Wednesday, October 5, 2011

Legal Provisions and Procedure for External Commercial Borrowings under Automatic Route

Legal Provisions and Procedure for External Commercial Borrowings under Automatic Route
(Guidelines, Procedure and Provisions)

External Commercial Borrowings (“ECB”) and Trade  Credits availed of by residents are  governed by clause (d) of sub-section 3 of section 6 of the  Foreign Exchange  Management Act, 1999 read with Notification No. FEMA 3/ 2000-RB viz. Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000, dated May 3, 2000, as amended from time to time.

The Reserve Bank of India issues a Master Circular every year consolidating all the circulars / notifications, and the existing instructions on the subject of "External Commercial Borrowings and Trade Credits" at one place.

The present information in the article is based on the Master Circular No.9 /2011-12 issued by RBI dated July 2011, FDI Policy via CIRCULAR 2 OF 2011 dated 30th September 2011, RBI Circular No.  RBI/2011-12/201, A.P. (DIR Series) Circular No.27 dated 23 september 2011 and Companies Act 1956 as amended upto 4th September, 2011 which may change from time to time and the provisions shall be changed accordingly.

The External Commercial Borrowing (“ECB”) can be accessed under two routes, viz., Automatic Route and Approval Route. ECB under Automatic Route do not require Reserve Bank / Government of India approval. In case of doubt as regards eligibility to access the Automatic Route, applicants may take recourse to the Approval Route.

Fund Raising Activities on which ECB Policy applies (i.e. such funds must be raised in compliance with ECB Policy)

The following fund raising activities required to be in compliance with the ECB Policy.

  1. Commercial Borrowing from outside India (i.e. External Commercial Borrowings): refer to commercial loans in the form of bank loans, buyers’ credit, suppliers’ credit; securitized instruments (e.g. floating rate notes and fixed rate bonds, non-convertible, optionally convertible or partially convertible preference shares) availed of from non-resident lenders with a minimum average maturity of 3 years.  

  1. Foreign Currency Convertible Bonds (FCCBs): It means a bond issued by an Indian company expressed in foreign currency, and the principal and interest in  respect of which is payable in foreign currency. Further, the bonds are required to  be issued in accordance with the scheme viz., "Issue of Foreign Currency  Convertible Bonds and Ordinary Shares (Through Depositary Receipt  Mechanism) Scheme, 1993”, and subscribed by a non-resident in foreign  currency and convertible into ordinary shares of the issuing company in any  manner, either in whole, or in part, on the basis  of any equity related warrants  attached to debt instruments. The ECB policy is applicable to FCCBs. The issue  of FCCBs is also required to adhere to the provisions of Notification FEMA No. 120/RB-2004 dated July 7, 2004, as amended from time to time.

  1. Preference shares (i.e. non-convertible, optionally convertible or partially convertible):  for issue of which, funds have been received on or after May 1, 2007 would be considered as debt and should conform to the ECB policy. Accordingly, all the norms applicable for ECBs, viz. eligible borrowers, recognised lenders, amount and maturity, end use stipulations, etc. shall apply. Since these instruments would be denominated in Rupees, the rupee interest rate will be based on the swap equivalent of LIBOR plus the spread as permissible for ECBs of corresponding maturity

  1. Foreign Currency Exchangeable Bond (FCEB): means a bond expressed in foreign currency, the principal and interest in respect of which is payable in foreign currency, issued by an Issuing Company and subscribed to by a person who is a resident outside India, in foreign currency and exchangeable into equity share of another company, to be called  the Offered Company, in any manner, either wholly, or partly or on the basis of any equity related warrants attached to debt instruments. The FCEB must comply with the “Issue of Foreign Currency exchangeable Bonds (FCEB) Scheme, 2008”, notified by the Government of India, Ministry of Finance, Department of Economic Affairs vide Notification G.S.R.89(E) dated February 15, 2008. The guidelines, rules, etc governing ECBs are also applicable to FCEBs.

Who can Raise ECB/ Eligible Borrowers under Automatic Route

The ECB facility is available to the following kind of entities:

1.     Automatic route is available to the Companies Registered under the Companies Act 1956 carrying business in the following sectors:
Ø  Real Sector,  Industrial Sector, Infrastructure Sector
Ø  Service Sectors Companies viz. hotel, hospital, software sectors

  Ø     Infrastructure Finance Companies except financial intermediaries, e.g.   banks,  financial  institutions (FIs), Housing Finance Companies (HFCs) and Non-Banking  Financial Companies (NBFCs) 

2.      Infrastructure Finance Companies except financial intermediaries, e.g. banks, financial  institutions (FIs), Housing Finance Companies (HFCs) and Non-Banking  Financial Companies (NBFCs)

3.      Units in Special Economic Zones (SEZ) can raise ECB for their own requirement. However, they cannot transfer or on-lend ECB funds to sister concerns or any  unit in the Domestic Tariff Area

4.      Non-Government Organizations (NGOs) engaged in micro finance activities provided such NGO’s should have a satisfactory borrowing relationship for at least 3 years with a scheduled commercial bank authorized to deal in foreign exchange in India and they have acquired a certificate of due diligence on `fit and proper’ status of the Board/ Committee of management of the borrowing entity from the designated AD bank.

