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External Commercial Borrowings- A pathway for businesses in India
Have you ever wondered why running a company in India could be challenging?
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.
What are External Commercial Borrowings (ECB)?
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)
How can you raise ECB in India?
ECBs can be raised through two routes namely,
- Approval route
- Automatic route
| Approval route | Automatic Route |
|---|---|
| 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,
- Foreign currency denominated ECB
- INR denominated ECB
| Basis | Foreign currency denominated ECB | INR denominated ECB |
|---|---|---|
| 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.
Can I utilize the ECB borrowed for any purposes?
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:
- Real estate activities
- Investment in capital market
- Equity investment
- Working capital purpose, General corporate purpose and Repayment of rupee loans, except in the case where ECB is raised exclusively for such purposes and raised by NBFC.
What are the documents that are required for the purpose of raising ECB?
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;
- Loan agreement
- Loan registration number (It should be obtained from RBI before securing the ECB)
- Copy of respective offer letter furnishing the respective details of the offer.
- Undertaking by the proposed director of the company that the ECB must be utilized only for permitted purposes.
- Customer request letter.
- Average maturity period Schedule- Raising funds by way of ECB is subject to certain maturity, referred to as minimum average maturity period.
Steps involved in availing ECB in India
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;
- Submission of Form ECB & Loan agreement: The borrower must submit the ECB application form along with the loan agreement entered with the Non-resident associate entity to an Authorized Dealer (AD) Bank. The borrower is also required to submit other documents such as offer letter, Customer request letter, undertaking by the director and average maturity period schedule with the AD category bank. Once the documents are submitted the AD Bank will scrutinize the documents submitted.
- Submission to RBI: Post scrutiny, the AD Bank submits the documents to Reserve Bank of India (RBI).
- Issuance of LRN: RBI issues LRN after reviewing the documents and application
- Drawdown of loan: Once the LRN is issued the borrower can draw down the loan for credit to their account.
- Reporting requirements on monthly basis: Once the drawdown starts the borrower is required to report the ECB transaction in form ECB 2 within seven workings from the close of the month which it relates to. Changes in the ECB parameters should also be reported on Form ECB 2 return.
Documents to be submitted with bank:
(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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