External Commercial Borrowings (ECBs)

External Commercial Borrowings are commercial loans in the form of bank loans, buyers credit, suppliers credit, securitized instruments availed from non-resident lenders with minimum average maturity of 3 years. The Indian Corporate World sees ECBs as a source of inexpensive funds. It does come with a constraint on how the fund can be used but the amount of interest payable on these funds can overcome all those issues. ECBs can be used for any purpose except for investment in the stock market and speculation in real estate. It is supposed to be used as a source of finance for corporates to increase capacity or for a Greenfield project. Corporates are free to raise ECB from any internationally recognized source, such as banks, export credit agencies, suppliers of equipment etc. The Indian Income Tax Act eases the interest on the Loan amount on the tax payable by the company. Prior to the amendment, the interest payable on certain external commercial borrowings was exempt from tax in India. Over time in history of the ECBs major changes have been brought about in the tax treatment of interest payments to non-resident lenders of foreign currency loans to Indian companies by the Finance Act 2001. Interest payable by an industrial undertaking in India, related to external commercial borrowings as approved by the Indian government/Reserve Bank of India used to be eligible for tax exemptions as per Section 10(15)(iv)(b), (d) to (g) of the Income Tax Act, 1961. But the exemption has been withdrawn now. The rationale behind the move can be explained as that having regard to the fact that the interest received on ECBs by the lender is taxable in the country of his residence, he would get a credit for any tax paid by him in India. Any exemption from tax liability in the host country does not benefit the lender but only results in reducing tax revenues to the Indian counterpart. The focus of the ECB policy is to provide flexibility in borrowings by Indian corporates, and at the same time maintain prudent limits for total external borrowings. The guiding principles of the policy are to keep borrowing maturities long, costs low, and encourage infrastructure and export sector financing which are crucial for the overall growth of the economy. The government has been liberalizing ECB procedures to enable Indian corporates have greater access to international financial markets. ECBs can be accessed by two routes: 1) Automatic Route 2) Approval Route

Automatic Route:
In this case the companies need not take the approval of Reserve Bank or Government of India. ECBs for investment in infrastructure sector-in India, are under Automatic Route, i.e. do not require RBI/Government approval up to 5 million.

Eligible Borrowers:
1) Corporates and Infrastructure Finance Companies other than financial Intermediaries are eligible to raise ECB through automatic route. 2) Units in Special Economic Zones can raise ECBs for their own requirement but cannot transfer or lend ECB funds to any unit in Domestic Traffic Area(DTA) 3) NGOs which are into micro finance activities can also avail ECBs. 4) NBFCs-Infrastructure Finance Companies(IFCs) are permitted to avail ECBs for on-lending to the infrastructure sector 5) NBFCs-Asset Finance Companies are permitted to avail of ECBs for financing the infrastructure equipment for leasing to infrastructure projects. 6) Small Industries Development Bank of India (SIDBI) can avail of ECB for on-lending to MSME sector, as defined under the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006. 7) NGOs engaged in micro finance and MFIs registered as societies, trusts and co-operatives and engaged in micro finance (i) should have a satisfactory borrowing relationship for at least 3 years with a scheduled commercial bank authorized to deal in foreign exchange in India and (ii) would require a certificate of due diligence on `fit and proper status of the Board/ Committee of management of the borrowing entity from the designated AD bank. In case of doubt as regards eligibility to access Automatic Route, applicants may take recourse to the Approval Route as directed by RBI.

Recognized Lenders
The recognized sources for ECBs are international banks, international capital markets, multilateral financial institutions, regional financial institutions and Government owned development financial institutions, export credit agencies, suppliers of equipment, foreign collaborators and foreign equity holders.

A foreign equity holder requires the following minimum holding to be eligible as rec ognized lender:
1. For ECB up to USD 5 million - minimum paid-up equity of 25 per cent held directly by the lender 2. For ECB more than USD 5 million - minimum paid-up equity of 25 per cent held directly by the lender and ECB liability-equity ratio not exceeding 4:1

Amount and Maturity:

1) Corporates other than those in the hotel, hospital and software sectors can avail USD 750 million or its equivalent during a financial year. 2) Corporates in service sector are eligible for ECB up to USD 200 Million or its equivalent. 3) NGOs engaged in micro finance activities and Micro Finance Institutions (MFIs) can raise ECB up to USD 10 million or its equivalent during a financial year.

4) NBFC-IFCs can avail of ECB up to 75 per cent of their owned funds (ECB including outstanding ECBs) and must hedge 75 per cent of their currency risk exposure 5) NBFC-AFCs can avail of ECBs up to 75 per cent of their owned funds (ECB including outstanding ECBs) subject to a maximum of USD 200 million or its equivalent per financial year with a minimum maturity of 5 years 6) SIDBI can avail of ECB to the extent of 50 per cent of their owned funds including the outstanding ECB, subject to a maximum of USD 500 million per financial year 7) ECB up to USD 20 million or its equivalent in a financial year with minimum average maturity of three years 8) ECB above USD 20 million or equivalent and up to USD 750 million or its equivalent with a minimum average maturity of five years

Approval Route:
The companies need to take approval of Reserve Bank or Government of India.

