Financing is the first thing that comes to your mind when you think about the challenges that a company particularly a start-up company may face in India. Getting funds for your business is one of the main issues that all businesses face.
There are various sources through which a company can raise funds for its operation, each source has its own merits and demerits. External Commercial Borrowings (ECB) is one among the various sources through which a company can finance its operations.
External Commercial borrowings (ECB) are commercial loans borrowed by eligible resident entities from recognized non-resident associate entities.
ECBs can take various forms, including bank loans, securitized instruments, buyers’ credit, suppliers’ credit, Foreign Currency Convertible Bonds (FCCBs), Financial Lease, and Foreign Currency Exchangeable Bonds (FCEBs)
ECBs can be raised through two routes namely,
Approval route | Automatic Route |
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An approval must be obtained by sending the request to RBI through their Authorized dealers before raising ECB. | ECB raised under automatic route are examined by the Authorized Dealer Category-I (AD Category-1) banks and a prior approval would not be required from RBI. |
The ECB framework has the following two forms for raising loans,
Basis | Foreign currency denominated ECB | INR denominated ECB |
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Currency of Borrowing: | As the name suggests, in the case of foreign currency denominated ECBs, loans can be borrowed in any freely convertible foreign currency. | In the case of INR currency denominated ECBs, loans can be borrowed only in Indian Rupees |
Eligible borrowers: | Port trusts, Units of Special Economic Zones, Small Industries Development Bank of India, Export Import Bank of India & All Entities eligible to borrow | All entities eligible to raise FCY denominated ECB & Registered entities engaged in micro-finance activities, viz., registered Not for Profit |
Impact of ECB on start-ups
As per the guidelines issued every startup company in India which is eligible to receive FDI can avail ECB.
ECB provides an excellent opportunity for startups in India to access foreign funds at a cheaper cost. This not only helps in improving their financial health but also contributes to their growth and development. With the RBI’s liberal guidelines, it is now easier for startups to avail ECB from overseas.
This is the common question that arises in everyone’s mind. Yes, ECB loans are for a specific purpose, the proceeds from ECB cannot be utilized for a particular set of purposes which we call the “Negative list for end-uses”.
ECB proceeds cannot be utilized for the following purposes:
An eligible borrower is required to have the following list of documents which must be submitted to the RBI through AD Category- I banks for the purpose of borrowing funds;
If you are an eligible borrower and you are willing to obtain loan (ECB) from a Non-resident associate entity, then following are the steps involved in it;
(a) Form ECB 2 duly signed by the authorized signatory.
(b) Customer Request Letter for submission of Form ECB 2.
(c) Certificate from Company Secretary or Chartered Accountant certifying that the return is complete and is in compliance with RBI guidelines.
Separate ECB 2 forms must be submitted for ECBs used for capital and operating expenditures.
This blog post has been written by Maneesh of V Ramaratnam and Company
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