External Commercial Borrowings (ECB)

The External Commercial Borrowings (ECB) policy

framework has been updated to:
 Allow more resident entities to borrow
 Recognize more entities as lenders
 Expand permitted end-uses
 Rationalize all-in-cost and minimum maturity
requirements
aim to promote ease of doing business and support
Indian companies' financing needs, especially in the
infrastructure sector.
Recent changes aim to:

 Help a wider set of eligible borrowers (corporates

and entities) meet their capital needs
 Introduce a Uniform Minimum Average Maturity
Period
 Establish uniform all-in-cost ceilings
 Maintain a small negative end-use list
ECBs are commercial loans from recognized non-resident
entities to eligible resident entities, subject to parameters
like:
o Minimum maturity
o Permitted and non-permitted end-uses
o Maximum all-in-cost ceiling
These adjustments are expected to facilitate greater
access to External Commercial Borrowings (ECBs) for
Indian companies, thereby boosting their growth and
development prospects ¹.

Foreign Currency Denominated ECB:

- Minimum average maturity: 3 years

- Maximum all-in-cost ceiling: 6-month LIBOR + 350 bps
- Permitted end-uses: Capital expenditure, working
capital, refinancing, etc.
- Non-permitted end-uses: Real estate, stock market,
etc.
- Eligible borrowers: Corporates, PSUs, NBFCs, etc.
Foreign Currency Denominated ECB
This option includes loans such as bank loans, floating
or fixed rate notes, bonds, debentures (excluding fully
and compulsorily convertible instruments), trade credits
beyond three years, Foreign Currency Convertible
Bonds (FCCBs), Foreign Currency Exchangeable Bonds,
and financial leases ¹. FCCBs are issued in accordance
with the Issue of Foreign Currency Convertible Bonds
and Ordinary Shares (Through Depositary Receipt
Mechanism) Scheme, 1993, and must conform to other
applicable regulations without any warrants attached.
Foreign Currency Denominated ECB and eligible
borrowers:

Foreign Currency Exchangeable Bonds (FCEBs)

- Issued under the Issue of Foreign Currency

Exchangeable Bonds Scheme, 2008, as amended
- Foreign currency denominated instruments
exchangeable into equity shares of another company
(Offered Company)
- Exchangeable wholly, partly, or through equity-related
warrants attached to debt instruments
- Must conform to other applicable regulations

Eligible Borrowers

Entities eligible to receive Foreign Direct Investment

(FDI)
In addition to the above, the following entities are also
eligible to raise ECB:
1. Port Trusts
2. Units in Special Economic Zones (SEZ)
3. Small Industries Development Bank of India (SIDBI)
Other eligible borrowers may include:

- Companies listed on a recognized stock exchange

- Unlisted companies
- Limited Liability Partnerships (LLPs)
- Trading companies
- Housing finance companies
- Non-banking financial companies (NBFCs)

Key benefits of ECB for eligible borrowers:

- Access to foreign funds at competitive interest rates

- Diversification of funding sources
- Long-term financing options
- Flexibility in end-use of funds (subject to RBI
guidelines)

Please note that RBI regulations and guidelines are

subject to change.
Indian Rupee Denominated ECB

- Minimum average maturity: 5 years

- Maximum all-in-cost ceiling:
- Permitted end-uses: Capital expenditure,
infrastructure, affordable housing, etc.
- Non-permitted end Indian Rupee Denominated ECB
This option comprises loans including bank loans,
floating or fixed rate notes, bonds, debentures,
preference shares (excluding fully and compulsorily
convertible instruments), trade credits beyond three
years, financial leases, and plain vanilla Rupee
denominated bonds issued overseas ¹. These bonds can
be privately placed or listed on exchanges as per the
host country's regulations.