Eligible Borrowers
1) On lending by the Export-Import Bank for specific purpose will be considered on a case by case basis. 2) Banks and financial institutions which had participated in the textile or steel sector restructuring package, approved by the government are also permitted to the extent of their investment in the package and assessment by RBI norms. 3) ECB with minimum average maturity of 5 years by NBFCs from multilateral financial institutions, official export credit agencies and international banks to finance import of infrastructure equipment for leasing to infrastructure projects 4) NBFCs-IFCs can use ECBs beyond 75% of their owned funds for on-lending to infrastructure sector. 5) NBFCs-AFCs can avail ECB to finance import of infrastructure equipment for leasing beyond 75%of their owned funds 6) Corporate which have violated the existing ECB policy and are under investigation by Reserve Bank and / or Directorate of Enforcement, are allowed to avail ECB only under the Approval route.

Recognized Lenders:
The recognized sources for ECBs are international banks, international capital markets, multilateral financial institutions, regional financial institutions and Government owned development financial institutions, export credit agencies, suppliers of equipment, foreign collaborators and foreign equity holders. A "foreign equity holder" to be eligible as recognized lender under the approval route would require minimum holding of paid-up equity in the borrower company as set out below: 1) For ECB up to USD 5 million - minimum paid-up equity of 25 per cent held directly by the lender;

2) For ECB more than USD 5 million - minimum paid-up equity of 25 per cent held directly by the lender and ECB liability-equity ratio not exceeding 7:1; 3) ECB from indirect equity holders provided the indirect equity holding by the lender in the Indian company is at least 51 per cent; 4) ECB from a group company provided both the borrower and the foreign lender are subsidiaries of the same parent.

Amount and Maturity:

Eligible borrowers in automatic route other than hotels, hospital and software can avail ECB beyond 750 million USD per financial year. Corporates in service sector are eligible to avail ECB beyond USD 200 million per financial year

Ends-uses not permitted

Funds raised through ECBs are not supposed to be utilized to acquire a new company or to be invested in the capital market. The proceeds are not to be invested in real estate. Proceeds is not to be used for Working capital requirements, General Corporate Purposes and repayment of expensive Rupee Loans. ECB raised for foreign currency expenditure for permissible end-uses shall be parked overseas and not to be remitted to India. ECB proceeds parked overseas can be invested in the following liquid assets (a) deposits or Certificate of Deposit or other products offered by banks rated not less than AA (-) by Standard and Poor / Fitch IBCA or Aa3 by Moodys

All-in-cost ceilings
All-in-cost includes rate of interest, other fees and expenses in foreign currency except commitment fee, pre-payment fee, and fees payable in Indian Rupees. The payment of withholding tax in Indian Rupees is excluded for calculating the all-in-cost. The existing all-in-cost ceilings for ECB are as under:

Average Maturity Period

All-in-cost Ceilings over 6 month LIBOR* (Both automatic and approval route) 350 basis points 500 basis points

Three years and up to five years More than five years

Source: RBI Master Circular on External Commercial Borrowings and Trade Credits dated September 20, 2013

CONVERSION OF ECB INTO EQUITY

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, The foreign equity holding after such conversion of debt into equity is within the sectoral cap, if any,

Pricing of shares is as per SEBI and erstwhile CCI guidelines / regulations in the case listed/unlisted company.

Adhering to the above conditions, Borrowers are expected to report the conversion of ECBs into equity shares in a specified form to the concerned Reserve Bank. The words ECB wholly converted to equity should be mentioned in the form for 100% ECB converted to shares and ECB partially converted to equity should be clearly mentioned in the form where we have partial conversion of ECBs to equity.

Parking of ECB proceeds

The proceeds should be kept abroad until required in India.

Foreign Currency Convertible Bonds (FCCBs)

Foreign Currency Convertible Bonds (FCCBs) are convertible bonds issued by an Indian company expressed in foreign currency, subscribed by a person residing outside India, and the principal and interest in respect of which is payable in foreign currency. The bonds are required to be issued in accordance with the scheme viz., "Issue of Foreign Currency Convertible Bonds and Ordinary Shares (through Depositary Receipt Mechanism) Scheme, 1993. FCCBs are governed by the same regulations that govern ECBs.

Foreign Currency Exchange Bonds (FCEBs)

Foreign Currency Exchangeable Bonds (FCEBs) are bonds expressed in foreign currency, issued by an Issuing Company and subscribed to by a person who is a resident outside India, in foreign currency and which are exchangeable into equity shares of another company, called the Offered Company.