External Commercial Borrowings Guidelines & Compliance

ByPVR Rajendra Prasad, FCA

PnP ConsultingHyderabad Singapore Dubai

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ECB FRAME WORK

• FEMA Notification No 3 • Master Direction No 5 • A.P.(DIR Series) Circulars• Rupee Bonds – Masala Bonds - frame work is

different from ECB Frame Work.• Both Frame Works run separately and

Concurrently• FCNR(B) loans do not come under ECB Frame

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ECB FRAME WORK

• ECBs are commercial loans raised from Non Residents

• By Eligible Resident Borrowers• From Recognized Lenders• Complying with Regulatory Parameters –• Under Track I – Medium Term – 3/5 Years• Under Track II – Long Term – Min. 10 Years• Under Track III – INR – 3/5 Years 3PnP Consulting

Minimum Average Maturity Period

Ø ECB upto USD 50 MN 3 Years

Ø ECB above USD 50 MN 5 Years

Ø Infrastructure Sector companies:ü NBFCs – IFCü NBFCs – AFCü Holding Companiesü CICs

Ø FCCBs (No Put Option or Call Option)

Any Amount5 Years

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Minimum Average Maturity Period Calculationhttps://rbidocs.rbi.org.in/rdocs/Content/PDFs/12EC160712_A6.pdf

Available Routes

• Automatic Route - AD Banks• Approval Route - RBI

– Regulation Parameters are mostly similar - some requests entertained by RBI are:

– Amount of Borrowing

– Eligibility of Borrowers

– End Uses

• FCEBs are only under Approval Route5PnP Consulting

Types of ECB• Loans including Bank Loans• Securitized Instruments

– Floating Rate Notes

– Fixed Rate Notes

– Non Convertible Debentures / Preference Shares

– Optionally Convertible

– Partially Convertible

• Buyers’ Credit and Suppliers’ Credit• FCCBs and FCEBs• Financial Leases 6PnP Consulting

Eligible Borrowers

Track I Track II Track III1. Manufacturing and Software

Development Sector companiesAll entities in Track I All Entities in Track II

2. Shipping and Airline Companies 1.REITs 1. NBFCs –Under Regulatory purview

3. SIDBI 2. INVITs 2. NBFC – MFIs

4. Units in SEZs 3. Not for Profit Companies – Micro Finance

5. Exim Bank 4. Societies – Micro Finance

6. NBFC – IFC 5. Trusts – Micro Finance

7. NBFC – AFC 6. Cooperatives – Micro Finance

8. Holding Companies 7. NGOs – Micro Finance

9. Core Investment Companies 8. Companies in R&D

9. Companies in Training (other than Education)

10. Infrastructure Supply Companies

11. Logistic Companies

12. Developers of SEZs / NMIZs

Note: Entities in Micro Finance shall have at least 3 years of satisfactory borrowing experience with AD Banks and have “fit & proper” due diligence certificates from AD Bank

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Recognized Lenders / InvestorsTrack I Track II Track III

International Banks All lenders / investors in Track I * All lenders / investors in Track I

International Capital Markets EXCEPT EXCEPTMultilateral FIs Overseas Branches /

Subsidiaries of Indian BanksOverseas Branches / Subsidiaries of Indian Banks

Regional FIs

* In case of

NBFCs-MFIsOther MFIsNot for Profit CompaniesNGOscan also avail ECBs fromOverseas Organizations andIndividuals subject to KYC / AML compliances

Government Owned FIs

Export Credit Agencies

Suppliers of Equipment

Foreign Equity Holders

Overseas Long Term Investors such as:Ø Prudentially Regulated Financial EntitiesØ Pension FundsØ Insurance CompaniesØ Sovereign Wealth FundsØ Financial Institutions located in international

financial services centres in IndiaØ Overseas Branches / Subsidiaries of Indian

Banks 8PnP Consulting

All-in-Cost

Track I Track II Track III

ECB with Maturity 3/5 Years

ECB with Maturity of 10 Years

All-in-Cost should be in line with the market conditions.

300 bps plus 6 month LIBOR or applicable bench Mark for respective currency.

