Master Direction – External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers (Updated as on September 19, 2016)
RBI/FED/2015-16/15
FED Master Direction No.5/2015-16
January 1, 2016
(Updated as on September 19, 2016)
(Updated as on June 30, 2016)
(Updated as on May 11, 2016)
(Updated as on April 13, 2016)
(Updated as on March 30, 2016)
To
All Authorised Dealer Category – I banks and Authorised Banks
Madam / Dear Sir,
Master Direction – External Commercial Borrowings, Trade Credit, Borrowing and
Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers
Transactions on account of External Commercial Borrowings (ECB) and Trade Credit are governed by clause (d) of sub-section 3 of section 6 of the Foreign Exchange Management Act, 1999 (FEMA). Various provisions in respect of these two types of borrowings from overseas are included in the following three Regulations framed under FEMA:
Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000, notified vide Notification No. FEMA 3/2000-RB dated May 3, 2000;
Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004, notified vide Notification No. FEMA 120/2004-RB dated July 07, 2004; and
Foreign Exchange Management (Guarantees) Regulations, 2000, notified vide Notification No. FEMA 8/2000-RB dated May 03, 2000.
These Regulations are amended from time to time to incorporate the changes in the regulatory framework and published through amendment notifications.
2. Within the contours of the Regulations, Reserve Bank of India also issues directions to Authorised Persons under Section 11 of the Foreign Exchange Management Act (FEMA), 1999. These directions lay down the modalities as to how the foreign exchange business has to be conducted by the Authorised Persons with their customers/constituents with a view to implementing the regulations framed.
3. Instructions issued in respect of aforesaid borrowing transactions have been compiled in this Master Direction. The document also contains the terms and conditions related to borrowing and lending in foreign currency by authorised dealer and by persons other than authorised dealer. The list of underlying notifications/circulars which form the basis of this Master Direction is furnished in the Appendix. Reporting instructions can be found in Master Direction on reporting (Master Direction No. 18 dated January 01, 2016).
4. It may be noted that, whenever necessary, Reserve Bank shall issue directions to Authorised Persons through A.P. (DIR Series) Circulars in regard to any change in the Regulations or the manner in which relative transactions are to be conducted by the Authorised Persons with their customers/ constituents. TheMaster Direction issued herewith shall be amended suitably simultaneously.
Yours faithfully
(Shekhar Bhatnagar)
Chief General Manager-in-Charge
Master Direction – External Commercial Borrowings, Trade Credit, Borrowing
and Lending in Foreign Currency by Authorised Dealers and Persons other
than Authorised Dealers
Index
Para. No.
PART I
2
Framework for raising loans through External Commercial Borrowings
2.1
External Commercial Borrowings (ECB)
2.2
Forms of ECB
2.3
Available routes of raising ECB
2.4
Parameters for ECBs
2.4.1
Maturity prescription
2.4.2
Eligible Borrowers
2.4.3
Recognised Lenders
2.4.4
Cost of borrowings
2.4.5
Permitted end-uses
2.4.6
Individual limits
2.4.7
Currency of borrowing
2.5
Hedging requirements
2.6
Security for raising of ECB
2.6.1
Additional Conditions
2.6.1.1
Creation of Charge on Immovable Assets
2.6.1.2
Creation of Charge on Movable Assets
2.6.1.3
Creation of Charge over Financial Securities
2.6.1.4
Issue of Corporate or Personal Guarantee
2.7
Issuance of Guarantee, etc. by Indian banks and Financial Institutions
2.8
Debt Equity Ratio
2.9
Parking of ECB proceeds
2.9.1
Parking of ECB proceeds abroad
2.9.2
Parking of ECB proceeds domestically
2.10
Conversion of ECB into equity
2.10.1
Exchange rate for conversion of ECB dues into equity
2.11
Procedure of raising ECB
2.12
Reporting Requirements
2.12.1
Loan Registration Number (LRN)
2.12.2
Changes in terms and conditions of ECB
2.12.3
Reporting of actual transactions
2.12.4
Reporting on account of conversion of ECB into equity
2.13
Foreign Currency Convertible Bonds (FCCBs)
2.14
