External Commercial Borrowings - New Framework from RBI

Introduction

External Commercial Borrowings are commonly known as loan or debt or borrowing by Indian business houses from recognized entities registered outside India with minimum average maturity period of three year. The External Commercial Borrowing confirm with the policies of Reserve Bank of India (“RBI”) such as such as minimum maturity, permitted and non-permitted end-uses, maximum all-in-cost ceiling, etc. The Eligible resident entities can raise the ECBs from recognized non-resident entities in freely convertible Foreign Currency or INR Currency. External Commercial Borrowing (“ECB”) has been increasingly used as major debt raising tool for meeting capital requirements at competitive rates and tax optimization for both the lender as well as the borrower.

The Reserve Bank of India has revised the extant framework for external commercial borrowings (through circular dated January 16, 2019 which further liberalized dated July 30, 2019. The changes have removed almost all restrictions on eligible lenders and eligible borrowers and have substantially expanded the scope of end-use restrictions. The framework for raising loans through ECB comprises the following two options: (a) Foreign Currency denominated ECB (b) INR denominated ECB.

Eligible Borrower

The RBI has expended the list of eligible borrowing by including all entities eligible to receive Foreign Direct Investment (“FDI”). Additionally, Port Trusts, Units in SEZ, SIDBI and EXIM Bank of India. The registered entities engaged in micro-finance activities, viz., registered Not for Profit companies, registered societies or trusts or cooperatives and Non-Government Organization is eligible to raise ECBs in INR denominated currency.

Recognized Lender

The RBI had specified certain categories of entities which could provide ECB to eligible borrowers. Any resident of Financial Action Task Force (‘FATF’) or International Organization of Securities Commission compliant country can provide ECB to eligible Indian borrowers. Additionally, note that:

• Multilateral and regional financial institutions, where India is a member country, will be recognized lenders under the ECB Regulations.
• Individuals as lenders can only be permitted if they are foreign equity holders* or subscribers to bonds / debentures listed abroad; and
• Foreign branches / subsidiaries of Indian banks continue to be recognized lenders for FCY ECB (except FCCBs and FCEBs). However, underwriting by foreign branches/subsidiaries of Indian banks for issuances by Indian banks will not be allowed.

* Foreign Equity Holders means (a) direct foreign equity holder with minimum 25% direct equity holding by the lender in the borrowing entity, (b) indirect equity holder with minimum indirect equity holding of 51%, or (c) group company with common overseas parent.

Utilization of External Commercial Borrowing

The Reserve Bank of India relaxed the restriction on end-use of ECBs raised and vide the latest circular dated July 30, 2019 prescribed therein:

S.no	Particular	ECB Policy
1	ECB by Manufacturing Companies	The manufacturing companies can raise ECB for the capital expenditure up to USD 50 million or its equivalent per financial year with minimum average maturity period of one year. The amount more than USD 50 million or its equivalent per financial year can be raised with minimum average maturity period of up to three
2	ECB from Foreign Equity Shareholder	The eligible entities can raise ECB from foreign equity holder for working capital purposes, general corporate purposes or for repayment of Rupee loans with minimum average maturity period of five years.
3	ECB for the purpose of Working Capital or General Corporate Purpose	The eligible entities can raise ECB from recognized lender for working capital purposes or general corporate purposes with minimum average maturity period of ten years.
4	ECB for the purpose of Repayment of Rupee Loan– Capital Expenditure	The eligible entities can raise ECB from recognized lender for repayment of rupee loan availed for capital expenditure with minimum average maturity period of seven years.
5	Repayment of Rupee Loan– Working Capital or General Corporate Purpose	The eligible entities can raise ECB from recognized lender for repayment of rupee loan availed for working capital or general corporate purpose with minimum average maturity period of ten years.
6	Real Estate Activities	The ECB proceed cannot be utilized for the real estate activities. Any activity of construction or development of industrial park/ integrated townships/ SEZ are not regarded as real estate activity. Further, purchase or long-term lease of industrial land as part of new project or modernization of expansion of existing units or any activity which are considered as infrastructure activity will also not be regarded as real estate activity.
7	Non-Banking Financial Companies (NBFCs)	The NBFCs are also now eligible to raise ECBs for on lending to their clients for the purposes: a) Repayment of INR loans availed onshore where proceeds have been utilized for capital expenditure with minimum average maturity period of seven years. b) Repayment of INR loans availed onshore where proceeds have been utilized for purposes other than capital expenditure with minimum average maturity period of ten years. c) Working Capital or general corporate purpose with minimum average maturity period of ten years.
8	Investment in Capital Market or Equity Investment	The ECB proceed cannot be utilized for the investment in capital market or equity investment.
9	Investment in Term Deposit	The ECB proceed which is un-utilized can be parked in the Term Deposits.
10	Restructuring for refinancing stressed assets	An entity which is under a restructuring scheme/ corporate insolvency resolution process can raise ECB only if specifically permitted under the resolution plan. Eligible corporate borrowers who have availed Rupee loans domestically for capital expenditure in manufacturing and infrastructure sector and which have been classified as SMA-2 or NPA can avail ECB for repayment of these loans under any one-time settlement with lenders. Lender banks are also permitted to sell, through assignment, such loans to eligible ECB lenders, provided, the resultant external commercial borrowing complies with all-in-cost, minimum average maturity period and other relevant norms of the ECB framework.
11	Start-Up companies	Any entity recognized by the Central Government as a ‘start-up’ is allowed to raise ECB up to USD 3 million or equivalent per financial year. The AIC can be mutually agreeable between the borrower and the lender. This is in line with the earlier ECB framework. It has been clarified that start-ups under the special dispensation or other start-ups which are eligible to receive FDI, can also raise ECB under the general ECB Framework.
12	Infrastructure Sector	Infrastructure space companies can raise ECB from the recognized lender. Further, such companies are required to mandatorily hedge 70 per cent of their ECB exposure in case the average maturity of the ECB is less than 5 years.