500 bps over 6 months LIBOR orBench Mark Rate for the respective currency

ECB with maturity over 5 years450 bps

Penal interest Maximum 2% over applicable rate

Penal Interest – Max 2% over applicable Rate

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Individual Limits - ECBs

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Following Limits per Financial Year

Ø Manufacturing SectorsØ Infrastructure SectorØ NBFC - IFCsØ NBFC - AFCsØ Holding CompaniesØ CICs

USD 750MN

Ø Software Development Sector USD 200 MNØ Micro Finance Activities USD 100 MNØ All other Entities USD 500 MN

ECBs beyond the above limits will come under Approval Route

Individual Limits - ECBs

Ø Track III – INR ECBs – Exchange Rate of Date of Agreement

Ø In case of DIRECT Equity Holder, the above limits will be subject to

ECB Liability : Equity – Ratio

Automatic Route Ratio is 4:1

Approval Route Ratio is 7:1

The above limits will not apply if the total ECB is up to USD 5 Million

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For calculating ECB : Equity Ratio

Equity = Paid up Capital

+

Free Reserves

+

Share Premium

received in Foreign Currency

Note: In case there are more than one Foreign Direct Investor then the Share Premium brought in by the ECB Lender Foreign Direct Investor shall only be taken into Equity calculation

Individual Limits - ECBs

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End Uses – Track I

ECB proceeds can be used for:

1) Import of Capital Goods including import of services, technical know how and license fees provided they are part of capital goods

2) Local Sourcing of Capital Goods

3) New Project

4) Modernization and Expansion

5) ODI investments

6) Acquisition of Shares of Public Sector undertakings at any stage of disinvestment

7) Refinancing of Trade Credits raised for import of Goods

8) Payment of Capital Goods already shipped / imported but unpaid

9) Refinancing of existing ECBs provided residual maturity is not reduced.

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End Uses – Track I (Contd.)

10) SIDBI – can use only for on lending to MSME Sector.

11) Units in SEZ can only use for their own requirements.

12) Airline and Shipping companies can use only for import of vessels and aircrafts.

13) General Corporate Purposes (including working capital) allowed only if ECB raised from foreign direct / indirect or group company investor / Lender – Minimum maturity of 5 years.

14) NBFC – IFC and AFC only for on lending to infrastructure companies.

15) CIC and Holding companies only for on lending to infrastructure SPVs

16) Approval Route required for second hand machinery and on lending by EXIM Bank.

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End Uses – Track II

ECB proceeds can be used for all purposes excluding the following:

(i) Real Estate Activities

(ii) Investing in Capital Markets

(iii) Equity Investment Domestically

(iv) On lending to any entity with any of the above objectives

(v) Purchase of land15PnP Consulting

End Uses – Track III

Entity Purpose

NBFCs

• On lending permitted by RBI• Hypothecated Loans Domestically for

Capital Goods• Capital Goods – Lease / hire purchase

Developers of SEZs / NMIZs • Only for infrastructure facilities

NBFCs – MFIsOther MFIsNot for Profit CompaniesNGOs

• Only for on lending to self help groups or for bona fide micro finance activity including capacity building

All other eligible entities• For all purposes except as mentioned

in Track II

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Hedging• Hedging is compulsory for NBFC – IFCs, NBFC-

AFCs, Holding Companies and Core Investment Companies. Board approved Risk Management Policy is compulsory.

• All other entities mandated by Sectoral or Prudential Regulator should maintain Hedging at all times.

• Hedging should cover Principal and Coupon. A minimum tenor of one year with periodic Roll over.

• Natural hedge will be calculated with net cash flows matching in the same accounting year.

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Currency of Borrowing

Ø Any freely convertible foreign currencyØ INR ECBs by other than foreign equity holder

should mobilize Indian Rupees through Swaps / Outright sale in India through AD Bank.

Ø INR ECBs by foreign entity holder can mobilize Indian Rupees either in India or abroad.

Ø Change of Currency from one convertible to another convertible permitted

Ø Change of foreign convertible into INR permitted. However from INR to foreign convertible is not permitted.

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Security• Immovable Property• Movable Property / Assets• Financial Securities• Corporate Guarantee• Personal Guarantee• Rupee Accounts with Escrow Arrangements

The charge / pledge should be co-terminus with the ECB.

Guarantee, SBLC, letter of Undertaking or Letter of Comfort by Indian

Bank

Financial Institution

NBFC

is not permitted

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Parking of Proceeds

• ECB proceeds meant for forex expenditure can be parked abroad pending utilization.

• Can be invested in approved securities abroad pending utilization.

• ECB proceeds meant for Rupee expenditure should be repatriated immediately.

• Can be kept in a fixed deposit for maximum period of 12 months.

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Procedure

• For Approval Route cases - Form ECB through Authorized Dealer Bank should be sent to RBI.

• For Automatic Route cases – Form 83 should be submitted to Authorized Dealer Bank.

