This issue of LexCognito, which in Latin means 'awareness about law', seeks to provide you an insight into significant legal and regulatory developments that have taken place very recently in India.

Date: 21 January 2019
RBI notified New External Commercial Borrowing (ECB) Policy – New ECB Framework
The Reserve Bank of India ("RBI") has recently revised and simplified the law governing External Commercial Borrowings ("ECB") and has accordingly issued the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 vide its notification dated 17 December 2018.

In continuation of the aforesaid and also as part of RBI’s on-going efforts at rationalizing multiple regulations framed under Foreign Exchange Management Act, 1999 (“FEMA”), RBI has notified/launched ECB Policy i.e. New Framework for ECB and Rupee Denominated Bonds  i.e.  vide its Circular dated 16 January 2019. The new policy is for overseas borrowings, allowing all eligible entities to raise foreign funding under the automatic route and removing sectoral curbs. As per RBI Notification, the amended ECB policy/framework will come into force with immediate effect, i.e. from the date of Notification.

ECB means borrowing/loan by an Indian borrower from outside India. ECB can be raised only by an eligible resident entity from outside India in accordance with the framework decided by the RBI in consultation with the Government of India. It means they should conform to parameters such as minimum maturity, permitted and non-permitted end-uses, and maximum all-in-cost ceiling.

Salient features of the New Framework:

  • Merging of Tracks: The earlier four-tier structure has been replaced by two specific channels - dollar and rupee-denominated ECBs. Tracks I and II under the earlier framework have been merged as 'Foreign Currency denominated ECB' and Track III and Rupee Denominated Bonds framework have been combined as 'Rupee Denominated ECB' to make the framework instrument-neutral.
  • Eligible Borrowers: The list of eligible borrowers has been expanded to include all entities eligible to receive foreign direct investment ("FDI"). Additionally, port trusts, units in SEZ, SIDBI, EXIM Bank, registered entities engaged in micro-finance activities, registered societies/trusts/cooperatives and non-government organisations can also borrow under the new framework.
  • Recognised Lenders: Lenders for being eligible should be resident of Financial Action Task Force ("FATF"[1]) or International Organization of Securities Commission ("IOSCO")[2] compliant country. Multinational and Regional Financial Institutions where India is a member country are also considered as recognized lenders. This change will increase the lending options and will allow various new lenders in ECB space while strengthening the Anti-money laundering and Counter-terrorist financing framework.
  • Maturity Period: RBI kept minimum average maturity period (MAMP) unchanged at three (3) years for all ECBs, irrespective of the amount borrowed. If a manufacturer raises overseas debt of up to $50 million in a financial year, the minimum average maturity period would be one (1) year. Any ECBs raised from the foreign equity holder (of a domestic company for example) which are utilized for specific purposes will have a minimum average maturity of five (5) years.
  • End use: The common negative list of end-uses for which the ECB proceeds cannot be utilized remains unchanged. This would include real estate activities, investment in capital market, equity investment, working capital purposes except from foreign equity holder and repayment of Rupee loans except from foreign equity holder.
  • Limit and Leverage: RBI kept the borrowing limit under the automatic route unchanged at USD 750 million per financial year but replaced the sector-wise limits. However, for Start-ups, the amount is limited to USD 3 Million or equivalent per financial year. 
  • All-in-cost ceiling: All-in cost ceiling per annum has been pegged at 'benchmark rate plus 450 bps spread'.
  • Currency of Borrowing: ECB can be raised in any freely convertible foreign currency as well as in Indian Rupees.
  • Parking of ECB proceeds: ECB proceeds can be parked in abroad or domestically. ECB proceeds meant only for foreign currency expenditure can be parked abroad pending utilization. Till utilization, these funds can be invested in various liquid assets viz. deposits or certificate of deposit, treasury bills and other monetary instruments, deposits with foreign branches/subsidiaries of Indian banks abroad. ECB proceeds meant for Rupee expenditure should be repatriated immediately for credit to their Rupee accounts with AD Category I banks in India.
  • Conversion of ECB into equity: The facility of conversion of ECBs, including those which are matured but unpaid, into equity is permitted subject to the terms and conditions prescribed therein.
  • Security for raising ECB: Borrowers may provide security to the lenders by creation of charge on immovable assets, movable assets, financial securities subject to fulfillment on certain conditions. Borrowers may also provide corporate and/or personal guarantee in favour of overseas lender/security trustee, to secure ECB to be raised by the borrower subject to the terms and conditions specified in the Policy.
  • ECB facility for start-ups: Startups are now eligible to raise ECB under the automatic route as per the new framework. Those start-ups are eligible which are recognized as a Startup by the Central Government as on date of raising ECB. Minimum average maturity period will be three (3) years. As discussed above, the borrowing per Startup is limited to USD 3 million or equivalent per financial year either in INR or any convertible foreign currency or a combination of both.
  • Forms and Reporting requirements: Entities desirous to raise ECB under automatic route (i.e. without any regulatory approval) are required to approach an AD Category I bank along with duly filled in Form ECB. Certain reporting requirements are mandatory for borrowings under ECB Framework viz. obtaining Loan Registration Number before  any drawn- down of borrowings, reporting of changes in terms and conditions of ECB and monthly reporting of actual transactions in Form ECB 2 (Return). Non-compliance with such requirements will invite penalty. Late submission fee for delay in prescribed reporting has been introduced to avoid the need for compounding these contraventions. 
Lending and borrowing under the ECB framework by Indian banks and their overseas branches/subsidiaries will be subject to prudential guidelines issued by the Department of Banking Regulation of the Reserve Bank. Further, other entities raising ECB are required to follow the guidelines issued, if any, by the concerned sectoral or prudential regulator.
CRI Comment: The new ECB Framework will ease the borrowing norms allowing a wider set of end-users to tap overseas markets for loans. The futuristic approach taken by RBI must be appreciated. It is expected that this welcome step will result in ease of doing business in India.

[1] FATF is an intergovernmental organization founded in 1989 to develop policies to combat money laundering. The countries like China, Germany, Japan, South Korea, Turkey and Australia are members of FATF.
[2] IOSCO is an association of organizations that regulate the world's securities and future markets. Members are typically primary securities and/or futures regulators in a national jurisdiction or the main financial regulator from each country. The securities/futures regulators of all the aforesaid countries are also members of IOSCO. 
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Chambers of Rajan & Indraneel is a premier full service law firm headquartered at New Delhi, India. The Firm represents amalgamation of vast experiences and practices of two eminent lawyers. Indranil Ghosh is highly reputed as a disputes lawyer. He was a senior partner and head of litigation practice in one of the oldest Indian law firm Fox Mandal for several decades before setting up his own practice. Rajan D Gupta is a rank holder Chartered Accountant turned Corporate Lawyer. He is also a licensed Insolvency Resolution Professional. He has been associated with internationally renowned big law firms in past and has held senior level positions in firms like PwC, Fox Mandal, Khaitan & Co. and SRGR Law, etc. before starting the Firm.

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