Foreign Currency Exchangeable Bonds (FCEBs)
2.15
Refinancing of ECB
2.16
Powers delegated to AD Cat I banks to deal with ECB cases
2.16.1
Additional requirements
2.17
Borrowing by Entities under Investigation
2.18
ECB by entities under Joint Lender Forum (JLF) or Corporate Debt Restructuring (CDR)
2.19
Dissemination of information
2.20
Compliance with the guidelines
2.21
ECB raised under the erstwhile USD 5 million Scheme
2.22
ECB arrangements prior to December 02, 2015
2.22.1
ECB facility for Carve Outs
2.22.1.1
ECB facility for working capital by airlines companies
2.22.1.2
ECB facility for consistent foreign exchange earners under the USD 10 billion Scheme
2.22.1.3
ECB facility for low cost affordable housing projects
3
Framework for issuance of Rupee denominated bonds overseas
3.1
Form of borrowing
3.2
Available routes and limits of borrowing
3.3
Parameters of borrowing by issuance of Rupee denominated bonds
3.3.1
Minimum Maturity
3.3.2
Eligible borrowers
3.3.3
Recognised Investors
3.3.4
All-in-Cost
3.3.5
End-use Prescriptions
3.3.6
Exchange Rate for conversion
3.3.7
Hedging
3.3.8
Leverage Ratio
3.3.9
Reporting
3.3.10
Other provisions
Part II
4
Routing of funds raised abroad to India
Part III
5
Raising of loans as Trade Credit
5.1
Trade Credit
5.2
Routes and Amount of Trade Credit
5.2.1
Automatic Route
5.2.2
Approval Route
5.3
Maturity prescription
5.4
Cost of raising Trade Credit
5.5
Guarantee for Trade Credit
5.6
Reporting requirements
5.6.1
Monthly reporting
5.6.2
Quarterly reporting
Part IV
6
Borrowing and Lending in foreign currency by an Authorised Dealer
6.1
Borrowing in foreign currency by an Authorised Dealer
6.2
Lending in foreign currency by an Authorised Dealer
Part V
7
Borrowing and Lending in Foreign currency by persons other than authorised dealer
7.1
Borrowing in foreign currency by persons other than an authorised dealer
7.2
Lending in foreign currency by persons other than an authorised dealer
Part VI
8
Structured Obligations
8.1
Non-resident guarantee for domestic fund based and non-fund based facilities
8.2
Facility of Credit Enhancement
List of notifications/ circulars which have been consolidated in this Master Direction
Acronyms
AD:
Authorised Dealer
ADB:
Asian Development Bank
AFC:
Asset Finance Company
AIC:
All-in-Cost
AMP:
Average Maturity Period
BSE:
Bombay Stock Exchange
CDC:
Commonwealth Development Corporation
CIC:
Core Investment Company
COD:
Commercial Operation Date
DEPR:
Department of Economic and Policy Research
DSIM:
Department of Statistics and Information Management
DTA:
Domestic Tariff Area
ECB:
External Commercial Borrowings
FATF:
Financial Action Task Force
FCCB:
Foreign Currency Convertible Bond
FCEB:
Foreign Currency Exchangeable Bond
FCNR(B):
Foreign Currency Non-Resident (Bank)
FDI:
Foreign Direct Investment
FED:
Foreign Exchange Department
FEMA:
Foreign Exchange Management Act
FIPB:
Foreign Investment Promotion Board
HFC:
Housing Finance Company
IDC:
Interest during Construction
IFC:
Infrastructure Finance Company
INR:
Indian Rupee
JV:
Joint Venture
LC:
Letter of Credit
LIBOR:
London Interbank Offered Rate
LoC:
Letter of Comfort
LoU:
Letter of Undertaking
LRN:
Loan Registration Number
MFI:
Micro Finance Institution
NBFC:
Non-Banking Financial Company
NGO:
Non-Government Organisation
NHB:
National Housing Bank
NMIZ:
National Manufacturing Investment Zone
NNPA:
Net Non-Performing Assets
NOF:
Net Owned Fund
NRE:
Non-Resident External
NRO:
Non-Resident Ordinary
NSE:
National Stock Exchange
OCB:
Overseas Corporate Body
ODI:
Overseas Direct Investment
RBI:
Reserve Bank of India
RoC:
Registrar of Companies
SEZ:
Special Economic Zone
SHG:
Self-Help Group
SIDBI:
Small Industries Development Bank of India
SME:
Small and Medium Enterprise
SPV:
Special Purpose Vehicle
USD:
United States Dollar
WOS:
Wholly Owned Subsidiary
1. Important terms used in the Master Direction
1.1 The term ‘All-in-Cost’ includes rate of interest, other fees, expenses, charges, guarantee fees whether paid in foreign currency or Indian Rupees (INR) but will not include commitment fees, pre-payment fees / charges, withholding tax payable in INR. In the case of fixed rate loans, the swap cost plus spread should be equivalent of the floating rate plus the applicable spread.
