External Commercial Borrowings (ECBs) Policy

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ECB POLICY - AN OVERVIEW
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• As a part of the development policy, India has
  always promoted capital inflows. In other words
  to make domestically investment foreign capital
  is obtained from foreign countries. There are
  some reasons which compelled our government to go
  after foreign capital such as Lack of domestic
  capital and deficit in the current account. There
  are different types of foreign capital and the
  major category is foreign investment including
  FDI (Foreign Direct Investment) and FPI (Foreign
  Portfolio Investment). There are following types
  of foreign capital such as trade credit, NRI
  deposits and ECBs (External Commercial
  Borrowings).

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ECB Policy- An Overview

• External Commercial Borrowings (ECB) is a
  commercial loan availed from nonresident lenders
  by an Indian entity with a minimum average
  maturity of 3 years. These types of loans are
  provided by foreign commercial banks and other
  institutions. ECBs are defined as money borrowed
  from foreign resources in the form of
• Commercial bank loans
• Buyers credit/ suppliers credit
• Securitized instruments such as floating rate
  notes and fixed rate bonds
• Credit from official export credit agencies and
  commercial borrowings from Multilateral Financial
  Institutions.
• ECBs have emerged a major form of foreign
  capital like FDI and FII in the post reform
  period. In Country from several years
  contribution of ECBs was between 20 to 35 percent
  of the total capital flows. In large number
  Indian corporate and PSUs have used the ECBs as
  sources of investment. Private sector corporates
  have obtained bulk of the overseas loans or ECBs.
  ECB is easy to obtain fund for the corporates and
  it also helps them to make business/investment
  expansion. For expansion of existing capacity as
  well as for fresh investment, ECBs are being
  permitted by the Government as a source of
  finance for Indian Corporates.

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Objectives

• For expanding the existing capacity as well as
  for fresh investments government permits the ECBs
  as an additional source of financing.
• ECB policy seeks to emphasize the priority of
  investing in the infrastructure and core sectors
  such as Power, telecom, Railways, Roads, Urban
  infrastructure etc. and also emphasis on the need
  of capital for Small and Medium scale
  enterprises.

Benefits to Borrowers

• ECB funding helps corporates in paying to
  suppliers in other countries that may not be
  available in India.
• In comparison to domestic funds, cost of funds
  borrowed from external sources is cheaper.
• Borrower can diversify the investor base.
• It provides international market to borrowers. In
  ECB there are internationally recognised sources
  such as banks, export credit agencies, suppliers
  of Equipment, foreign collaborators, foreign
  equity holders, international capital markets
  etc.

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Advantages

• With the help of ECBs it provide an opportunity
  to borrow large volume of funds
• Funds are relatively available for long term
• In comparison to domestic funds interest rate are
  also lower
• Since ECBs are in the form of foreign currencies,
  they enable the corporate to have foreign
  currency to meet the import of machineries etc.
• ECBs can be raised by corporates from
  internationally recognized sources such as banks,
  export credit agencies, international capital
  markets etc.
• India has a vibrant corporate sector unlike many
  other emerging market economies and many of them
  have overseas operations as well. In India, to
  the corporates, domestic financial market is not
  often able to provide big sized loans at
  competitive rate of interests. For domestic
  companies ECBs have emerged as a valuable source
  of investable resource of funds. Under ECB Policy
  government put restrictions on amount of loan
  that can be obtained by a company, end user
  restrictions, interest rate ceiling for ECBs,
  maturity period etc. Government put ceiling for
  the total amount of ECBs that can be obtained
  through the ECB route during a year by all Indian
  firms.

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External Commercial Borrowings Commercial
Loans, buyer / suppliers credit, securitized
instruments (Bonds, Preference shares etc.) with
a minimum average maturity of 3 years.
Routes to access ECB
External Commercial Borrowing (ECB)
Automatic Route
Approval Route
USD 750 M-Maximum USD 200 M- Hotel, Hospital,
S/W and Miscellaneous Service USD 10 M- NGO in
MF MFI Specified NBFC and SIDBI as per
conditions
Approval route applicable - Not covered in
Automatic route
Minimum average maturity 3 or 5 years depending
on the quantum of ECB
Short term debt not encouraged
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Automatic Route
Eligible Borrowers

