A Guide To External Commercial Borrowings (“ECB”) Under FEMA-Part-2

ECB is an important source of funds for raising funds in the international market. Since ECB involves foreign currency, these transactions are regulated by RBI. A detailed discussion about ECB has been carried out in the first part of the article.

Remaining RBI Regulations related to external commercial borrowings are as follows:

1. Parking of ECB Proceeds:

• Funds borrowed through ECB, pending utilization, can’t be kept in the form. RBI has specified the following manner of parking of ECB proceeds.

1. Parking of ECB proceeds abroad: 
   1. ECB proceeds which are pending for utilization and meant only for foreign currency expenditure can be parked abroad. 
   2. Till utilisation, these funds can be invested in the following liquid assets:
      1. 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 Moody’s; 
      2. Treasury bills and other monetary instruments of one-year maturity having a minimum rating as indicated above and 
      3. deposits with foreign branches/subsidiaries of Indian banks abroad.

2. Parking of ECB proceeds domestically: 
   1. ECB proceeds meant for Rupee expenditure should be repatriated immediately to their Rupee accounts with AD Category I banks in India.
   2. Amount pending utilization can be parked in term deposits with AD Category I banks in India. Maximum period of such term deposit shall be 12 months cumulatively. 
   3. These term deposits should be kept in an unencumbered position, i.e, no debt should be raised against such term deposit.

2. Procedure of raising ECB: 

• Under automatic route:
  • Funds through ECB can be borrowed without obtaining any prior approval from RBI. However, parameters prescribed by RBI should be fulfilled.
  • Entities that want to raise ECB under the automatic route may approach an AD Category I bank with their proposal along with duly filled in Form external commercial borrowings.

• Under approval route:
  • Borrowers may approach the RBI with an application in Form ECB for examination through their AD Category I bank. 
  • RBI may consider such cases keeping in view the overall guidelines, macroeconomic situation and merits of the specific proposals. 
  • ECB proposals received by RBI above certain threshold limit (refixed from time to time) would be placed before the Empowered Committee set up by the Reserve Bank. The Empowered Committee will have external as well as internal members and the Reserve Bank will take a final decision in the cases taking into account the recommendation of the Empowered Committee. 

3. Reporting Requirement:

Borrowings under ECB are subject to the following reporting requirement:

1. Loan Registration Number (LRN): 
   1. Any borrower can draw-down in respect of an external commercial borrowings only after obtaining the LRN from the Reserve Bank. 
   2. To obtain the LRN, borrowers should file a certified application in Form ECB mentioning therein all information about terms and conditions of the ECB.
   3. Form should be filed in duplicate to the designated AD Category-I bank. 
   4. Further, AD Category-I bank will forward one copy to the RBI.
   5. Please note that copies of lthe oan agreement for raising ECB are not required to be submitted to the Reserve Bank.

2. Changes in terms and conditions of ECB:
   1. Any amendments in ECB parameters in consonance with the external commercial borrowings norms, including reduced repayment by mutual agreement between the lender and borrower, should be reported to the RBI through revised Form ECB.
   2. Information should not be filed later than 7 days from the changes effected. 
   3. While submitting revised Form ECB, the changes should be specifically mentioned in the communication.

3. Monthly Reporting of actual transactions:
   1. The borrower should provide information about all ECB transactions to AD Category-I Bank through form ECB-2 every month.
   2. Form ECB-2 should be filed within 7 days from the close of month.
   3. Any changes in ECB parameters should also be incorporated in Form ECB 2 Return.

4. Late fee for delay in reporting:
   1. Any borrower, who is otherwise in compliance with ECB guidelines, can regularise the delay in reporting of drawdown of external commercial borrowings proceeds before obtaining LRN or delay in submission of Form ECB 2 returns, by payment of late submission fees as detailed in the following matrix:

Sr. No.	Type of Return/Form	Period of delay	late fee
1	Form ECB 2	Up to 30 calendar days from due date of submission	INR 5,000
2	Form ECB 2/ Form ECB	Up to three years from the due date of submission/ date of drawdown	INR 50,000 Per year
3	Form ECB 2/ Form ECB	Beyond three years from the due date of submission/ date of drawdown	INR 1,00,000 Per Year

2. Payment for late fee can be made through Demand Draft or any other mode specified by the Reserve Bank. Such payment should be accompanied with the requisite return(s). 
3. Form external commercial borrowings and Form ECB 2 returns reporting contraventions will be treated separately. 
4. Non-payment of LSF will be treated as contravention of reporting provision and shall be subject to compounding or adjudication as provided in FEMA 1999 or regulations/rules framed thereunder.

4. Standard Operating Procedure (SOP) for untraceable Entities:

Late fees are prescribed for delay in filing of external commercial borrowings returns. However, what about the entities that have raised funds through ECB and did not file any kind of ECB returns. Such entities are mentioned as “UNTRACEABLE ENTITIES” by RBI and separate Standard Operating Procedure (“SOP”) is given for the same in master directions.