1.2 The term ‘Close relative’ means a relative as defined under the Companies Act, 1956/2013:
Act of 1956
Act of 2013
U/s 6: MEANING OF “RELATIVE”
A person shall be deemed to be a relative of another, if, and only if,
(a) they are members of a Hindu undivided family ; or
(b) they are husband and wife ; or
(c) the one is related to the other in the manner indicated in Schedule IA.
U/s 2(77) ‘‘relative’’, with reference to any person, means anyone who is related to another, if—
(i) they are members of a Hindu Undivided Family;
(ii) they are husband and wife; or
(iii) one person is related to the other in such manner as may be prescribed.
Schedule IA
As prescribed
Father
Father (including step-father)
Mother (including step-mother)
Mother (including step-mother)
Son (including step-son)
Son (including step-son)
Son’s wife
Son’s wife
Daughter (including step-daughter)
Daughter
Father’s father
Daughter’s husband
Father’s mother
Brother (including step-brothers)
Mother’s mother
Sister (including step-sister)
Mother’s father
–
Son’s son
–
Son’s son’s wife
–
Son’s daughter
–
Son’s daughter’s husband
–
Daughter’s husband
–
Daughter’s son
–
Daughter’s son’s wife
–
Daughter’s daughter
–
Daughter’s daughter’s husband
–
Brother (including step-brothers)
–
Brother’s wife
–
Sister (including step-sister)
–
Sister’s husband
–
1.3 Unless the context requires otherwise, the terms ‘Authorised dealer’, ‘Authorised bank’, ‘Non-resident Indian (NRI)’, ‘Person of Indian origin (PIO)’, ‘NRE account’, ‘NRO account’, ‘NRNR account’, ‘NRSR account’, and ‘FCNR (B) account’ shall have the same meanings as assigned to them respectively in Foreign Exchange Management (Deposits) Regulations, 2000 notified vide Notification No. FEMA 5/2000-RB dated May 03, 2000.
1.4 The term ‘Designated Authorized Dealer Category I Bank’ is the bank branch which is designated by the ECB borrower for meeting the reporting requirements including obtention of the Loan Registration Number (LRN) from RBI, exercising the delegated powers under these guidelines and monitoring of ECB transactions.
1.5 The term ‘Foreign Currency Convertible Bonds’ (FCCBs) refers to foreign currency denominated instruments which are issued in accordance with the Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993 as amended from time to time.
1.6 The term ‘Foreign Currency Exchangeable Bonds’ (FCEBs) refers to foreign currency denominated instruments which are issued in accordance with the Issue of Foreign Currency Exchangeable Bonds Scheme, 2008.
1.7 The term ‘Foreign Equity Holder’ means (a) direct foreign equity holder with minimum 25% direct equity holding by the lender in the borrowing entity, (b) indirect equity holder with minimum indirect equity holding of 51%, and (c) group company with common overseas parent.
