Regulatory Overview for External Commercial Borrowings

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Regulatory Overview for External Commercial Borrowings

May 11, 2020




External Commercial Borrowings (ECB’s) are commercial loans raised by eligible resident entities from recognized non-resident entities and should conform to parameters such as minimum maturity, permitted and non-permitted end-uses, maximum all-in-cost ceiling, etc. The parameters given below apply in totality and not on a standalone basis. ECB can be raised either through automatic route or under the approval route.


1. Foreign Equity Holder:

It means (a) direct foreign equity holder with minimum 25% direct equity holding in the borrowing entity, (b) indirect equity holder with minimum indirect equity holding of 51%, or (c) group company with common overseas parent.

2. FATF compliant country:

A country that is a member of the Financial Action Task Force (FATF) or a member of a FATF-Style Regional Body; and should not be a country identified in the public statement of the FATF as (i) A jurisdiction having a strategic Anti-Money Laundering or Combating the Financing of Terrorism deficiencies to which counter measures apply; or (ii) A jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the Financial Action Task Force to address the deficiencies.

3. All in Cost:

 It includes rate of interest, other fees, expenses, charges, guarantee fees, ECA charges, whether paid in foreign currency or INR but will not include commitment fees and withholding tax payable in INR. In the case of fixed rate loans, the swap cost plus spread should not be more than the floating rate plus the applicable spread. Additionally, for FCCBs, the issue related expenses should not exceed 4 per cent of the issue size and in case of private placement, these expenses should not exceed 2 per cent of the issue size, etc.


1. Types of ECB:

Based on form of currency in which ECB is raised, they can be divided into two forms as follows:

a. Foreign Currency (FCY) denominated ECB: Currency of borrowing is in any freely convertible Foreign Currency.

b. Indian Rupee (INR) denominated ECB: Borrowings is raised in Indian Rupees.

2. Forms of ECB:

ECB can be raised in following forms:

a. Loans including bank loans;

b. Floating/ fixed rate notes/ bonds/ debentures (other than fully and compulsorily convertible instruments);

c. Trade credits beyond 3 years;

d. Foreign Currency Convertible Bond (FCCBs);

e. Foreign Currency Exchangeable Bond (FCEBs);

f. Financial Lease and

g. Plain vanilla Rupee denominated bonds issued overseas, which can be either placed privately or listed on exchanges as per host country regulations.

3. Eligible borrowers:

a. All entities eligible to receive FDI.

b. Port Trusts

c. Units in SEZ


e. EXIM Bank of India.

f. Registered entities engaged in micro-finance activities, viz., registered Not for Profit companies, registered societies/trusts/ co-operatives and Non-Government Organizations.

Provided that the eligible borrowers mentioned in 3(f) can raise only INR denominated ECB.Further, from the aforesaid, it can be deduced that now even LLPs are eligible to raise ECB under this new framework. The eligible borrower now includes all entities eligible to receive FDI. Under the extant foreign exchange regulations, foreign direct investments is permitted in an LLP, in those sectors/activities where 100% FDI is allowed through the automatic route and there are no FDI linked performance related conditions. Therefore, an LLP which is engaged in any activity where 100% FDI is permitted and thereare no FDI linked performance related conditions, is an eligible borrower to raise ECB.

4. Recognized lenders:

a. The lender should be resident of FATF or IOSCO compliant country, including on transfer of ECB.

b. Multilateral and Regional Financial Institutions where India is a member country will also be considered as recognized lenders;

c. Individuals as lenders can only be permitted if they are foreign equity holders or for subscription to bonds/debentures listed abroad; and

d. Foreign branches / subsidiaries of Indian banks are permitted as recognized lenders only for FCY ECB (except FCCBs and FCEBs).

e. Foreign branches / subsidiaries of Indian banks, subject to applicable prudential norms, can participate as arrangers/underwriters/market-makers/traders for Rupee denominated Bonds issued overseas. However, underwriting by foreign branches/subsidiaries of Indian banks for issuances by Indian banks will not be allowed.

5. MinimumAverage Maturity Period (MAMP):

MAMP for ECB will be 3 years. Call and put options, if any, shall not be exercisable prior to completion of minimum average maturity. However, for the specific categories mentioned below, the MAMP will be as prescribed therein:


Sr.No. Category MAMP
(a) ECB raised by manufacturing companies up to USD 50 million or its equivalent per financial year. 1 year
(b) ECB raised from foreign equity holder for working capital purposes, general corporate purposes or for repayment of Rupee loans 5 years
1(c) ECB raised for
(i) working capital purposes or general corporate purposes
(ii) on-lending by NBFCs for working capital purposes or general corporate purposes
10 years
(d) ECB raised for
(i) repayment of Rupee loans availed domestically for capital expenditure
(ii) on-lending by NBFCs for the same purpose
7 years
(e) ECB raised for
(i) repayment of Rupee loans availed domestically for purposes other than capital expenditure
(ii) on-lending by NBFCs for the same purpose
10 years
for the categories mentioned at (b) to (e) –
(i) ECB cannot be raised from foreign branches / subsidiaries of Indian banks
(ii) the prescribed MAMP will have to be strictly complied with under all circumstances.

