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By Neha Agarwal March 19, 2018


Any money that is borrowed from a foreign source or foreign institutions (for entities that are eligible to take them as per RBI guidelines and other laws governing such borrowings) the objective of which is to finance the commercial activities in India is known as ‘External Commercial Borrowings’.

It can be:

  • Loan from a foreign bank such as HSBC Hong Kong or Standard Charted London etc.
  • Loan by an importer-buyer for payment of imports in India from foreign banks or financial institutions – Buyers’ Credit;
  • Suppliers’ credit;
  • Securitised instruments such as floating rate notes and fixed rate bonds, non-convertible, optionally convertible or partially convertible preference shares / debentures);
  • Foreign Currency Convertible Bonds (FCCBs);
  • Financial Lease; and
  • Foreign Currency Exchangeable Bonds (FCEBs).

From a lower single digit, foreign commercial borrowings now constitute 38% of India’s external debt of over $470 billion. (Data can be found here).

ECBs are an added source of financing for most of the Corporate India. The Government policy emphasizes ECB investments in industrial sectors and strategically core sectors such as aviation, power, infrastructure, telecom, railways, road, etc.

ECB are an attractive source of financing the businesses in India as it provides access to loan at cheaper rates of interest outside India. The interest rates of RBI for commercial borrowings are high when compared to other countries. (Latest rates here)

However, not all the entities can take benefit of ECBs- As they increase the external debt of the country; it has to be in sync with the foreign exchange reserves. Regulatory policies regarding ECBs and all the procedural requirements are set out by Reserve Bank of India. Some entities are required to take the approval of RBI and borrowings subject to such approval are through “approval route”, others just need to comply with the procedures and no approval is required, such borrowings are through the “automatic route”.

How are ECBs different from Foreign Direct Investment?

ECB means foreign funding which is not in the form of equity. When it is used in the form of equity capital then it is called Foreign Direct Investment (FDI). Any Investment made towards core capital of an organization such as equity shares, convertible preference shares or convertible debentures. We should note here that those instruments which can be converted into equity are called convertible. The convertible instruments are covered under the FDI Policy.

Any other direct capital is not allowed in ECB.

ECB Framework –who can borrow? Who can lend? And where can the money be utilised?

Eligible borrowers-entities entitled to raise money thorough ECBs

  • Manufacturing and development sector, i.e. in “real” or industrial sector
  • SIDBI- Small Industries Development Bank of India;
  • Units in Special Economic Zones (SEZs);
  • Shipping and airlines companies;
  • Export Import Bank of India (Exim Bank) (only under the approval route)
  • Non-Banking Financial Companies (NBFCs;
  • Companies in infrastructure sector;
  • Holding companies;
  • Core Investment Companies (CICs);
  • Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (INVITs) coming under the regulatory framework of the Securities and Exchange Board of India (SEBI);
  • NBFCs-Micro Finance Institutions (NBFCs-MFIs), Not for Profit companies registered under the Companies Act, 1956/2013, Societies, trusts and cooperatives (registered under the Societies Registration Act, 1860, Indian Trust Act, 1882 and State-level Cooperative Acts/Multi-level Cooperative Act/State-level mutually aided Cooperative Acts respectively), Non-Government Organisations (NGOs) which are engaged in micro finance activities1;
  • Companies engaged in miscellaneous services viz. research and development (R&D), training (other than educational institutes), companies supporting infrastructure, companies providing logistics services;
  • Developers of Special Economic Zones (SEZs) or National Manufacturing and Investment Zones (NMIZs);

Note: There are three tracks which set out the minimum average maturity (MAM) period- the above listed borrowers fall into different categories of such track thereby having different MAM period.

Eligible lenders-

  • International banks;
  • International capital markets;
  • Multilateral financial institutions (such as IFC, ADB, CDC, etc.);
  • Export credit agencies;
  • Suppliers' of equipment;
  • Foreign collaborators and
  • Foreign equity holders (other than erstwhile OCBs).

The basic end –use for which ECBs can be utilized, is on capital expenditure in the form of import of capital goods, New project; Modernisation or expansion of existing units in the Indian “real” sector (which is the Indian Industrial sector), infrastructure and specified service sector hospital, hotel , etc.

ECBs cannot be utilized for –

  • On-lending or investment in capital market or acquiring a company (or a part thereof) in India by a corporate;
  • Investment in Special Purpose Vehicles (SPVs), Money Market Mutual Funds (MMMFs), etc,
  • Real estate sector, working capital, general corporate purpose and repayment of existing Rupee loans.
  • Guarantees

(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).

ECB limits- Under automatic route for -

  • Infrastructure sector , real –industrial sector up to USD 750 million
  • Software development sector, hotels, hospitals –up to USD 200 million
  • Micro finance activities – up to USD 100 million
  • A company or other remaining entities (other than a financial intermediary, registered under the Companies Act, can raise up to USD 500 million in a financial year.

If the above mentioned limits are exceeded then the approval route has to be taken.

Generally, companies can borrow under the automatic route. Approval needs to be taken under the following cases:

  • When a service sector company which is not in hotels, hospital or software services example R&D, Training institutions, etc.;
  • SEZ developers (wanting to provide infrastructure facilities in the SEZs) Co-operative societies, financial institutions or banks;

ECB which are not covered under the automatic route are subject to approval by the RBI and depends on case to case basis.

Process to avail ECB

Under the automatic route, borrowers have to submit Form 83 to the designated AD cat 1 bank to obtain a Loan Registration Number (LRN). The AD forwards form 83 to RBI Department; loan can only be availed after LRN is issued.

Under the approval route, the borrower has to submit an application in Form ECB to RBI. After examination of the application, permission may be granted. 

(For more details check here)


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Tags: Legal , External commercial borrowings , ECB , foreign , loan , FCCB , FCEB

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