The Reserve Bank of India (RBI) has simplified and

liberalized the ECB framework over time, making it
easier for Indian companies to access foreign funds.
Some key changes include:
- Expanded Eligible Borrowers: Now includes all entities
eligible to receive Foreign Direct Investment (FDI), such
as Limited Liability Partnerships (LLPs) and trading
entities
- Recognized Lenders: Expanded to include entities from
Financial Action Task Force (FATF) and International
Organization of Securities Commissions (IOSCO)
compliant countries
- Minimum Average Maturity Period: Relaxed to 3 years
across all tracks and forms of ECB
- End-Use Restrictions: Prohibited uses include capital
market investments, real estate, construction, and
development of SEZ/industrial park/integrated township
es: Real estate, stock market, etc.
- Eligible borrowers: Corporates, PSUs, NBFCs, etc.

These entities can raise Indian Rupee Denominated ECB

to access funds for their operational and business
needs.

Benefits for micro-finance entities:

- Access to affordable funding

- Increased liquidity
- Enhanced financial inclusion

RBI guidelines and regulations apply to Indian Rupee

Denominated ECB, including:
- Minimum Average Maturity Period
- All-in-cost ceilings
- End-use restrictions
- Reporting requirements

Borrowers should consult the latest RBI notifications

and seek professional advice before raising Indian
Rupee Denominated ECB.

Recognised Lenders for External Commercial

Borrowings (ECB)

Eligible Lenders:

1. Residents of Financial Action Task Force (FATF) or

International Organisation of Securities Commissions
(IOSCO) compliant countries.
2. Multilateral and Regional Financial Institutions (where
India is a member country).

Special Cases:

1. Individuals: Only permitted as lenders if they are:

- Foreign equity holders.
- Subscribing to bonds/debentures listed abroad.
2. Foreign branches/subsidiaries of Indian banks:
- Permitted for Foreign Currency ECB (except FCCBs
and FCEBs).
 - Can act as
arrangers/underwriters/market-makers/traders for
Rupee denominated Bonds issued overseas.
- Cannot underwrite issuances by Indian banks.

Key Points:

- FATF/IOSCO compliance ensures lender credibility.

- Multilateral institutions, like World Bank, Asian
Development Bank, are recognised lenders.
- Individuals can lend only under specific conditions.
- Foreign branches/subsidiaries of Indian banks have
limited lender roles.

Purpose:

To ensure ECB lending is secure, regulated, and

compliant with international standards, reducing risk
and promoting healthy foreign investment in India.

Regulatory Body:

Reserve Bank of India (RBI) governs ECB regulations.

Minimum Average Maturity Period (MAMP) for

External Commercial Borrowings (ECB)

General MAMP: 3 years

Specific Category-wise MAMP:

A. Manufacturing companies (up to USD 50
million/financial year): 1 year

B. ECB from foreign equity holder (working

capital/general corporate purposes/Rupee loan
repayment): 5 years

C. ECB for:
* Working capital/general corporate purposes
* On-lending by NBFCs (working capital/general
corporate purposes): 10 years

D. ECB for:
* Repayment of Rupee loans (capital expenditure)
* On-lending by NBFCs (capital expenditure): 7 years

E. ECB for:
* Repayment of Rupee loans (non-capital expenditure)
* On-lending by NBFCs (non-capital expenditure): 10
years

Common Conditions for B-E:

1. ECB cannot be raised from foreign

branches/subsidiaries of Indian banks.
2. Prescribed MAMP must be strictly complied with.

- MAMP ensures borrowers don't rely heavily on short-

term foreign debt.
- Different MAMPs apply to various borrowing purposes
and entities.
- Stricter MAMP requirements for certain categories to
maintain financial stability.

Prohibited end-uses, also known as the negative

list:

- Real Estate Activities: ECB proceeds cannot be

used for real estate activities, such as buying or
developing properties.
- Investment in Capital Market: Borrowed funds
cannot be invested in the capital market, including
stocks, bonds, or other securities.
- Equity Investment: ECB proceeds cannot be used to
make equity investments in other companies.
- Working Capital Purposes: ECB cannot be used for
working capital purposes, except in specific cases
where the ECB is raised from foreign equity holders or
for on-lending by Non-Banking Financial Companies
(NBFCs)
- General Corporate Purposes: Similarly, ECB cannot
be used for general corporate purposes, except in
specific cases where the ECB is raised from foreign
equity holders or for on-lending by NBFCs
- Repayment of Rupee Loans: ECB proceeds cannot
be used to repay Rupee loans, except in specific cases
where the ECB is raised for capital expenditure or on-
lending by NBFCs
- On-lending: ECB cannot be on-lent to entities for the
above activities, except in specific cases where the ECB
is raised by NBFCs for working capital purposes or
repayment of Rupee loans.

