The Reserve Bank of India (“RBI”) circulated Master Directions on External Commercial Borrowings, Trade Credits and Structured Obligations on March 26, 2019 bearing reference RBI/FED/2018-19/67 FED Master Direction No.5/2018-19 (“Master Directions”). As per paragraph 2 of the Master Directions, External Commercial Borrowings (“ECB”) are commercial loans raised by eligible resident entities from recognised non-resident entities and should conform to parameters such as minimum maturity, permitted and non-permitted end-uses, maximum all-in-cost ceiling, etc. As per the Master Directions, there are two types framework namely (a) freely convertible foreign currency denominated ECB (“FC ECB”); and (b) Indian currency denominated ECB (“INR ECB”). Please note that the Master Directions have also offered special dispensations for startups and entities under restructuring/ ECB facility for refinancing stressed assets, which have been captured under Annexure A and Annexure B respectively.
1. FC ECB
1.1. Form of FC ECB – As per Sr. No. (ii) of paragraph 2.1 of the Master Directions, following are the forms of FC ECB:
(a) loans including bank loans;
(b) floating/ fixed rate notes/bonds/ debentures/ preference shares (other than fully and compulsorily convertible instruments);
(c) trade credits beyond 3 (three) years;
(d) financial lease;
(e) Foreign Currency Convertible Bonds (“FCCBs”); and
(f) Foreign Currency Exchangeable Bonds (“FCEBs”).
1.2. Eligible borrowers - As per Sr. No. (iii) of paragraph 2.1 of the Master Directions, following are the eligible borrowers for availing FC ECB:
(a) all entities eligible to receive foreign direct investment;
(b) port trusts;
(c) units in special economic zone;
(d) Small Industries Development Bank of India; and
(e) EXIM Bank of India.
1.3. All-in-cost ceiling per annum - As per Sr. No. (vi) of paragraph 2.1 of the Master Directions, following are the all-in cost ceiling per annum for FC ECB:
(a) benchmark rate plus 550 bps spread for existing ECBs linked to LIBOR whose benchmarks are changed to an alternative reference rate; and
(b) benchmark rate plus 500 bps spread for new ECBs.
1.4. Exchange rate - As per Sr. No. (ix) of paragraph 2.1 of the Master Directions, the exchange rate for change of currency of FCY ECB into INR ECB can be:
(a) at the exchange rate prevailing on the date of the agreement for such change between the parties; or
(b) at an exchange rate, which is less than the rate prevailing on the date of the agreement, if consented to by the ECB lender.
1.5. Change of currency of borrowing - As per Sr. No. (xi) of paragraph 2.1 of the Master Directions, it is permitted to change the currency of ECB from one freely convertible foreign currency to any other freely convertible foreign currency as well as to INR.
1.6. Hedging - The eligible borrower is required to follow the guidelines for hedging issued, if any, by the concerned sectoral or prudential regulator in respect of foreign currency exposure. [Note: For instance, power generating company (except such generating companies which are utilizing renewable energy resources) have to comply with Regulations 68 and 69 of the Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations, 2019 in relation to hedging of foreign exchange exposure and recovery of cost of hedging or foreign exchange rate variation.] Infrastructure companies are required to have a board approved risk management policy. Further, such companies are required to mandatorily hedge 70% (seventy per cent) of their ECB exposure in case the average maturity of the ECB is less than 5 years. The designated AD Category-I bank is required to verify that such 70% (seventy per cent) hedging requirement is complied with during the currency of the ECB and is required to report the position to RBI through Form ECB 2. The following operational aspects with respect to hedging are required to be ensured:
(a) Coverage - The eligible borrower is required to cover the principal and coupon through financial hedges. The financial hedge shall begin from the time of each such exposure (i.e., the day the liability is created in the books of the borrower).
(b) Tenor and rollover - A minimum tenor of 1 (one) year for the financial hedge would be required with periodic rollover, duly ensuring that the exposure on account of ECB is not unhedged at any point during the currency of the ECB.