1.8 The term ‘Infrastructure Sector’ has the same meaning as given in the Harmonised Master List of Infrastructure sub-sectors approved by Government of India vide Notification F. No. 13/06/2009-INF dated March 27, 2012 as amended / updated from time to time. 1For the purpose of ECB, “Exploration, Mining and Refinery” sectors which are not included in the Harmonised list of infrastructure sector but were eligible to take ECB under the previous ECB framework (c.f. A.P. (DIR Series) Circular No. 48 dated September 18, 2013) will be deemed as in the infrastructure sector.
1.9 The terms ‘Person Resident in India’ and ‘Person Resident outside India’ shall have the same meanings as assigned to them in Sections 2(v) and 2(w) of the Foreign Exchange Management Act, 1999 (FEMA).
1.10 The term ‘RFC account’ shall have the same meaning as referred to in the Foreign Exchange Management (Foreign currency accounts by a person resident in India) Regulations, 2000.
1.11 The term ‘Indian entity’ means a company or a body corporate or a firm in India.
1.12 The term ‘Joint Venture abroad’ means a foreign concern formed, registered or incorporated in a foreign country in accordance with the laws and regulations of that country and in which investment has been made by an Indian entity.
1.13 The term ‘Wholly owned subsidiary abroad’ means a foreign concern formed, registered or incorporated in a foreign country in accordance with the laws and regulations of that country and whose entire capital is owned by an Indian entity.
PART I
2. Framework for raising loans through External Commercial Borrowings
2.1 External Commercial Borrowings (ECB): ECBs 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. The parameters apply in totality and not on a standalone basis. The framework for raising loans through ECB (herein after referred to as the ECB Framework) comprises the following three tracks:
Track I : Medium term foreign currency denominated ECB with minimum average maturity of 3/5 years.
Track II : Long term foreign currency denominated ECB with minimum average maturity of 10 years.
Track III : Indian Rupee (INR) denominated ECB with minimum average maturity of 3/5 years.
2.2 Forms of ECB: The ECB Framework enables permitted resident entities to borrow from recognized non-resident entities in the following forms:
Loans including bank loans;
Securitized instruments (e.g. floating rate notes and fixed rate bonds, non-convertible, optionally convertible or partially convertible preference shares / debentures);
Buyers’ credit;
Suppliers’ credit;
Foreign Currency Convertible Bonds (FCCBs);
Financial Lease; and
Foreign Currency Exchangeable Bonds (FCEBs)
2However, ECB framework is not applicable in respect of the investment in Non-convertible Debentures (NCDs) in India made by Registered Foreign Portfolio Investors (RFPIs).
2.3 Available routes for raising ECB: Under the ECB framework, ECBs can be raised either under the automatic route or under the approval route. For the automatic route, the cases are examined by the Authorised Dealer Category-I (AD Category-I) banks. Under the approval route, the prospective borrowers are required to send their requests to the RBI through their ADs for examination. While the regulatory provisions are mostly similar, there are some differences in the form of amount of borrowing, eligibility of borrowers, permissible end-uses, etc. under the two routes. While the first six forms of borrowing, mentioned at 2.2 above, can be raised both under the automatic and approval routes, FCEBs can be issued only under the approval route.
2.4 Parameters for ECBs: Various parameters of raising loan under ECB framework are mentioned in the following sub-paragraphs.
2.4.1 Minimum Average Maturity Period: The minimum average maturities for the three tracks are set out as under:
Track I
Track II
Track III
3 years for ECB upto USD 50 million or its equivalent.
5 years for ECB beyond USD 50 million or its equivalent.
35 years for eligible borrowers under para 2.4.2.vi, irrespective of the amount of borrowing.
45 years for Foreign Currency Convertible Bonds (FCCBs)/ Foreign Currency Exchangeable Bonds (FCEBs) irrespective of the amount of borrowing. The call and put option, if any, for FCCBs shall not be exercisable prior to 5 years.
10 years irrespective of the amount.
Same as under Track I.
2.4.2 Eligible Borrowers: The list of entities eligible to raise ECB under the three tracks is set out in the following table.