It's essential to note that borrowers must comply with

these guidelines to avoid penalties under the Foreign
Exchange Management Act (FEMA)

Exchanging Foreign Currency ECB to Indian

Rupee ECB:

Exchange Rate Options:

1. Prevailing rate on the agreement date.

2. Lower rate than prevailing on the agreement date,
with lender's consent.

Conversion to Rupee:

Exchange rate on settlement date applies.

Implications:

1. Currency risk management.

2. Potential gains/losses due to exchange rate
fluctuations.
Regulatory Compliance:

Reserve Bank of India (RBI) guidelines govern ECB.

Documentation:

Agreement should specify exchange rate terms.

Tax Implications:

Consider tax implications of exchange rate gains/losses.

ECB Limit and Leverage

Automatic Route Limit:

$750 million (or equivalent) per financial year

Leverage Ratio (Foreign Currency ECB from Direct

Foreign Equity Holder):
ECB Liability: Equity Ratio ≤ 7:1

Exemption:
If outstanding ECB (including proposed) ≤ $5 million (or
equivalent)

Additional Requirements:
Compliance with sectoral/prudential regulator's debt-
equity ratio guidelines, if applicable

Key Implications:
1. Limits borrowing capacity
2. Regulates debt-to-equity ratio
3. Prevents over-leveraging
4. Ensures adequate equity investment

Regulatory Framework:
Reserve Bank of India (RBI) and sectoral/prudential
regulators (e.g., SEBI, IRDA)

Restrictions on Indian Banks, Financial

Institutions, and NBFCs

Guarantee Issuance:

- Indian banks
- All India Financial Institutions
- Non-Banking Financial Companies (NBFCs)
Cannot issue guarantees related to External
Commercial Borrowings (ECB)

Investment Restrictions:

- Financial intermediaries (Indian banks, All India

Financial Institutions, NBFCs)
Cannot invest in:
- Foreign Currency Convertible Bonds (FCCBs)
 - Foreign Currency Exchangeable Bonds (FCEBs)

Purpose:

- Prevent risk exposure for Indian financial institutions

- Regulate foreign borrowing and investment activities

Parking ECB Proceeds Domestically

For Rupee expenditure, ECB proceeds should be

repatriated immediately to AD Category I banks in
India. Additionally, ECB borrowers can park ECB
proceeds in term deposits with AD Category I banks for
up to 12 months cumulatively, provided these term
deposits remain unencumbered.

It's essential to note that ECB proceeds cannot be used

for activities like real estate investment, capital market
investment, or equity investment. The Reserve Bank of
India (RBI) has guidelines in place to ensure ECB
proceeds are utilized for permissible end-uses.

Raising External Commercial Borrowings (ECBs)

involves several steps and considerations.

Eligibility and Routes

To begin with, all ECBs can be raised under the
automatic route if they meet the prescribed
parameters. However, for approval route cases,
borrowers need to approach the Reserve Bank of India
(RBI) with an application in the prescribed format (Form
ECB) through their AD Category I bank .
Automatic Route
Entities eligible to raise ECB under the automatic route
can approach an AD Category I bank with their proposal
and a duly filled-in Form ECB. This route is available for
manufacturing companies to raise ECB up to $50 million
or its equivalent per financial year with a minimum
average maturity period of one year.

Approval Route
For approval route cases, the RBI considers the overall
guidelines, macroeconomic situation, and merits of
specific proposals. ECB proposals above a certain
threshold limit are reviewed by the Empowered
Committee, comprising internal and external members,
before the RBI makes a final decision.