(c) Natural Hedge - Natural hedge, in lieu of financial hedge, shall be considered only to the extent of offsetting projected cash flows / revenues in matching currency, net of all other projected outflows. For this purpose, an ECB may be considered naturally hedged if the offsetting exposure has the maturity/cash flow within the same accounting year. Any other arrangements/ structures, where revenues are indexed to foreign currency are not considered as a natural hedge.
2. INR ECB
2.1. Form of INR ECB – As per Sr. No. (ii) of paragraph 2.1 of the Master Directions, following are forms of INR ECB: (a) loans including bank loans; (b) floating/ fixed rate notes/bonds/ debentures/ preference shares (other than fully and compulsorily convertible instruments); (c) trade credits beyond 3 (three) years; (d) financial lease; and (e) plain vanilla Rupee denominated bonds issued overseas, which can be either placed privately or listed on exchanges as per host country regulations.
2.2. Eligible borrowers - As per Sr. No. (iii) of paragraph 2.1 of the Master Directions, following are eligible borrowers for availing INR ECB: (a) all entities eligible to raise FCY ECB; and (b) registered entities engaged in micro-finance activities, viz., registered not for profit companies, registered societies/trusts/ cooperatives and non-government organisations.
2.3. All-in-cost ceiling per annum - As per Sr. No. (vi) of paragraph 2.1 of the Master Directions, the all-in cost ceiling per annum for INR ECB is benchmark rate plus 450 bps spread.
2.4. Exchange rate - As per Sr. No. (ix) of paragraph 2.1 of the Master Directions, the exchange rate for conversion to Indian Rupees shall be the rate prevailing on the date of settlement.
2.5. Change of currency of borrowing - As per Sr. No. (xi) of paragraph 2.1 of the Master Directions, it is not permitted to change the currency from INR to any freely convertible foreign currency.
2.6. Hedging - Overseas investors are eligible to hedge their exposure in Rupee through permitted derivative products with AD Category I banks in India. The investors can also access the domestic market through branches / subsidiaries of Indian banks abroad or branches of foreign banks with Indian presence on a back-to-back basis.
3. COMMON FOR BOTH FC ECB AND INR ECB
3.1. Procedure of raising ECB – If the ECBs conform to the parameters prescribed under the Master Directions, the same can be raised under the automatic route. For automatic route cases, the borrowers are required to approach an AD Category I bank with their proposal along with duly filled in Form ECB. For approval route cases, the borrowers are required to approach RBI with an application in the format of Form ECB for examination through their AD Category I bank.
3.2. Limit and leverage - All eligible borrowers are permitted to avail ECB up to USD 750 million or equivalent per financial year under the automatic route. Further, in case of FC ECB raised from direct foreign equity holder, liability-equity ratio for such FC ECB raised under the automatic route shall not exceed 7:1. However, this ratio is not applicable if the outstanding amount of all ECB, including the proposed one, is up to USD 5 million or its equivalent. Further, the eligible borrowers are also governed by the guidelines on debt equity ratio, issued, if any, by the sectoral or prudential regulator concerned. [Note: For instance, for the power generating companies (including such generating companies which use renewable energy sources), the debt equity ratio is 70:30 as per regulation 19 of Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations, 2019 and regulation 13 of Central Electricity Regulatory Commission (Terms and Conditions for Tariff determination from Renewable Energy Sources) Regulations, 2020.]
3.3. Recognised lenders - The lender (including on transfer of ECB) should be resident of a country compliant with (a) Financial Action Task Force (“FATF”); or (b) International Organisation of Securities Commission. Having said that, please note the following:
(a) Multilateral and regional financial institutions where India is a member country are also be considered as recognised lenders;
(b) Individuals as lenders are permitted if they are foreign equity holders or for subscription to bonds/debentures listed abroad; and
(c) Foreign branches / subsidiaries of Indian banks (“Overseas Indian Banks”) are permitted only for FC ECB (except for FCCBs and FCEBs). Further, Overseas Indian Banks, subject to applicable prudential norms, can participate as arrangers/underwriters/market-makers/traders for Indian Rupee denominated bonds issued overseas. However, Overseas Indian Banks are not permitted to underwrite issuances by Indian banks.