Track I
Track II
Track III
Companies in manufacturing and software development sectors.
Shipping and airlines companies.
Small Industries Development Bank of India (SIDBI).
Units in Special Economic Zones (SEZs).
Export Import Bank of India (Exim Bank) (only under the approval route).
5Companies in infrastructure sector, Non-Banking Financial Companies -Infrastructure Finance Companies (NBFC-IFCs), NBFCs-Asset Finance Companies (NBFC-AFCs), Holding Companies and Core Investment Companies (CICs).
All entities listed under Track I.
Companies in infrastructure sector.
Holding companies.
Core Investment Companies (CICs).
Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (INVITs) coming under the regulatory framework of the Securities and Exchange Board of India (SEBI).
All entities listed under Track II.
All Non-Banking Financial Companies (NBFCs) 6coming under the regulatory purview of the Reserve Bank.
NBFCs-Micro Finance Institutions (NBFCs-MFIs), Not for Profit companies registered under the Companies Act, 1956/2013, Societies, trusts and cooperatives (registered under the Societies Registration Act, 1860, Indian Trust Act, 1882 and State-level Cooperative Acts/Multi-level Cooperative Act/State-level mutually aided Cooperative Acts respectively), Non-Government Organisations (NGOs) which are engaged in micro finance activities1.
Companies engaged in miscellaneous services viz. research and development (R&D), training (other than educational institutes), companies supporting infrastructure, companies providing logistics services.
Developers of Special Economic Zones (SEZs)/ National Manufacturing and Investment Zones (NMIZs).
Notes: 1. Entities engaged in micro-finance activities to be eligible to raise ECB: (i) should have a satisfactory borrowing relationship for at least three years with an AD Category I bank in India, and (ii) should have a certificate of due diligence on ‘fit and proper’ status from the AD Category I bank.
2.4.3 Recognised Lenders/Investors: The list of recognized lenders / investors for the three tracks will be as follows:
Track I
Track II
Track III
International banks.
International capital markets.
Multilateral financial institutions (such as, IFC, ADB, etc.) / regional financial institutions and Government owned (either wholly or partially) financial institutions.
Export credit agencies.
Suppliers of equipment.
Foreign equity holders.
Overseas long term investors such as:
Prudentially regulated financial entities;
Pension funds;
Insurance companies;
Sovereign Wealth Funds;
Financial institutions located in International Financial Services Centres in India
Overseas branches / subsidiaries of Indian banks2
All entities listed under Track I but for overseas branches / subsidiaries of Indian banks.
All entities listed under Track I but for overseas branches / subsidiaries of Indian banks. In case of NBFCs-MFIs, other eligible MFIs, not for profit companies and NGOs, ECB can also be availed from overseas organisations3 and individuals4.
Notes: 2. Overseas branches / subsidiaries of Indian banks can be lenders only under Track I. Further, their participation under this track is subject to the prudential norms issued by the Department of Banking Regulation, RBI. Indian banks are not permitted to participate in refinancing of existing ECBs.
3. Overseas Organizations proposing to lend ECB would have to furnish to the authorised dealer bank of the borrower a certificate of due diligence from an overseas bank, which, in turn, is subject to regulation of host-country regulators and such host country adheres to the Financial Action Task Force (FATF) guidelines on anti-money laundering (AML)/ combating the financing of terrorism (CFT). The certificate of due diligence should comprise the following: (i) that the lender maintains an account with the bank at least for a period of two years, (ii) that the lending entity is organised as per the local laws and held in good esteem by the business/local community, and (iii) that there is no criminal action pending against it.
4. Individual lender has to obtain a certificate of due diligence from an overseas bank indicating that the lender maintains an account with the bank for at least a period of two years. Other evidence /documents such as audited statement of account and income tax return, which the overseas lender may furnish, need to be certified and forwarded by the overseas bank. Individual lenders from countries which do not adhere to FATF guidelines on AML / CFT are not eligible to extend ECB.