• Drawdown and any payment of fees / charges for raising ECB should only happen after obtaining Loan Registration Number (LRN) from RBI.

• ECB 2 Returns should be submitted monthly till the end of the loan tenure.

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FCCBs and FCEBs

• FCCBs shall be with minimum 5 year maturity• No call / put options within 5 years• No Warrants to be attached• Maximum issue expenses 4% if listed or 2% if

private placement.• FCEBs – with prior approval of RBI.

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Refinancing of existing ECBs

• Refinancing existing ECB with fresh ECB

permitted

• Lower all-in-cost and no reduction of maturity

period

• Indian Banks not permitted to participate

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ECB Responsibility

• Primary Responsibility is of ECB Borrowing Company.

• Entities under investigation by ED can raise ECBs under Automatic Route. However, such ED investigation etc. should be intimated in the Form 83.

• Entities under JLF/CDR should obtain prior permission from JLF / CDR Empowered Committee before raising ECB.

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Powers delegated to AD for changes

1) Drawdown / Repayment

2) Currency of Borrowing

3) Change of Authorized Dealer Bank.

4) Transfer of ECB

5) Change of Lender

6) Change in the name of Lender

7) Prepayment of ECB

8) Cancellation of LRN

9) End-use changes

10) Reduction in ECB.

11) Change in A.I.C.

12) Refinancing ECB

13) Extension of ECB

14) Change in the name of Borrower Company

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ECBs for Startups

• Recognized Start up entity can raise ECB.• Maturity – 3 years• Recognized Lender – Any Lender KYC / AML

compliant except Indian Banks abroad.• Limit – up to USD 3 Million per Financial Year.• All in Cost – Mutually agreed.• End uses – Any expenditure in connection with

the business.26PnP Consulting

Rupee Bonds – Masala Bonds• Plain Vanilla Rupee Bonds

• Only in FATF compliant financial centres can

be privately placed or listed as per host

country regulations

• Automatic Route up to INR 5000 Crores per

Financial Year

• Approval Route beyond INR 5000 Crores

• Overall cap for the country INR 2,44,323

Crores

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Rupee Bonds - Parameters• Minimum Maturity – 3 years• Any corporate, Body Corporate, REITs, INVITs and Banks

are eligible• Recognized Investors:

– Any Resident of a CountryØ The country is a member of FATF or FATF-Style Regional

Body; and Ø Whose securities Regulator is a signatory to IOSCO’s

Multilateral MoU or a signatory to bilateral MoU with SEBI for information sharing arrangements

and Ø Should not be a country identified by FATF as

– AML deficient; or– Not made sufficient progress in compliance

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Rupee Bonds - Parameters

• Indian Banks can act as Arranger / Underwriter.

• In case of Underwriting, Indian Banks should not hold more than 5% of issue size after six months of issue.

• In case Indian Banks are issuing Bonds then Indian Bank branches / subsidiary abroad cannot act as underwriters.

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Rupee Bonds - Parameters• All-in-cost - Commensurate with Market Conditions

• End Use- for all purposes

excepti. Real estate activities other than development of

integrated township affordable housing projects;

ii. Investing in capital market and using the proceeds for equity investment domestically;

iii. Activities prohibited as per the foreign direct investment guidelines;

iv. On-lending to other entities for any of the above purposes; and

v. Purchase of Land

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Rupee Bonds - Parameters

• Form 83 and ECB 2 procedure to be followed as in ECB Frame Work.

• In addition, AD banks should report to the FED, ECB Division, RBI, Central Office, Mumbai through email the figures of actual draw downs/repayments

• Other provisions – ECB Frame work provisions relating to obtaining LRN, Parking of proceeds, security/guarantees, conversion into equity, corporate under investigation will be applicable.

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Routing of Funds Raised Abroad

i. Indian companies or their ADs are not allowed to issue any direct or indirect guarantee or create any contingent liability or offer any security in any form for such borrowings by their overseas holding / associate / subsidiary / group companies except for the purposes explicitly permitted in the relevant Regulations.

ii. Further, funds raised abroad by overseas holding / associate / subsidiary / group companies of Indian companies with support of the Indian companies or their ADs as mentioned at (i) above cannot be used in India unless it conforms to the general or specific permission granted under the relevant Regulations.

iii. Indian companies or their ADs using or establishing structures which contravene the above shall render themselves liable for penal action as prescribed under FEMA.

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Thank you !

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PVR RAJENDRA PRASAD, FCAPnP Consulting

Hyderabad Singapore Dubai+91 9395320202 +65 92229114

rpfema@gmail.com