THE EVOLUTIONARY CONCEPT OF EXTERNAL COMMERCIAL

BORROWINGS IN INDIA

Basically, there are three broad sources of finance namely: debt, equity and borrowings. External

Commercial Borrowings (hereinafter referred to as ECBs) has become an integral part of the

Indian Balance of Payment Circuit as it comes as an opportunity for the corporate circuit of India

to access the foreign capital. The monitoring body for ECBs in India regarding the regulations is

the Reserve Bank of India in consonance with the Ministry of Finance. The statutory framework

governing the laws related to ECBs is the Foreign Exchange Management Act, 1999. While

India embarked upon globalization post the 1990 BoP crisis, ECBs became a great source of debt

creating capital inflows as the economy took as paradigm shift.1

During the initial three decades post independence, the borrowing scenario was restricted to

bilateral and multilateral arrangements only but post that phase, ECB emerged as a perfect

medium for raising debt as the existing sources of finances were found inadequate and

insufficient.2 Several public sector undertakings and financial institutions were motivated to

explore the international market for appropriate and effective remedies. In the upcoming era, a

regulatory approach was adopted by India by restricting debt creating flows and encouraging

non-debt creating flows. During the early days, when the idea of borrowing and lending was

novice in terms of structure and conceptualization, the Ministry of Finance used to be the
1
Bhupal Singh, Corporate choice for overseas borrowings: The Indian evidence, MPRA PAPER, UNIVERSITY

LIBRARY OF MUNICH, GERMANY, 2007,(13 August, 2020, 5:34 AM), https://mpra.ub.uni-

muenchen.de/13220/1/corporate_choice_for_overseas_borrowings.pdf.
2
Ministry of Finance, Report of the Committee to Review the Framework of Access to Domestic and Overseas

Capital Markets (Phase II, Part II: Foreign Currency Borrowing) (Report III), GOVERNMENT OF INDIA, (13 August,

2020, 6:31 AM), https://finmin.nic.in/sites/default/files/SahooCommittee_ecbReport_20150225.pdf.

regulatory body for the proper facilitation. 3 With time, RBI took the entire control of the policy

framing regarding ECBs.

Section 6(3)(d) of the Foreign Exchange Management Act, 1999, gives RBI the authority to lay

down regulations regarding any sort of borrowing in terms of foreign exchange. In consonance

with the provision, RBI has categorized several borrowings of which, ECBs are also an

important aspect. ECBs (as governed by FEMA) are commercial loans such as bank loans,

suppliers’ credit, buyers’ credit, and instruments which are securitized (like rate bonds,

preference shares which are non convertible, or partially convertible, or optionally convertible ),

and are given by lenders from abroad with a minimum average maturity period for three years.4

The Existing Framework

Access to ECBs can be facilitated by both automatic and approval route. The pertinent difference

between the both is that under the automatic route, no approval is needed from any authority

while going through the approval route, prior approval from the Reserve Bank is necessary.

Mostly, ECBs allotted for the end use of a particular sector is kept under the approval route

firstly, before moving it to the automatic route. Moreover, access to ECB is more restricted for

the sector of banks and financial institutions. There are several restrictions laid down regarding

external commercial borrowings both in automatic and approval route. Some of the significant

3
Ministry of Finance, Government revises External Commercial Borrowings Policy, GOVERNMENT OF INDIA, 2003,

(14 August,2020, 4:33 PM),http://pib.nic.in/archieve/lreleng/lyr2003/rnov2003/12112003/r1211200314. html.

4
Reserve Bank of India, Foreign Exchange Management (Borrowing or lending in foreign exchange) Regulations,

2000, Notification No. FEMA 3/2000-RB dated 3rd May 2000, May 3, 2000, GOVERNMENT OF INDIA, (15 August,

2020, 3:55 AM) rbi.org.in.

restrictions are regarding who can lend, who can borrow, the end purpose of an ECB, the all-cost

regarding the same, etc. 5

Automatic Route

While initially only firms registered under Companies Act, 1956 were allowed to borrow under

this route (barring intermediaries), with time, significant changes were made as NBFCs, NGOs,

SEZs and Micro financial institutions came under this head. 6 In the same manner, there are

several recognized lenders such as international banks; international capital markets, multilateral

financial institutions, etc.7 While the maximum borrowable is 750 million USD, the maturity

period is 3 years for amount up to 20 million and 5 years for amount ranging from 20 to 750

million USD.8 The borrowings are restricted to significant uses only such as import of capital

goods, modernization or expansion of existing production units in the real sector including

infrastructure and overseas direct investment in joint venture and wholly owned subsidiaries.

General corporate purposes are also allowed by some foreign equity holders subjected to certain

conditions. With passing time, the list that permits activities has been expanded for NBFCs to get

ECB for on-lending and leasing of infrastructural projects. 9 Any sorts of guarantee by any of

recognized banks and NBFCs are strictly prohibited. If the expenditure of the ECB is for rupee

expenditure, it must be repatriated immediately.10 Prepayment up to 500 million USD is

5
Part I I.(A) iv, Id.

6
Part I(I)(A)(i), Id.

7
Part I(I)(A)(ii), Id.

8
Part I(I)(A)(iii), Id.

9
See Part I (I)(A)(v), Id.

10
See Part I(I)(A)(x), Id.
permitted by authorized dealer banks subjected to the minimum maturity guidelines of the

respective ECB.11

Approval Route

The eligible borrowers under the approval route are of great variety. these include banks and

financial institutions which had an active participation in the textile or steel sector restructuring

scheme, NBFCs undertaking ECB with the 5 year gap of minimum average maturity, housing

finance Companies undertaking FCCBs, certain categories of NBFCs, SEZs, multi state

cooperative societies, SIDBIs, etc.12 The recognized lenders are the same as the automatic

route.13 Under the approval route, amount of borrowings can exceed that of the automatic route. 14

Under the approval route, maturity period can exceed than that of the automatic route. The ones

availing the facility of ECB can take a short term credit and can anticipate it being replaced with

the long-term credit in future.15 While the end use restrictions are more or less similar as that of

the automatic route, there are certain exceptions. For example, ECBs automatic route are not

allowed in order to acquire a company while it can be allowed under the approval route for

acquisition by a IFC, EXIM bank, etc. In the same manner, civil aviation forms can avail ECB

through approval route for facilitating capital requirements.16 The status of guarantee is same as

11
See Part I(I)(A)(xi), Id.

12
Part I(I)(B)(i), Id.

13
Part I(I)(B)(ii), Id.

14
Part I(I)(B)(iii),Id.

15
Part I(I)(B)(v)(h), Id.

16
Part I(I)(B)(v)(i), Id.
that of the automatic route. Prepayment of amounts exceeding 500 million USD is

acknowledged.17

It is a fact that restructuring of ECB policies is a positive step by the policy framers in regards to

liberalization of multiple regulations framed under FEMA in a positive way. The debt market is

widened up with the support of the Government in order to avail foreign currency inflows with

the help of potential borrowers. The constant changes in the policies has given a relaxed

approach and opened gates for both potential borrowers and potential lenders.

17
Part I(I)(B)(xiii), Id.