• Corporates including those in the hotel,
  hospital, software sectors
• Non-Government Organizations (NGOs) engaged in
  micro finance activities are eligible to avail of
  ECB.
• Units in Special Economic Zones (SEZ) Units
  (except financial intermediaries, individuals,
  Trusts)
• NBFC-IFC, NBFC-AFC
• Companies in Miscellaneous Services i.e. Training
  Activities, RD and Infra Support (except
  Educational Inst., Trading business, Logistic
  Services, Financial Services, and Consultancy
  Services) only from its Direct/Indirect Equity
  Holder/Group Cos
• Small Industries Development Bank of India
  (SIDBI) can avail of ECB for on lending to MSME
  Sector)
• Other specified

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Recognized Lenders

• International Banks
• International Capital Markets
• Multilateral Financial Institutions such as IFC,
  ADB, CDC etc.
• Export credit agencies
• Suppliers of equipment
• Foreign collaborators
• Foreign Equity Holders (min. 25)
• For ECB beyond USD 5M ECB Liability- Equity
  Ratio 41
• Indirect Equity Holder- Only if indirect Holding
  in IC is 51
• Group Co.- ECB from a group company is permitted
  provided both the borrower and the foreign lender
  are subsidiaries of the same parent

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Maturity

• The maximum amount of ECB which can be raised by
  a corporate is USD 750 million or its equivalent
  during a financial year other than hotel,
  hospital and software sectors, and corporate in
  miscellaneous services sector.
• USD 200 M- Hotel, Hospital, S/W and Miscellaneous
  Service
• U 10 M- NGO in MF MFI
• Specified NBFC and SIDBI as per conditions
• Minimum average maturity 3 or 5 years depending
  on the quantum of ECB
• Minimum avg. maturity period
• USD 20 M 3 years
• Beyond USD 20 up to 750 M 5 years
• All in Cost Ceiling
• 3-5 years LIBOR 350 bps
• Beyond 5 years LIBOR 500 bps
• (Fixed rate loans swap
• cost margin)

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End Use

• Real/ Industrial sector (SME)
• Import of capital goods,
• New Projects, Expansion/ modernization of
  existing units
• Overseas Direct Investment in Joint Ventures
  (JV)/ Wholly Owned Subsidiaries (WOS) Payment of
  Interest During Construction (IDC)
• First stage acquisition of shares in the
  disinvestment process and also in the mandatory
  second stage offer under GOIs disinvestment
  program
• Payment for obtaining License/ permit for 3G
  spectrum.
• For lending to self-help groups or for micro
  credit by NGOs
• Repayment of rupee loans by companies in
  infrastructure sector manufacturing and hotel
  sector (with project cost of NR 250 or more)
• General corporate purpose from foreign direct
  equity holder

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End Use (Not Permitted)

• On lending, Investment in capital market or
  acquiring a company in India
• Real Estate Sector
• General corporate purposes
• Repayment of existing INR Loan

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Other permitted end uses

• Import of capital goods New projects
• Modernization/expansion of existing projects in
  real sector (industrial sector including SME and
  infrastructure sector)
• Hotel Sector (fixed capital investment of Rs.
  200 Crore)
• Convention Centers (fixed capital investment of
  Rs. 300 Crore)
• Common infrastructure for Industrial Parks, SEZ,
  Tourism Facilities
• Capital investment for fertilizers
• Post harvest infrastructure for agricultural and
  horticultural produce including cold storage
• Soil testing laboratories Cold chain for farm
  level pre-cooling, preservation, storage or
  agricultural and allied produce, marine produce
  and meat
• ODI in JV/WOS abroad
• Acquisition of shares in disinvestment process of
  PSU shares
• IDC for Indian Infrastructure sector
• Capital expenditure in maintenance and operations
  of toll system
• Refinancing of Bridge finance availed for import
  of capital goods in infrastructure sector
• Import of services, technical know-how, payment
  of license fee etc.
• General corporate purposes from FDEH in
  manufacturing, infrastructure, hotels, hospitals
  and IT sector (minimum average maturity 7 years)
• Payment of spectrum allocation

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• Guarantee
• Issuance of guarantee, standby letter of credit,
  letter of undertaking or letter of comfort by
  banks, Financial Institutions and Non-Banking
  Financial Companies (NBFCs) from India relating
  to ECB is not permitted.
• Pledge of shares by promoters, domestic associate
  companies of the borrower
• Corporate Guarantee, Personal Guarantee ,
• Creation of Charge over immoveable assets and
  financial securities is Possible only after
  obtaining no objection from AD bank.
• Incase of enforcement of charge property will
  be transferred only to person resident in India