2.4.4 All-in-Cost (AIC): The all-in-cost requirements for the three tracks will be as under:
Track I
Track II
Track III
The all-in-cost ceiling is prescribed through a spread over the benchmark as under:
For ECB with minimum average maturity period of 3 to 5 years – 300 basis points per annum over 6 month LIBOR or applicable bench mark for the respective currency.
For ECB with average maturity period of more than 5 years – 450 basis points per annum over 6 month LIBOR or applicable bench mark for the respective currency.
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.
The maximum spread over the benchmark will be 500 basis points per annum.
Remaining conditions will be as given under Track I.
The all-in-cost should be in line with the market conditions.
2.4.5 End-use prescriptions: The end-use prescriptions for ECB raised under the three tracks are given in the following table:
Track I
Track II
Track III
ECB proceeds can be utilised for capital expenditure in the form of:
Import of capital goods including payment towards import of services, technical know-how and license fees, provided the same are part of these capital goods;
Local sourcing of capital goods;
New project;
Modernisation /expansion of existing units;
Overseas direct investment in Joint ventures (JV)/ Wholly owned subsidiaries (WOS);
Acquisition of shares of public sector undertakings at any stage of disinvestment under the disinvestment programme of the Government of India;
Refinancing of existing trade credit raised for import of capital goods;
Payment of capital goods already shipped / imported but unpaid;
Refinancing of existing ECB provided the residual maturity is not reduced.
SIDBI can raise ECB only for the purpose of on-lending to the borrowers in the Micro, Small and Medium Enterprises (MSME sector), where MSME sector is as defined under the MSME Development Act, 2006, as amended from time to time5.
Units of SEZs can raise ECB only for their own requirements5.
Shipping and airlines companies can raise ECB only for import of vessels and aircrafts respectively5.
ECB proceeds can be used for general corporate purpose (including working capital) provided the ECB is raised from the direct / indirect equity holder or from a group company for a minimum average maturity of 5 years.
7NBFC-IFCs and NBFCs-AFCs can raise ECB only for financing infrastructure.
8Holding Companies and CICs shall use ECB proceeds only for on-lending to infrastructure Special Purpose Vehicles (SPVs).
ECBs for the following purposes will be considered only under the approval route5:
Import of second hand goods as per the Director General of Foreign Trade (DGFT) guidelines;
On-lending by Exim Bank.
1. The ECB proceeds can be used for all purposes excluding the following:
Real estate activities
Investing in capital market
Using the proceeds for equity investment domestically;
On-lending to other entities with any of the above objectives;
Purchase of land
2. Holding companies can also use ECB proceeds for providing loans to their infrastructure SPVs.
NBFCs can use ECB proceeds only for:
9On-lending for any activities, including infrastructure sector as permitted by the concerned regulatory department of RBI;
providing hypothecated loans to domestic entities for acquisition of capital goods/equipment; and
providing capital goods/equipment to domestic entities by way of lease and hire-purchases
2. Developers of SEZs/ NMIZs can raise ECB only for providing infrastructure facilities within SEZ/ NMIZ.
3. NBFCs-MFI, other eligible MFIs, NGOs and not for profit companies registered under the Companies Act, 1956/2013 can raise ECB only for on-lending to self-help groups or for micro-credit or for bonafide micro finance activity including capacity building.
4. For other eligible entities under this track, the ECB proceeds can be used for all purposes excluding the following:
Real estate activities
Investing in capital market
Using the proceeds for equity investment domestically;
On-lending to other entities with any of the above objectives;
Purchase of land
Notes: 5. The respective conditions will be applicable for all three tracks.