From whom ECB (Loan) can be raised/ Recognized Lenders under Automatic Route:

The eligible borrowers can raise loan under ECB policy from any internationally recognized financial sources. The following may be the sources:
(i)                 International banks,
(ii)              International capital markets,
(iii)            Multilateral financial institutions (such as IFC, ADB, CDC, etc.) / regional financial institutions and Government owned development financial institutions,
(iv)            Export credit agencies, S
(v)               Suppliers of equipments,
(vi)            Foreign collaborators and
(vii)          Foreign equity holders (other than erstwhile Overseas Corporate Bodies OCBs).

  1. Foreign equity holder is eligible to be recognized lender only if he satisfies the following criteria.

He must hold the minimum paid up equity share capital in the company to which he is lending as set out below:

For ECB up to USD 5 million - minimum paid-up equity of 25 per cent held directly by the lender,

For ECB more than USD 5 million - minimum paid-up equity of 25 per cent held directly by the lender and debt-equity ratio not exceeding 4:1 (i.e. the  proposed ECB not exceeding four times the direct foreign equity holding)

Amount of ECB and Maturity Time under Automatic Route:

The followings are the provisions in this regard:

  1. The maximum amount of ECB which can be raised by an Eligible borrowers in real sector-industrial sector-infrastructure sector is USD 750 (increase from USD 500 million to USD 750 million via Circular RBI/2011-12/201, A.P. (DIR Series) Circular No.27 dated 23 september 2011) million or equivalent per financial year under the automatic.

  1. Corporates in the services sector viz. hotels, hospitals and software sector are allowed to avail of ECB up to USD 200 million or its equivalent (increase from USD 100 million to USD 200 million via Circular RBI/2011-12/201, A.P. (DIR Series) Circular No.27 dated 23 september 2011) in a financial year for meeting foreign currency and/ or Rupee capital expenditure for permissible end-uses.  The proceeds of the ECBs should not be used for acquisition of land.

  1. ECB up to USD 20 million or its equivalent in a financial year with minimum average maturity of three years. 

  1. ECB above USD 20 million or equivalent and up to USD 750 million or its equivalent with a minimum average maturity of five years. 

  1. NGOs engaged in micro finance activities can raise ECB up to USD 5 million or its equivalent during a financial year. Designated AD bank has to ensure that at the time of drawdown the forex exposure of the borrower is fully hedged.

  1. ECB up to USD 20 million or equivalent can have call/put option provided the minimum average maturity of three years is complied with before exercising call/put option. 

All-in-cost ceilings

There is a limit that the total cost of raising shall no go beyond a certain limit. The ECB All-in-cost includes the following:

                                i.            Rate of interest,

                             ii.            Other fees and expenses in foreign currency except commitment fee, pre-payment fee, and fees payable in Indian Rupees. 

Note: The payment of withholding tax in Indian Rupees is excluded for calculating the all-in-cost.  

Presently the following ceilings are valid until reviewed:

Average Maturity Period                        All-in-cost Ceilings over 6 month LIBOR

Three years and up to five years               300 basis points

More than five years                                    500 basis points

End Use of ECB Raised Under Automatic Route:

The amount raised through the ECB under automatic route is subject to regulations. It can be used for some specific purposes and certain use is not permitted also.

Permitted End Use: the followings are the permitted end use of ECB

Ø      ECB can be raised for investment [such as import of capital goods (as classified by DGFT in the Foreign Trade Policy), new projects, modernization/expansion of existing production units] in real sector - industrial sector including small  and medium enterprises (SME), infrastructure sector and specified service sectors namely hotel, hospital, software in India.

Note: Infrastructure sector is defined as (i) power, (ii) telecommunication, (iii) railways, (iv) roads including bridges, (v) sea port and airport, (vi) industrial parks, (vii) urban infrastructure (water supply, sanitation and sewage projects), (viii) mining, exploration and refining and (ix) cold storage or cold room facility, including for farm level pre-cooling, for preservation or storage of agricultural and allied produce, marine products and meat. 

Ø    Overseas direct investment in Joint Ventures (JV)/ Wholly Owned Subsidiaries (WOS) subject to the existing guidelines on Indian Direct Investment in JV/ WOS abroad.

Ø      Utilization of ECB proceeds is permitted for first stage acquisition of shares in the disinvestment process and also in the mandatory second stage offer to the public under the Government’s disinvestment programme of PSU shares.

Ø    For lending to self-help groups or for micro-credit or for bonafide micro finance activity including capacity building by NGOs engaged in micro finance activities.

Ø      Payment for Spectrum Allocation.

Ø   Infrastructure Finance Companies  (IFCs) i.e. Non Banking Financial Companies (NBFCs) categorized as IFCs by the Reserve Bank, are permitted to avail of ECBs, including the outstanding ECBs, up to 50 percent of their owned funds, for on-lending  to the infrastructure sector as defined under the ECB policy, subject to their complying with the following conditions:

i)   Compliance with the norms prescribed in the DNBS Circular DNBS.PD.CCNo.168 / 03.02.089 / 2009-10 dated February 12, 2010

ii)          Hedging of the currency risk in full. Designated Authorised Dealer should ensure compliance with the extant norms while certifying the ECB application.