ECB Policy

• Authorized Dealer can permit
• Change in Name Change in Lender Change in End
  Use, Change in All-in-Cost
• Transfer of ECB, Currency Reschedulement,
  Reduction in amount of ECB
• Cancellation of LRN

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Conversion of ECB into Equity

• Conditions
• Activities to be under Automatic Route / FIPB
  approval obtained
• Sectoral Cap not breached
• Pricing Listed as per SEBI Unlisted At a Fair
  Value arrived by CA/MB based on IAP on ALP on
  the date of conversion
• Conversion Rate Maximum at exchange rate
  prevailing on the date of the agreement between
  the parties.
• Reporting structure
• Full conversion of outstanding ECB into equity
  Form FC-GPR to AD Form ECB-2 to DSIM within 7
  working days from the close of the month
• Partial conversion of outstanding ECB into equity
  Form FC-GPR for converted portion Form ECB-2
  to DSIM mentioning converted and unconverted
  portion

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Procedure

• Execution of Loan Agreement(filing is not
  compulsory)

Filing of Form 83 duly certified by CA/CS to AD
AD to process the request and send to RBI for LRN
Drawn should take place post allotment of LRN
Filing of Monthly Return in ECB 2 by 7th of next
month
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of Cont
Compounding of Contraventions
Compounding of contraventions means settle an
offence committed by the contravener through
imposition of a monetary penalty without going in
for litigation after the contravener acknowledges
having committed the contravention.
Objective

• To provide comfort by minimizing transaction
  costs, while taking severe view of willful,
  malafide and fraudulent transactions but it is
  not equal to withdrawal of a charge or a
  complaint but an agreement not to pursue the
  legal battle and spare the accused from further
  consequences.

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Filling Application

• Application Form
• Nature of the contravention
• Provisions of FEMA under which the transaction
  would be handled
• While undertaking the transaction which of the
  FEMA provisions were contravened
• Transaction- Parties involved, Date of the
  transaction and Amount involved
• DD in favor of RESERVE BANK OF INDIA Payable
  at RO/MUMBAI
• RBI Office Jurisdiction
• Regional Offices Central
  Offices

• - Delay in AR,FC-GPR
• Non Allotment/Refund in 180 days
• Violation of Pricing Guidelines
• Issue of Ineligible Instruments
• Issue of securities without RBI/FIPB approval
• Delay in Filing of FC-TRS-NR/R-R/NR
• Recording of Transfer by Company without FC-TRS

• New Delhi
• Acquisition of IMP in/outside India
• LO, BO and PO
• Deposits
• Mumbai
• ECB
• ODI
• Export, Import and Others

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Features of Compounding

• Voluntary
• No suo-motto investigation
• Time Bound completion (Within 180 days)
• No further proceedings for contravention so
  compounded
• Payment of sum of contravention (within 15 days)
• Once the order is passed, no contravener seek to
  withdraw the order or to hold it as void or
  request a review of the order
• No appeal against the Order
• Non payment shall be deemed as no application is
  made
• No compounding before expiry of 3 years of
  previous order for similar contravention
• No Compounding of cases where approval of any
  statutory authority/Govt. etc. was required
  unless such approvals has been sought

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Ascertainment of Nature of Contravention by RBI

• Depends on whether the contravention is
• Technical/ Minor in nature and needs only
  Cautionary Advice.
• Serious in nature and warrant Compounding
• Prima facie, involves Money-Laundering, National
  and Security concerns involving serious
  infringement of the regulatory framework
• However, RBI reserves the right to classify the
  contraventions and no body else has any right to
  classify any contravention as technical suo moto.
• Decision of Sum of contravention by RBI depends
  on
• Amount of Gain of unfair advantage made from
  contravention
• Amount of Loss to any agency/authority/exchequer
  from contravention
• Economic benefits accruing to the contravener
  from delayed compliance or compliance avoided
• Repetitive nature of the contravention, Track
  Record, History of non-compliance of the
  Contravener
• Contraveners conduct in undertaking the
  transaction, Disclosure of full facts in the
  application and submissions made during the
  personal hearing
• Any other factor considered relevant and
  appropriate

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Contraventions Penalties

• Application for Condonation
• Application for compounding
• Adjudication proceedings
• Penalty/ Confiscation in case of quantifiable
  offence Up to 3 times, in case of non
  -quantifiable offence Up to Rs. 200,000, in
  case of continuing penalty - Rs. 5000 per day
• Imprisonment if penalty not paid within
  prescribed time