6. All in Cost ceiling per annum:

 All in cost ceiling per annum should be benchmark rate plus 450 bps spread.

Prepayment charge/ Penal interest, if any, for default or breach of covenants, should not be more than 2 per cent over and above the contracted rate of interest on the outstanding principal amount and will be outside the all-in-cost ceiling.

7. End Uses of ECB:

ECB proceeds cannot be utilized for the following:

a. Real estate activities.

b. Investment in capital market.

c. Equity investment.

d. Working capital purposes, except in case of ECB mentioned at 5(b) and 5(c) above.

e. General corporate purposes, except in case of ECB mentioned at 5(b) and 5(c) above.

f. Repayment of Rupee loans, except in case of ECB mentioned at 5(d) and 5(e) above.

g. On-lending to entities for the above activities, except in case of ECB raised by NBFCs as given at 5(c),5(d) and 5(e) above.

8. Limit and leverage:

All eligible borrowers can raise ECB up to USD 750 million or equivalent per financial year under the automatic route.Further, in case of FCY denominated ECB raised from direct foreign equity holder, ECB liability-equity ratio for ECB raised under the automatic route cannot exceed 7:1. However, this ratio will not be applicable if the outstanding amount of all ECB, including the proposed one, is up to USD 5 million or its equivalent.Under the erstwhile framework there were sectoral limits on borrowing whereas the new ECB framework allows all eligible borrowers to borrow upto USD 750 million per financial year without any specific sectoral limits.

9. Issuance of Guarantee, etc. by Indian banks and Financial Institutions:

Issuance of any type of guarantee by Indian banks, All India Financial Institutions and NBFCs relating to ECB is not permitted. Further, financial intermediaries (viz., Indian banks, All India Financial Institutions, or NBFCs) shall not invest in FCCBs/ FCEBs in any manner whatsoever.

Note: The ECB framework is not applicable in respect of investments in Non-Convertible Debentures in India made by Registered Foreign Portfolio Investors. Lending and borrowing under the ECB framework by Indian banks and their branches/subsidiaries outside India 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.

10. Parking Of ECB Proceeds:

a. Parking of ECB proceeds abroad: ECB proceeds meant only for foreign currency expenditure can be parked abroad pending utilization. Till utilization, these funds can be invested in the following liquid assets

i. 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;

ii. Treasury bills and other monetary instruments of one-year maturity having minimum rating as indicated above and

iii. Deposits with foreign branches/subsidiaries of Indian banks abroad.

b. Parking of ECB proceeds domestically:ECB proceeds meant for Rupee expenditure should be repatriated immediately for credit to their Rupee accounts with AD Category I banks in India. ECB borrowers are also allowed to park ECB proceeds in term deposits with AD Category I banks in India for a maximum period of 12 months cumulatively. These term deposits should be kept in unencumbered position.


1. All ECB can be raised under the automatic route if they conform to the parameters prescribed under this framework. The borrowers shall file a duly filled Form ECB.

2. For approval route cases, the borrowers may approach the RBI thorough AD Bank with an application in Form ECB.


1. Loan Registration Number (LRN):

Any draw-down in respect of an ECB should happen only after obtaining the LRN from the Reserve Bank. To obtain the LRN, borrowers are required to submit duly certified Form ECB, which also contains terms and conditions of the ECB, in duplicate to the designated AD Category I bank.

2. Changes in terms and conditions of ECB:

Changes in ECB parameters in consonance with the ECB norms should be reported through revised Form ECB within 7 days from the changes effected.

3. Monthly Reporting of actual transactions: 

The borrowers are required to report actual ECB transactions through Form ECB 2 Return within seven working days from the close of month to which it relates. Changes, if any, in ECB parameters should also be incorporated in Form ECB 2 Return.


Conversion of ECB, including those which are matured but unpaid, into equity is permitted subject to the following conditions:

1. The activity of the borrowing company is covered under the automatic route for FDI or Government approval is received, wherever applicable, for foreign equity participation as per extant FDI policy.

2. The conversion should be with the lender’s consent and without any additional cost,

3. Should not result in contravention of eligibility and breach of applicable sector cap on the foreign equity holding under FDI policy;

4. Pricing Guidelines:

For conversion of ECB dues into equity, the exchange rate prevailing on the date of the agreement between the parties concerned for such conversion or 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 with reference to the date of conversion only.

5. Reporting Requirements:

a. Partial conversion: The converted portion is to be reported in Form FC-GPR prescribed for reporting of FDI flows, while monthly reporting Form ECB 2 Return will be with suitable remarks, viz., “ECB partially converted to equity”.

b. Full conversion: The entire portion is to be reported in Form FC-GPR and Form ECB 2 Return should be filed with remarks “ECB fully converted to equity”. Subsequent filing of Form ECB 2 Return is not required.

Authors: Anita Dugar, Senior Associate; Nisha Jhawar, Associate.

Disclaimer: The content of this article is intended to provide a general guide to the subject matter. For any queries, the authors can be reached at (i) (ii)

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