*Recognized Lenders and End-Uses*

ECBs can be raised from recognized lenders, including
foreign equity holders with a minimum 25% direct
equity holding in the borrowing entity. The end-uses of
ECBs are restricted, and reimbursement of past
expenditures is not permitted.

*Additional Requirements*
Borrowers must ensure compliance with ECB guidelines,
including all-in-cost ceilings, average maturity periods,
and leverage criteria. They must also report their ECB
transactions to the RBI using Form ECB.

It's essential to consult the Reserve Bank of India's

guidelines and Master Direction No. 5 on External
Commercial Borrowings for detailed information on
raising ECBs

Whose Responsibility is it to Ensure Compliance

with ECB Guidelines?

The primary responsibility for ensuring compliance with

External Commercial Borrowing (ECB) guidelines lies
with the borrower. This means that borrowers must
ensure their ECB transactions adhere to the applicable
guidelines, regulations, and provisions outlined in the
Foreign Exchange Management Act (FEMA).

Failure to comply can result in penal action under FEMA,

especially if borrowers attempt to bypass or circumvent
ECB guidelines. This includes raising borrowings in
unauthorized manners, disguising borrowing as other
types of transactions, or contravening provisions of the
Foreign Exchange Management (Borrowing and Lending
in Foreign Exchange) Regulations, 2018.

To avoid these issues, borrowers should carefully review

the ECB framework, which covers key aspects such as:

- Eligible Lenders: FATF or IOSCO compliant countries,

multilateral financial institutions, and foreign equity
holders with a minimum 25% direct equity holding in
the borrowing entity.
- Recognized Forms of ECB: Loans, bonds, debentures,
trade credits, Foreign Currency Exchangeable Bonds,
Foreign Currency Convertible Bonds, and financial
leases.
- Routes for Raising ECB: Automatic and approval
routes, each with specific requirements and guidelines.

By understanding these regulations and taking

responsibility for compliance, borrowers can ensure
successful ECB transactions.

Reporting requirements for borrowings under the

External Commercial Borrowings (ECB)
framework:

- Loan Registration Number (LRN): Obtain LRN from the

Reserve Bank before any draw-down of ECB. Submit
duly certified Form ECB to the designated AD Category I
bank, which will forward one copy to the Reserve Bank.
- Changes in Terms and Conditions: Report changes in
ECB parameters to the Department of Statistics and
Information Management within 7 days through revised
Form ECB.
- Monthly Reporting: Submit Form ECB 2 Return through
the AD Category I bank within 7 working days from the
close of the month.
- Late Submission Fee (LSF): Pay prescribed fees to
regularize delay in reporting.
- Standard Operating Procedure (SOP) for Untraceable
Entities: Designated AD Category-I banks must follow
SOP for entities that fail to submit prescribed returns for
8 quarters or more.

The Standard Operating Procedure (SOP) for

Untraceable Entities is a crucial guideline for designated
AD Category-I banks in India to deal with borrowers who
have raised External Commercial Borrowings (ECB) but
are untraceable and non-compliant with reporting
provisions.

Definition of Untraceable Entities

An entity is considered untraceable if:

- Entity/auditor(s)/director(s)/promoter(s) are
unreachable or unresponsive via email/letters/phone for
at least two quarters with six or more documented
communications/reminders.
- The entity is not operational at its registered office
address or during visits by AD Bank officials or
authorized agencies.
- The entity has not submitted its Statutory Auditor's
Certificate for two or more years.

Actions Against Untraceable Entities

In such cases, the AD Category-I banks must take the
following actions:

- File Revised Form ECB: Submit the revised form, if

necessary, and the last Form ECB 2 Return without
company certification, clearly marking "UNTRACEABLE
ENTITY" on top.
- Write-Off External Debt: Treat the outstanding amount
as written off from the country's external debt liability,
but allow lenders to retain it in their books for recovery
through judicial/non-judicial means.
- No Fresh ECB Applications: Refrain from
processing/examining new ECB applications from the
entity.
- Inform Directorate of Enforcement: Notify the
Directorate of Enforcement when designating an entity
as "UNTRACEABLE ENTITY."
- No Inward Remittance or Debt Servicing: Prohibit
inward remittance or debt servicing under the auto
route.