All in Cost (“AIC”)

The interest on loan shall be paid by eligible entities to recognized lender subject to the loan agreement. However, all-in-cost cannot exceed 450 basis point over the benchmark rate.The All-in-Cost includes rate of interest, other fees, expenses, charges, guarantee fees, ECA charges, whether paid in foreign currency or INR but will not include commitment fees and withholding tax payable in INR.

ECBs Limit

All eligible borrowers can raise ECB up to USD 750 million or equivalent per financial year under auto route. Further, in case of foreign denominated ECB raised from direct foreign equity holder, ECB liability-equity ratio for ECBs raised under the automatic route cannot exceed 7:1. However, this ratio will not be applicable if outstanding amount of all ECBs, including proposed one, is up to USD 5 million or equivalent.

Compliances under ECBs

The RBI had specified certain compliances which are required to be done by the Eligible Borrower:

• The Eligible Borrower required to receive a Loan Registration Number before receiving the funds from the Eligible Lender. The Eligible Borrower required to submit the Form ECB, which also contains terms and conditions of the ECB, in duplicate to the designated AD Category I bank.
• Changes in ECB parameters in consonance with the ECB norms, including reduced repayment by mutual agreement between the lender and borrower, should be reported through revised Form ECB at the earliest, in any case not later than 7 days from the changes effected.
• The borrowers are required to report actual ECB transactions through Form ECB 2 Return through the AD Category I bank on monthly basis.

Any borrower, who is otherwise in compliance with ECB Regulations, can regularize delay in reporting / form submissions by payment of Late Submission Fee (“LSF”) as below:

S.no	Type of Return	Period of delay	Applicable LSF
1	Form ECB 2	Up to 30 calendar days from due date of submission	INR 5,000
2	Form ECB 2/Form ECB	Up to three years from due date of submission/date of drawdown	INR 50,000 per year
3	Form ECB 2/Form ECB	Beyond three years from due date of submission/date of drawdown	INR 100,000 per year

The conversion of ECB into equity is permitted subject to the following conditions:

• The activity of the company is covered under the Automatic Route for Foreign Direct Investment or Government approval for foreign equity participation has been obtained by the company, wherever applicable.
• The foreign equity holding after such conversion of debt into equity is within the sectoral cap, if any,
• Pricing of shares as per the pricing guidelines.

LIBOR in External Commercial Borrowing (“ECB”) agreements in India

The Reserve Bank of India BI restricts the borrowing cost to the Benchmark rate plus 450 bps spread. LIBOR is a benchmark rate that is normally used in the ECBs agreements by foreign institutions. It is important to evaluate the impact of discontinuation of LIBOR by the foreign institution as well as the borrower on the following:

A)     agreements that are executed with LIBOR as the benchmark and having the maturity post-December 2021.
B)     alternative benchmark to be used on the agreements which are yet to be executed.

The transition of the new benchmark rate is expected to be one of the most significant changes in the global financial market. The foreign institutions and companies require to adopt the proper strategy to transit the LIBOR to the new benchmark rate.

The companies should evaluate alternative benchmark rates and amend their loan agreements with a ‘Fallback language’ clause. The agreement should define a clear transition strategy and roadmap like the obligation of each party, the method to adopt a benchmark replacement rate, adjustment of the benchmark replacement rate to avoid future disputes.

Conclusion

The competitive rate of interest, tax optimization for both the lender as well as the borrower and liquidity make an External Commercial Borrowing a preferred choice for Indian corporates to raise an offshore debt for their new projects. The Indian business houses can raise offshore debt for refinancing their existing INR debt or meeting their requirement for working capital or general corporate purposes.