End Use Not Permitted: the followings are the not permitted end use of ECB

Ø      For on-lending or investment in capital market or acquiring a company (or a part thereof) in India by a corporate [investment in Special Purpose Vehicles (SPVs), Money Market Mutual Funds (MMMFs), etc., are also considered as investment in capital markets).

Ø      For real estate sector.

Ø   for working capital, general corporate purpose and repayment of existing Rupee loans.

Security to be Provided to the Lender and Creation of Charge over Immoveable Assets and Financial Securities

  1. The borrower of can offer any security of his choice against ECB raised.  But creation of charge over immoveable assets and financial securities, such as shares, in favour of the overseas lender is subject to Regulation 8 of Notification No. FEMA 21/RB-2000 dated May 3, 2000 and Regulation 3 of Notification No. FEMA 20/RB-2000 dated May 3, 2000, respectively, as amended from time to time ans can be offered only after a “No Objection” certificate given by AD Category I Bank in this regard.

  1. AD Category - I banks have been delegated powers to convey ‘no objection’ under the Foreign Exchange Management Act (FEMA), 1999 for creation of charge on immovable assets, financial securities and issue of corporate or personal guarantees in favour of overseas lender / security trustee, to secure the ECB to be raised by the borrower. 

Parking of ECB Proceeds under Automatic Route:

Borrowers are permitted to either keep ECB proceeds abroad or to remit these funds to India, pending utilization for permissible end-uses.  ECB proceeds parked overseas can be invested in the following liquid assets

(a) 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

(b) Treasury bills and other monetary instruments of one year maturity having minimum rating as indicated above, and

(c) Deposits with overseas branches / subsidiaries of Indian banks abroad. The funds should be invested in such a way that the investments can be liquidated as and when funds are required by the borrower in India.   

ECB funds may also be repatriated to India for credit to the borrowers’ Rupee accounts with AD Category I banks in India, pending utilization for permissible end-uses.

Repayment of ECB Raised under Automatic Route:

Prepayment of ECB up to USD 500 million may be allowed by AD banks without prior approval of Reserve Bank subject to compliance with the stipulated minimum average maturity period as applicable to the loan.

Refinancing of an existing ECB

The existing ECB may be refinanced by raising a fresh ECB subject to the condition that the fresh ECB is raised at a lower all-in-cost and the outstanding maturity of the original ECB is maintained.
Procedure of Raising ECB


The first step is to get the loan sanctioned in the Board or general meeting of the Company as applicable and authorized any person to do the required fthings with regard to issue of ECB.


As under automatic route no prior permission of Government of India /RBI is required permission the Borrower may enter into loan agreement with the recognized lender complying with the ECB guidelines for raising ECB under Automatic Route.


Apply for the Loan Registration Number (LRN) from the Reserve Bank  of India before drawing down the ECB. For allotment of Loan Registration Number (LRN), borrowers are required to submit Form 83, in duplicate, certified by the Company Secretary (CS) or Chartered Accountant (CA) to the designated AD bank. One copy is to be forwarded by the designated AD bank to the Director, Balance of Payments Statistics Division, Department of Statistics and Information Systems (DSIM), Reserve Bank of India, Bandra-Kurla Complex, Mumbai The borrower can draw-down the loan only after obtaining the LRN from DSIM, Reserve Bank

Non Compliance of ECB Guidelines and Penalties

The primary responsibility to ensure that ECB raised / utilised are in conformity with the ECB guidelines and the Reserve Bank  regulations / directions is that of the borrower concerned and any contravention of the ECB guidelines will be viewed seriously and will invite penal action under FEMA 1999 (cf. A. P. (DIR Series) Circular No. 31 dated February 1, 2005).  The designated AD bank is also required to ensure that raising / utilisation of ECB is in compliance with ECB guidelines at the time of certification

Companies Act 1956 and External Commercial Borrowings:

A public and private limited company can take loan from other company and body corporate in and outside India and the same would be covered under section 372A as an inter corporate loan. The above is exempt from the deposit rules, 1975.

A public and private company can also take loan from Banks/PFIs under the same section 372A as inter corporate loan.

Further provisions of section 124 to 145 related to creation, modification and satisfaction of charges will also be attracted in ECB. 

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Nimesh Kumar said...

Really very nice and useful notes devesh ji. Very nice blogging.

Nimesh Kumar

Siva Prasad said...


Anonymous said...

can u please provide me with the format of consent letter which is to be given by the buyer and seller in case of transfer of shares from resident to non resident

Anonymous said...

my id is

abhishek pundir said...

It says to change a lender the terms and conditions of the ECB shouldnt change. but what if i want to change the lender for a better rate of interest and all other terms and conditions of the ECB are the same ?

Sangini said...

ECB explained in simple terms...Excellent