Converting External Commercial Borrowings

(ECB) into equity is allowed under certain
conditions.

Eligibility: The borrowing company's activity must be

covered under the automatic route for Foreign Direct
Investment (FDI) or have government approval for
foreign equity participation.
Lender's Consent: The conversion must be done with
the lender's consent and without any additional cost.
Sectoral Caps: The conversion should not breach
applicable sectoral caps on foreign equity holding under
FDI policy.
Pricing Guidelines: Applicable pricing guidelines for
shares must be followed.
- Reporting:
- Partial conversion: Report converted portion in Form
FC-GPR and monthly Form ECB 2 Return with remarks
"ECB partially converted to equity".
- Full conversion: Report entire portion in Form FC-
GPR and final Form ECB 2 Return with remarks "ECB
fully converted to equity".
- Phased conversion: Report in phases through Form
FC-GPR and Form ECB 2 Return.
- Other Credit Facilities: Comply with prudential
guidelines and restructuring guidelines if the borrower
has availed other credit facilities from Indian banks.
- Consent of Other Lenders: Obtain consent from other
lenders or exchange information regarding conversions.
- Exchange Rate: Apply the exchange rate prevailing on
the date of agreement or a mutually agreed lesser rate
for ECB dues conversion.

ECB Facility for Oil Marketing Companies (OMCs)

Eligibility: Public Sector Oil Marketing Companies

(OMCs) Purpose: Working capital purposes
Recognized Lenders: All recognized lenders under
automatic route

Minimum Average Maturity: 3 years

Hedging Requirement: No mandatory hedging

Individual Limit: No individual limit

Overall Ceiling: USD 10 billion or equivalent

ECB facility for Startups:

Eligibility
Central Government-recognized Startups

Key Features
1. Maturity: 3-year minimum average maturity
2. Recognized Lender: FATF-compliant country residents
(excluding Indian bank branches/subsidiaries and
overseas entities with Indian direct investment)
3. Forms: Loans or preference shares
4.Currency: Freely convertible currency/INR/combination
5. Amount: USD 3 million/INR equivalent per financial
year
6. All-in-Cost: Mutually agreed
7. End-Uses: Business expenditure
8. Conversion to Equity: Permitted (subject to
regulations)
9. Security: Movable/immovable/intangible assets,
financial securities, guarantees
10. Hedging: Permitted for overseas lenders (INR
denominated ECB)

Important Considerations

- Risk management policy for currency risk

- Market rate conversion for INR borrowing
- Compliance with foreign direct investment/foreign
portfolio investment norms

Benefits

- Access to foreign funds

- Flexibility in funding options
- Encourages innovation and entrepreneurship

Regulatory Framework

- Reserve Bank of India (RBI) guidelines

- Foreign Exchange Management Act (FEMA) regulations
This facility enables Startups to raise external
commercial borrowings (ECBs) with ease, supporting
their growth and expansion plans.
Entities under investigation can still raise External
Commercial Borrowings (ECB) if they meet the eligibility
criteria, despite ongoing investigations or appeals
related to FEMA regulation violations. This is allowed as
long as the borrowing entity informs the AD Category-I
bank or RBI about the pending investigation or appeal.

Key Conditions:

- Eligibility: The entity must be otherwise eligible for

ECB.
- Disclosure: The borrowing entity must inform the AD
Category-I bank or RBI about the pending investigation
or appeal.
- Notification: The AD Category-I bank or RBI will notify
the concerned agencies by sending a copy of the
approval letter.

Important Considerations:

 The pending investigations or appeals do not affect

the ECB application.
 The borrowing entity must comply with applicable
norms.
  The outcome of the investigations or appeals will
not be prejudiced.

These guidelines ensure transparency and compliance

with regulatory requirements, allowing entities under
investigation to access ECB while maintaining
accountability.