2.4.6 Individual Limits: The individual limits refer to the amount of ECB which can be raised in a financial year under the automatic route.
i. The individual limits of ECB that can be raised by eligible entities under the automatic route per financial year for all the three tracks are set out as under:
Up to USD 750 million or equivalent for the companies in infrastructure and manufacturing sectors, 10Non-Banking Financial Companies -Infrastructure Finance Companies (NBFC-IFCs), NBFCs-Asset Finance Companies (NBFC-AFCs), Holding Companies and Core Investment Companies;
Up to USD 200 million or equivalent for companies in software development sector;
Up to USD 100 million or equivalent for entities engaged in micro finance activities; and
Up to 500 million or equivalent for remaining entities.
ii. ECB proposals beyond aforesaid limits will come under the approval route. For computation of individual limits under Track III, exchange rate prevailing on the date of agreement should be taken into account.
iii. In case the ECB is raised from direct equity holder, aforesaid individual ECB limits will also subject to ECB liability: equity ratio6 requirement. For ECB raised under the automatic route, the ECB liability of the borrower (including all outstanding ECBs and the proposed one) towards the foreign equity holder should not be more than four times of the equity contributed by the latter. For ECB raised under the approval route, this ratio should not be more than 7:1. This ratio will not be applicable if total of all ECBs raised by an entity is up to USD 5 million or equivalent.
Notes 6. For the purpose of ECB liability: equity ratio, the paid-up capital, free reserves (including the share premium received in foreign currency) as per the latest audited balance sheet can be reckoned for calculating the ‘equity’ of the foreign equity holder. Where there are more than one foreign equity holders in the borrowing company, the portion of the share premium in foreign currency brought in by the lender(s) concerned shall only be considered for calculating the ratio.
2.4.7 Currency of Borrowing: ECB can be raised in any freely convertible foreign currency as well as in Indian Rupees. Further details are given below:
i. In case of Rupee denominated ECB, the non-resident lender, other than foreign equity holders, should mobilise Indian Rupees through swaps/outright sale undertaken through an AD Category I bank in India.
ii. Change of currency of ECB from one convertible foreign currency to any other convertible foreign currency as well as to INR is freely permitted. Change of currency from INR to any foreign currency is, however, not permitted.
iii. Change of currency of ECB into INR can be at the exchange rate prevailing on the date of the agreement between the parties concerned for such change or at an exchange rate which is less than the rate prevailing on the date of agreement if consented to by the ECB lender.
2.5 Hedging Requirements: 11Borrowers eligible in terms of paragraph 2.4.2.vi above shall have a board approved risk management policy and shall keep their ECB exposure hedged 100 per cent at all times. Further, the designated AD Category-I bank shall verify that 100 per cent hedging requirement is complied with during the currency of ECB and report the position to RBI through ECB 2 returns. Also, the entities raising ECB under the provisions of tracks I and II are required to follow the guidelines for hedging issued, if any, by the concerned sectoral or prudential regulator in respect of foreign currency exposure.
2.6 Security for raising ECB: AD Cat I banks are permitted to allow creation 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:
the underlying ECB is in compliance with the extant ECB guidelines,
there exists a security clause in the Loan Agreement requiring the ECB borrower to create charge, in favour of overseas lender / security trustee, on immovable assets / movable assets / financial securities / issuance of corporate and / or personal guarantee, and
No objection certificate, as applicable, from the existing lenders in India has been obtained.
2.6.1 Additional conditions: Once aforesaid stipulations are met, the AD Category I bank may permit creation of charge on immovable assets, movable assets, financial securities and issue of corporate and / or personal guarantees, during the currency of the ECB with security co-terminating with underlying ECB, subject to the following:
2.6.1.1 Creation of Charge on Immovable Assets: The arrangement shall be subject to the following:
Such security shall be subject to provisions contained in the Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2000.
The permission should not be construed as a permission to acquire immovable asset (property) in India, by the overseas lender/ security trustee.
In the event of enforcement / invocation of the charge, the immovable asset/ property will have to be sold only to a person resident in India and the sale proceeds shall be repatriated to liquidate the outstanding ECB.
2.6.1.2 Creation of Charge on Movable Assets: In the event of enforcement/ invocation of the charge, the claim of the lender, whether the lender takes over the movable asset or otherwise, will be restricted to the outstanding claim against the ECB. Encumbered movable assets may also be taken out of the country subject to getting ‘No Objection Certificate’ from domestic lender/s, if any.
2.6.1.3 Creation of Charge over Financial Securities: The arrangements may be permitted subject to the following:
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, viz. 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 ECB borrower/promoter, is also permitted.
