ECB Framework - Post the enormous victory of the Bhartiya Janta Party and its allies in the Centre in 2019, this year has been witnessing substantial modifications in the existing laws of India. The Modi government has been a constant advocate of own business and thus, in the past few years, we have observed a sudden burst of start-ups in the Indian market. In order to continue and encourage the Indian start-ups further, the government and the Reserve Bank of India (“RBI”) brought in extensive amendments by the notifications dated January 16, 2019, February 08, 2019 and March 13, 2019 and subsequently amended Master Direction - External Commercial Borrowings, Trade Credits and Structured Obligations dated March 26, 2019 (collectively referred as “Amended Framework”). External Commercial Borrowing (“ECB”) are the debts availed by Indian commercial entities from foreign lenders. We have enumerated below the vital alternations:
- Consolidation of tracks: The earlier Master
Director dated January 01, 2016 (“Erstwhile Framework”) had 4 types of ECB
under it, in which Track 1 and 2 were for medium-term and long-term foreign
currency (“FCY”) denominated ECB. The Track 3 and Masala Bonds
were medium-term and long-term Rupee (“INR”) denominated ECB. In
the Amended Framework, the Track I and II have been merged as ‘FCY denominated
ECB’ and further Track III and Masala Bonds have been merged as ‘INR
- Expansion of forms of ECB: The Amended Framework
has expanded the forms by which ECB can be given for both the ECBs viz:
inclusion of trade credits beyond 3 years. It further states that plain vanilla
INR denominated ECB can either be placed privately or listed on exchanges as
per host country regulations.
- Standardisation of Recognised Lenders: Unlike Erstwhile
Framework, the Amended Framework has uniformed the criteria of lenders who can
lend in India throughout all kind of ECBs. The lender has to be a member of
FATF or International Organization of Securities Commissions (“IOSCO”) and also
includes multilateral and regional financial institutions of which India is a
member. Further, for both the denominations of ECB, foreign individuals will be
only considered as a lender if the bond is listed in the host country. The
foreign branches/subsidiaries of Indian banks can also be considered as an
eligible lender, however, underwriting by such foreign branches/subsidiaries
cannot be considered as eligible lender.
- Changes in the ‘Eligible Borrowers’: The Erstwhile Framework
had a list of eligible borrowers for every track, however the same has been
simplified in the Amended Framework. All entities who are eligible to raise
Foreign Direct Investment (“FDI”) will be considered eligible under the current ECB
norms, which includes port trusts, unit in Special Economic Zone, Small
Industries Development Bank of India and Export-Import Bank of India while for INR denominated ECB, eligible lenders include all eligible
lenders under FCY denominated ECB and registered entities engaged in
micro-financing in India.
- Uniformity in Minimum Average Maturity Period
(“MAMP”): The Amended Framework has uniformed the MAMP as 3 years for all ECBs,
contrasting the Erstwhile Framework wherein every track had an individual MAMP.
The exception to the above-mentioned standardised MAMP in the Amended
Framework is that the manufacturing companies may raise ECBs with MAMP of 1
year for ECB up to USD 50,000,000 or its equivalent per financial year.
Further, if the ECB is raised from foreign equity holder and utilized for
working capital purposes, general corporate purposes or repayment of Rupee
loans, MAMP will be 5 years. The call and put option, if any, shall not be
exercisable prior to completion of MAMP.
- Consistency in the individual limits: The Amended Framework
has created a uniform limit of USD 750,000,000 for both FCY and INR denominated
ECB under the automatic route. However, the provision regarding raising ECB
from direct foreign equity holder has been rephrased, not amended.
- Changes in exchange rates of ECB: As per the Erstwhile
Framework, the exchange rate was the rate which was prevalent on the day of
settlement, whereas in the Amended Framework, the exchange rate for FCY
denominated ECB will be the rate prevailing on the date of agreement or any
rate agreement by the lender and for INR denominated ECB, the exchange rate of
the Erstwhile Framework will prevail.
- Variations in hedging provisions: The hedging provision of
the Erstwhile Framework was optional and was permitted through derivative
products with Authorized Dealer (“AD Bank”) Category I banks or through branches/subsidiaries
of Indian banks abroad or branches of foreign banks with Indian presence on a
back-to-back basis. According to the Amended Framework, 70% of the total
borrowing has to be compulsorily hedged if the MAMP is less than 5 years for FCY denominated ECB. For the INR denominated ECB, the external lender
is eligible to hedge their exposure in Rupee through permitted derivative
products with AD Category I banks in India. The investors can also access the
domestic market through branches/subsidiaries of Indian banks abroad or
branches of foreign banks with Indian presence on a back to back basis.
- Deviation in reporting: In the Erstwhile
Framework, the entities desirous to raise ECB under the automatic route had to
approach an AD Bank with their proposal along with duly filled Form 83, however
for approval route cases, the borrowers had to approach the RBI with an
application in Form ECB for examination through their AD Bank. However, in the
Amended Framework, Form 83 and ECB have been merged to Form ECB.