3.4. Minimum Average Maturity Period (“MAMP”) – MAMP for ECB is 3 (three) years. RBI has further stated that call and put options, if any, should not be exercisable prior to completion of minimum average maturity. However, for the specific categories mentioned below, the MAMP is as following:
(a) for ECB raised by manufacturing companies up to USD 50 million or its equivalent per financial year the MAMP shall be 1 (one) year;
(b) for ECB raised from foreign equity holder for working capital purposes, general corporate purposes or for repayment of Rupee loans the MAMP shall be 5 (five) years (“Foreign Equity Holder ECB”);
(c) for ECB raised for: (i) working capital purposes or general corporate purposes; and/or (ii) on-lending by NBFCs for working capital purposes or general corporate purposes; the MAMP shall be 10 (ten) years (“WC and GC ECB”);
(d) for ECB raised for: (i) repayment of Rupee loans availed domestically for capital expenditure; and/or (ii) on-lending by NBFCs for the same purpose; the MAMP shall be 7 (seven) years (“Capex ECB”); and
(e) for ECB raised for: (i) repayment of Rupee loans availed domestically for purposes other than capital expenditure; and/or (ii) on-lending by NBFCs for the same purpose; the MAMP shall be 10 (ten) years (“Non-Capex ECB”).
3.5. Negative List - 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 Foreign Equity Holder ECB and WC and GC ECB;
(e) General corporate purposes, except in case of Foreign Equity Holder ECB and WC and GC ECB;
(f) Repayment of Rupee loans, except in case of Capex ECB and Non-Capex ECB; and
(g) On-lending to entities for the above activities, except in case of ECB raised by NBFCs for Capex ECB and Non-Capex ECB.
3.6. Other Costs - Prepayment charge and/or penal interest, if any, for default or breach of covenants, cannot be more than 2% (two per cent) over and above the contracted rate of interest on the outstanding principal amount and will not be considered under the all-in-cost ceiling. [Note: Please note that the same is charged on the outstanding principal amount and not on the whole outstanding amount (i.e., principal and interest).]
4. REPORTING REQUIREMENTS
4.1. Please note the following reporting requirements as per the Master Directions:
(a) Loan Registration Number (“LRN”) – RBI has specifically stated that any drawdown in respect of an ECB can happen only after obtaining the LRN from RBI. [Note – The borrowers is be required to submit two sets of duly certified Form ECB to AD Category I bank. Further, please note that the copies of loan agreement for raising ECB are not required to be submitted to RBI.]
(b) Changes in terms and conditions of ECB - Changes in ECB parameters in consonance with the Master Directions, including reduced repayment by mutual agreement between the lender and borrower, are required to be reported to the Department of Statistics and Information Management (“DSIM”) through revised Form ECB within 7 (seven) days from the changes effected. [Note – Please note that RBI has specifically stated that while submitting revised Form ECB the changes are required to be specifically mentioned in the communication.]
(c) Monthly Reporting of actual transactions - The borrowers are required to report actual ECB transactions in Form ECB 2 Return through the AD Category I bank on monthly basis so as to reach DSIM within 7 (seven) working days from the close of month to which it relates. Changes, if any, in ECB parameters are also required to be mentioned under Form ECB 2 Return.
5. SECURITY CREATION
5.1. 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, to secure the ECB to be raised/ raised by the borrower, subject to satisfying themselves that:
(a) the underlying ECB is in compliance with the Master Directions;
(b) there exists a security clause in the Loan Agreement requiring the borrower to create/cancel charge, in favour of overseas lender/security trustee, on the concerned asset and/or issuance of guarantee, and
(c) No objection certificate, as applicable, from the existing lenders in India has been obtained in case of creation of charge.
5.2. Creation of Charge on Immovable Assets - The arrangement is subject to the following:
(a) The security shall be subject to provisions contained in the Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2018;
(b) The permission shall not be construed as a permission to acquire immovable asset (property) in India, by the overseas lender/ security trustee; and
(c) In the event of enforcement, the immovable asset/ property shall be sold only to a person resident in India and the sale proceeds shall be repatriated to liquidate the outstanding ECB.
5.3. Creation of Charge on Movable Assets - In the event of enforcement, the claim of the lender, whether the lender takes over the movable asset or otherwise, is restricted to the outstanding claim against the ECB. Encumbered movable assets may be taken out of India subject to issuance of „No Objection Certificate‟ from domestic lenders, if any.