As per Para 6.5 of ECB Master Directions, AD Category-1 bank is required to follow the following SOP in case of untraceable entities which have not filed ECB returns prescribed under the ECB framework, either physically or electronically, for the past 8 quarters or more:

4.1 Meaning of Untraceable Entities:

Any entity which has raised funds through external commercial borrowings and entity itself or its auditor(s), director(s) or  promoter(s) are not reachable or responsive over email/letters/phone for 2 quarters or more with documented communication/ reminders sent 6 or more and it fulfills both of the following conditions:

1. Entity is not operative at the registered office address available with the AD Bank or not found to be operative during the visit by the officials of the AD Bank;
2. Entities have not submitted Statutory Auditor’s Certificate for the last two years or more;

4.2 Action against untraceable Entities:

Following actions shall be taken under untraceable entities:

1. File Revised Form external commercial borrowings, if required, and last Form ECB 2 Return without certification from the company with ‘UNTRACEABLE ENTITY’ written in bold on top. The outstanding amount will be treated as written-off from external debt liability of the country but may be retained by the lender in its books for recovery through judicial/ non-judicial means;
2. No fresh ECB application by the entity should be examined/processed by the AD bank;
3. Directorate of Enforcement should be informed whenever any entity is designated ‘UNTRACEABLE ENTITY’; and
4. No inward remittance or debt servicing will be permitted under the automatic route.

5. Conversion of ECB into Equity: 

In some cases, instead of repaying ECB, the borrower may propose to issue equity shares in its company to the lender to avoid repayment. Issuance of equity shares to ECB lender will result in Foreign Direct Investment (“FDI”) in the company. Therefore, all guidelines related to FDI such as approval, sectoral cap, etc. should be fulfilled.

As per ECB Master Directions, following guidelines should be fulfilled in case of conversion of ECB to equity:

1. ECB matured but not paid can also be converted into equity.
2. The activity of the borrowing company is covered under the automatic route for FDI or in other cases, Government approval is received, for foreign equity participation as per extant FDI policy.
3. The conversion should be made with the lender’s consent and without any additional cost.
4. Conversion should not result in contravention of eligibility and breach of applicable sector cap on the foreign equity holding under FDI policy;
5. Applicable pricing guidelines for shares are complied with;
6. In case of partial or full conversion of ECB into equity, the reporting to the Reserve Bank will be as under:
   1. Partial conversion: the converted portion is to be reported in Form FC-GPR prescribed for reporting of FDI flows, while monthly reporting to DSIM in Form ECB 2 Return will be with suitable remarks, viz., “external commercial borrowings partially converted to equity”.
   2. Full conversion: the entire portion is to be reported in Form FC-GPR, while reporting to DSIM in Form ECB 2 Return should be done with remarks “ECB fully converted to equity”. Subsequent filing of Form ECB 2 Return is not required.
   3. If conversion is carried out in a phased manner, then reporting through Form FC-GPR and Form ECB 2 Return will also be in phases.
7. If such borrower has availed other credit facilities from the Indian banking system, including foreign branches/subsidiaries of Indian banks, the applicable prudential guidelines issued by the Department of Banking Regulation of Reserve Bank, including guidelines on restructuring are complied with;
8. Consent of other lenders, if any, to the same borrower is available or at least information regarding conversions is exchanged with other lenders of the borrower.
9. For conversion of ECB dues into equity, the exchange rate prevailing on the date of the agreement between the parties concerned for such conversion shall be considered. However, any lesser rate can be applied with a mutual agreement with the ECB lender. It may be noted that the fair value of the equity shares to be issued shall be worked out concerning the date of conversion only.

6. Security for raising ECB: 

To ensure security to the lender, the AD Category-I banks are permitted to allow creation/cancellation of charge on immovable assets, movable assets, financial securities and issue of corporate and/or personal guarantees in favour of overseas lender/security trustee. However, the Bank should satisfy itself that:

1. the underlying ECB complies with the extant ECB guidelines,
2. security clause exists in the Loan Agreement requiring the ECB borrower to create/cancel a charge, in favour of the overseas lender, and
3. No objection certificate, as applicable, from the existing lenders in India has been obtained in case of creation of charge.

Once the aforesaid stipulations are met, the AD Category I bank may permit creation of charge subject to fulfillment of conditions specified by RBI based on the nature of security..

7. Special procedure for ECB for certain entities:

7.1 ECB facility for Oil Marketing Companies: 

1. Public Sector Oil Marketing Companies (OMCs) can raise ECB for working capital purposes with minimum average maturity period of 3 years from all recognised lenders under the automatic route without mandatory hedging and individual limit requirements. 
2. The overall ceiling shall be USD 10 billion or equivalent. 
3. Further, OMCs should have a Board approved forex mark to market procedure and prudent risk management policy, for such ECB. 

All other provisions under the ECB framework will apply to such ECB.

7.2 ECB facility for Startups: 

AD Category-I banks are permitted to allow Startups, entities recognised by the Central Government, to raise ECB under the automatic route with various liberalization. Few liberalisations are as follows:

1. Minimum average maturity period will be 3 years.
2. Lender/investor shall be a resident of a FATF compliant country. However, foreign branches/subsidiaries of Indian banks and overseas entity in which Indian entity has made overseas direct investment as per the extant Overseas Direct Investment Policy will not be considered as recognised lenders under this framework.
3. The borrowing can be in the form of loans or non-convertible, optionally convertible or partially convertible preference shares.
4. The borrowing per Startup will be limited to USD 3 million or equivalent per financial year either in INR or any convertible foreign currency or a combination of both.
5. All-in-cost shall be mutually agreed between the borrower and the lender.
6. Proceeds can be used for any expenditure in connection with the business of the borrower.
7. Conversion of ECB into equity is freely permitted subject to the Regulations applicable for foreign investment in Startups.

Conclusion:

In the era of globalization, funds can be arranged through the international market at more economical rates. However, before opting for ECBs, every entity is advised to seek professional service to ensure that all guidelines issued by RBI are duly complied with.