Further, the borrower under the Erstwhile Framework
has to file Form ECB-2 monthly with the Department of Statistics and
Information Management (DSIM) and in case of failure to file the same, the Loan
Registration Number (“LRN”) was being instantly cancelled. In the Amended
Framework, the late submission of Form ECB-2/ECB can now be compounded by
paying late fees of:
- INR 5,000 for delay of submission of 30 days from the due date;
- INR 50,000 per year for delay up to 3 years;
- INR 1,00,000 per year for delay beyond 3 years;
- Alternation in Trade Credit norms: Trade-credit limit for the
automatic route for import of non-capital and capital goods has been increased
from USD 20,000,000 to USD 50,000,000 for import of non-capital and capital
goods and for beyond USD 50,000,000, the RBI approval is required. Further, for
oil/gas refining & marketing, airline and shipping companies, the limit is
set up to USD 150,000,000 or equivalent per import transaction and beyond it,
RBI approval is required. The MAMP for trade credits of capital goods has been
reduced from 5 years to 3 years. The all-in-cost ceiling per annum has been
reduced from 350 basic points over 6 months LIBOR to 250 basic points over 6
- Other modifications: The other relevant
modifications include the following:
- The Amended Framework introduced the ‘Standard operating procedure for
untraceable entities’ wherein if the AD Bank does not receive any response from
any means of communication by a particular entity for more than two quarters or
the entity has stopped operating in its registered office or the entity is not
filing the statutory auditor’s report for than 2 years, the AD Bank has to
immediately file Form ECB/ECB-2 and mark it as ‘Untraceable entity’. The AD
Bank should not further examine/process any fresh ECB application or any inward
remittance and debt servicing will be permitted under the automatic route.
- The Amended Framework further states that an entity which is under
restructuring scheme/ CIRP under Insolvency and Bankruptcy Code, 2016 can raise
ECB only if specifically permitted under the resolution plan and they can raise
ECBs from all recognized lenders, except foreign branches/subsidiaries of
Indian banks, for repayment of Rupee term loans of the target company. Such
ECBs will be considered under the approval route only.
- As per the Amended Framework, trade credit can henceforth be raised by a
unit or a developer in SEZ
for purchase of non-capital and capital goods within an SEZ including FTWZ or
from a different SEZ including FTWZ subject to compliance with parameters of
ordinary trade credit and provisions of SEZ Act, 2005. Further, an entity in
DTA is also allowed to raise trade credit for the purchase of capital /
non-capital goods from a unit or a developer of an SEZ including FTWZ. For such
trade credit transactions, the date of transfer of ownership of goods will be
treated as trade credit date. As there will be no bill of entry for sale
transactions within SEZ, the inter-unit receipt generated through National
Securities Depository Limited can be treated as an import document.
- The Amended Framework allows bank guarantees to be given by the AD Bank,
on behalf of the importer, in favour of overseas lender of trade credit not
exceeding the amount of trade credit, within the maximum permissible period.
Trade credit may also be secured by an overseas guarantee issued by foreign
banks/overseas branches of Indian banks. The importer may also offer the security
of movable assets (including financial assets) / immovable assets (excluding
land in SEZs) / corporate or personal guarantee for raising trade credit, with
prior scrutiny of the AD Bank.
- Part IV (Borrowing and Lending in foreign currency by an Authorised
Dealer) and Part V (Borrowing and Lending in foreign currency by persons other
than an authorised dealer) of the Erstwhile Framework has been removed in the
- Amendment as per notification dated July 30, 2019: The notification enables
the eligible borrowers and NBFCs
with ECB of MAMP of 10 years for the purpose of working capital and general
corporate purposes and for on-lending for the above purposes, respectively.
Further, this notification enumerates that eligible borrowers with ECB of MAMP
of 7 years can utilise the funds for repayment of rupee-denominated loans
raised for capital expenditure and also NBFC can further lend for the same
purpose if their ECB is with MAMP of 7 years.
The notification also states that eligible borrowers
in manufacturing & infrastructure sector which have been classified as
‘special mention account-2’
can also repay their domestically availed rupee-denominated loans used for
capital expenditure by their ECB loans through any one-time settlement
arrangement with lenders.
Domestic lenders have also been permitted to sell,
through assignment, such loans to eligible ECB lenders, except foreign
branches/ overseas subsidiaries of Indian banks, provided, the resultant ECB
complies with all-in-cost, MAMP and other laws of the ECB framework.
On analysis of the
above-cited amendments, we have observed that the government is enabling Indian
businesses to obtain capital in a simpler form, with necessary compliances. The
amendments have liberalized the Indian borrowing market further with an aim to
devise easier capital access to the start-ups and the promoters, who are not
willing to dilute their shareholding in their companies, however, had to take
recourse of FDI, due to the stringent policies in the Erstwhile Framework.
Nevertheless, by this policy, the government has opened the debt market of
India considerably and thus, the government needs to be stringent with the
compliances as in the absence of the same, India might drown in the morass of
debt in the foreign market. Such liberalisation of the debt market is like a
‘two-edged sword’ which shall act as a boon to the Indian market, if administered
meticulously and as an irrevocable bane, if not.
-  Bearing A. P. (DIR Series) Circular No. 17
-  Bearing A. P. (DIR Series) Circular No. 18
-  Bearing A. P. (DIR Series) Circular No. 23
-  Special Economic Zone
-  Free Trade and Warehousing Zone
-  Bearing A.P. (DIR Series) Circular No. 04
-  Non-banking Financial Company
-  where principal or interest payment is overdue between 61-90 days
Contributed By - Shreya Dasgupta
Designation - Senior Associate