5.4. Creation of Charge over Financial Securities - The arrangement is subject to the following:
(a) Pledge of shares of the borrowing company held by the promoters as well as in domestic associate companies of the borrower is permitted. Pledge on other financial securities, i.e., bonds and debentures, government securities, government savings certificates, deposit receipts of securities and units of the Unit Trust of India or of any mutual funds, standing in the name of the borrower/promoter, is also permitted.
(b) Security interest over all current and future loan assets and all current assets including cash and cash equivalents, including Rupee accounts of the borrower with ADs in India, standing in the name of the borrower/promoter, is permitted. The Rupee accounts of the borrower/promoter can also be in the form of escrow arrangement or debt service reserve account.
(c) In case of invocation of pledge, transfer of financial securities shall be in accordance with the extant foreign direct investment policy and/or policies for foreign institutional investors including provisions relating to sectoral cap and pricing read with the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2017.
5.5. Issue of Corporate or Personal Guarantee - The arrangement is subject to the following:
(a) A copy of board resolution for the issue of corporate guarantee for the company issuing such guarantee, specifying name of the officials authorised to execute such guarantees on behalf of the company or in individual capacity is required to be obtained.
(b) Specific requests from individuals to issue personal guarantee indicating details of the ECB should be obtained.
(c) Such security is subject to provisions contained in the Foreign Exchange Management (Guarantees) Regulations, 2000.
(d) ECB can be credit enhanced / guaranteed / insured by overseas party only if the same fulfils the criteria of recognised lender under extant the Master Directions.
[Note: Please note that Indian banks, All India Financial Institutions and NBFCs are not permitted to issue guarantee, standby letter of credit, letter of undertaking or letter of comfort in relation to ECBs Further, the same are prohibited from investing in FCCBs/ FCEBs in any manner whatsoever.]
6. REFINANCING OF EXISTING ECB
Refinancing of existing ECB by fresh ECB is permitted provided the outstanding maturity of the original borrowing (weighted outstanding maturity in case of multiple borrowings) is not reduced and all-in-cost of fresh ECB is lower than the all-in-cost (weighted average cost in case of multiple borrowings) of existing ECB. Further, refinancing of ECB raised under the previous ECB frameworks may also be permitted, subject to additionally ensuring that the borrower is eligible to raise ECB under the extant framework. Raising of fresh ECB to part refinance the existing ECB is also permitted subject to same conditions. Indian banks are permitted to participate in refinancing of existing ECB, only for highly rated corporates (i.e., AAA rated) and for Navratna/Maharatna public sector undertakings.
7. CONVERSION OF ECB INTO EQUITY
Conversion of ECB, including those which are matured but unpaid, into equity is permitted subject to the following conditions:
7.1. The activity of the borrower is covered under the automatic route for FDI or Government approval is received, for foreign equity participation as per extant FDI policy.
7.2. The conversion, which should be with the lender‟s consent and without any additional cost, should not result in contravention of eligibility and breach of applicable sector cap on the foreign equity holding under FDI policy.
7.3. Applicable pricing guidelines for shares are complied with.
7.4. In case of partial or full conversion of ECB into equity, the reporting to RBI will be as under:
(a) For partial conversion, the converted portion is to be reported in Form FC-GPR prescribed for reporting of FDI, while monthly reporting to DSIM in Form ECB 2 Return will be with remarks “ECB partially converted to equity”.
(b) For 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.
(c) For conversion of ECB into equity in phases, reporting through Form FC-GPR and Form ECB 2 Return will also be in phases.
7.5. If the borrower concerned has availed of 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 RBI, including guidelines on restructuring are required to be complied with. [Note: In such a scenario, the relevant lenders are required to follow RBI‟s guidelines on „Framework for Resolution of Stressed Assets‟ which are mentioned under RBI‟s Master Circular on Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances dated April 1, 2022 (“IRAC Norms”), whereby a resolution plan is required to be implemented. In case the resolution plan involves an act of restructuring whereby new securities are issued by the borrower which would be held by the lenders in lieu of a portion of the pre-restructured exposure, the lenders are required to follow RBI‟s directions on asset classification, provisioning and valuation methodologies as mentioned under paragraph 21 of Part B2 of the IRAC Norms.]