In addition, 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, can be used as security for ECB. The Rupee accounts of the borrower/promoter can also be in the form of escrow arrangement or debt service reserve account.
In case of invocation of pledge, transfer of financial securities shall be in accordance with the extant FDI/FII policy including provisions relating to sectoral cap and pricing as applicable read with the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000.
2.6.1.4 Issue of Corporate or Personal Guarantee: The arrangement shall be subject to the following:
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 should be obtained.
Specific requests from individuals to issue personal guarantee indicating details of the ECB should be obtained.
Such security shall be subject to provisions contained in the Foreign Exchange Management (Guarantees) Regulations, 2000.
ECB can be credit enhanced / guaranteed / insured by overseas party/ parties only if it/ they fulfil/s the criteria of recognised lender under extant ECB guidelines.
2.7 Issuance of Guarantee, etc. by Indian banks and Financial Institutions: Issuance of guarantee, standby letter of credit, letter of undertaking or letter of comfort 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 in any manner whatsoever.
2.8 Debt Equity Ratio: The borrowing entities will be governed by the guidelines on debt equity ratio issued, if any, by the sectoral or prudential regulator concerned.
2.9 Parking of ECB proceeds: ECB proceeds are permitted to be parked abroad as well as domestically in the manner given below:
2.9.1 Parking of ECB proceeds abroad: ECB proceeds meant only for foreign currency expenditure can be parked abroad pending utilization. Till utilisation, these funds 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.
2.9.2 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. These term deposits should be kept in unencumbered position.
2.10 Conversion of ECB into equity: Conversion of ECB into equity is permitted subject to the following conditions:
The activity of the borrowing company is covered under the automatic route for Foreign Direct Investment (FDI) or approval from the Foreign Investment Promotion Board (FIPB), wherever applicable, for foreign equity participation has been obtained as per the extant FDI policy;
The foreign equity holding after such conversion of debt into equity is within the applicable sectoral cap;
Applicable pricing guidelines for shares are complied with.
2.10.1 Exchange rate for conversion of ECB dues into equity: 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.
2.11 Procedure of raising ECB: For approval route cases, the borrowers may approach the RBI with an application in prescribed format Form ECB for examination through their AD Category I bank. Such cases shall be considered keeping in view the overall guidelines, macroeconomic situation and merits of the specific proposals 12ECB proposals received in the Reserve Bank above certain threshold limit (refixed from time to time) would be placed before the Empowered Committee set up by the Reserve Bank. The Empowered Committee will have external as well as internal members and the Reserve Bank will take a final decision in the cases taking into account recommendation of the Empowered Committee. Entities desirous to raise ECB under the automatic route may approach an AD Category I bank with their proposal along with duly filled in Form 83. Formats of Form ECB and Form 83 are available at Annex I and II respectively of Part V of the Master Directions – Reporting under Foreign Exchange Management Act, 1999.
2.12 Reporting Requirements: Borrowings under ECB Framework are subject to reporting requirements in respect of the following:
2.12.1 Loan Registration Number (LRN):Any draw-down in respect of an ECB as well as payment of any fees / charges for raising an ECB should happen only after obtaining the LRN from RBI. To obtain the LRN, borrowers are required to submit duly certified Form 83, which also contains terms and conditions of the ECB, in duplicate to the designated AD Category I bank. In turn, the AD Category I bank will forward one copy to the Director, Balance of Payments Statistics Division, Department of Statistics and Information Management (DSIM), Reserve Bank of India, Bandra-Kurla Complex, Mumbai – 400 051, 13Contact numbers 022-26572513 and 022-26573612. Copies of loan agreement for raising ECB are not required to be submitted to the Reserve Bank.
2.12.2 Changes in terms and conditions of ECB: Permitted changes in ECB parameters should be reported to the DSIM through revised Form 83 at the earliest, in any case not later than 7 days from the changes effected. While submitting revised Form 83 the changes should be specifically mentioned in the communication.
2.12.3 Reporting of act