recognised lenders (except for foreign branches or overseas subsidiaries of Indian banks) with a minimum AMP of 7 years for repayment of rupee loans availed domestically for capital expenditure. NBFCs are now allowed toon-lend ECBs with a minimum AMP of 7 years for repayment of rupee loans availed domestically for capital expenditure.
The Circular further clarifies that for repayment of rupee loans availed domestically by Eligible Borrowers or NBFCs for purposes other than capital expenditure, the minimum AMP is required to be 10 years.
Repayment of Rupee Loans Availed Domestically for Capital Expenditure in Manufacturing and Infrastructure Sector
Eligible borrowers are also permitted to raise ECB from recognised lenders (except for foreign branches or overseas subsidiaries of Indian banks), for repayment of rupee loans availed domestically for capital expenditure in manufacturing and infrastructure sector provided it is classified as a SMA – 2 (Special Mention Account 2) or NPA (Non-Performing Asset) under any one time settlement with the lenders. SPA – 2 is a loan or an advance where the principal or the interest payment is overdue between 61-90 days. NPA is a loan or an advance where the principal or the interest payment has remained overdue for a period of 90 days.
Lender banks are permitted to sell such loans to the eligible lenders except foreign branches or overseas subsidiaries of Indian banks, provided that the resultant ECB complies with parameters like all-in-cost and minimum AMP, maturity period and all other applicable terms of the ECB framework.
The Circular clarifies that for each of the aforesaid permitted end-uses, the prescribed minimum AMP will be required to be strictly complied with under all circumstances. The relaxation in the ECB framework by the RBI is a pragmatic step, and is expected to act as a positive step towards increased access to global markets by eligible Indian borrowers and encouragement of further ECB flows into the country.