7.6. 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.
7.7. 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.
This is a note for reference and does not constitute legal advice. For any queries, please feel free to contact Srishti Ojha (email@example.com) and Aditya Prakash (firstname.lastname@example.org)
ECB FACILITY FOR STARTUPS
AD Category-I banks are permitted to allow Startups to raise ECB under the automatic route as per the following framework:
1. Eligibility – The entity should be recognized as a Startup by the Central Government as on date of raising ECB.
2. MAMP - 3 (three) years.
3. Recognized lender - 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 recognized lenders under the Master Directions.
4. Forms - The borrowing can be in form of loans or non-convertible, optionally convertible or partially convertible preference shares.
5. Currency - The borrowing shall be denominated in any freely convertible currency or in Indian Rupees or a combination thereof. In case of borrowing in INR, the non-resident lender, is required to mobilise INR through swaps/outright sale undertaken through an AD Category-I bank in India.
6. Amount - 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.
7. All-in-cost - Shall be mutually agreed between the Startup and the lender.
8. End uses - For any expenditure in connection with the business of the Startup.
9. Conversion into equity - Conversion into equity is freely permitted subject to regulations applicable for foreign investment in Startups.
10. Security - The choice of security to be provided to the lender is left to the Startup which can be in the nature of movable, immovable, intangible assets (including patents, intellectual property rights), financial securities, etc. and shall comply with foreign direct investment / foreign portfolio investment / or any other norms applicable for foreign lenders / entities holding such securities. Further, issuance of corporate or personal guarantee is allowed. Guarantee issued by a non-resident is allowed only if such parties qualify as lender under Master Directions for Startups. However, issuance of guarantee, standby letter of credit, letter of undertaking or letter of comfort by Indian banks, all India Financial Institutions and NBFCs is not permitted.
11. Hedging - The overseas lender, in case of INR denominated ECB, will be eligible to hedge its INR exposure through permitted derivative products with AD Category – I banks in India. The lender can also access the domestic market through branches/ subsidiaries of Indian banks abroad or branches of foreign bank with Indian presence on a back-to-back basis. [VL Note: RBI has advised that Startups raising ECB in foreign currency, whether having natural hedge or not, are exposed to currency risk due to exchange rate movements and hence are advised to ensure that they have an appropriate risk management policy to manage potential risk arising out of ECB.]
12. Conversion rate - In case of borrowing in INR, the foreign currency - INR conversion will be at the market rate as on the date of agreement.
13. Other Provisions - Other provisions like parking of ECB proceeds, reporting arrangements, powers delegated to AD banks, conversion of ECB into equity will be as mentioned in the Master Directions. However, provisions on leverage ratio and ECB liability to equity ratio are not applicable. Further, the Startups (which are recognized as a Startup by the Central Government) as well as other startups (which are not recognized) which are eligible to receive FDI, can also raise ECB under the general ECB route/framework.
ECB BY ENTITIES UNDER RESTRUCTURING/ ECB FACILITY FOR REFINANCING STRESSED ASSETS
1. An entity which is under a restructuring scheme/ corporate insolvency resolution process can raise ECB only if specifically permitted under the resolution plan.
2. Eligible borrowers who have availed Rupee loans domestically for capital expenditure in manufacturing and infrastructure sector and which have been classified as SMA-2 or NPA can avail ECB for repayment of these loans under any one-time settlement with lenders. Lenders are also permitted to sell, through assignment, such loans to eligible ECB lenders, provided, the resultant external commercial borrowing complies with all-in-cost, MAMP and other relevant norms of the ECB framework. Foreign branches/ overseas subsidiaries of Indian banks are prohibited from lending for the said purpose. The MAMP is required to be strictly complied with under all circumstances.
3. Eligible borrowers, who are under participating in any corporate insolvency resolution process as resolution applicants, can raise ECB from all recognized lenders, except foreign branches/subsidiaries of Indian banks, for repayment of Rupee term loans of the target company. Such ECB will be considered under the approval route.