RBI vide its circular number “FED
Master Direction No.5/2018-19” dated 26th March, 2019 issued a
Master Direction with respect to External Commercial Borrowings (ECB), Trade
Credits and Structured Obligations, which are governed by clause (d) of sub-section
3 of section 6 of the Foreign Exchange Management Act, 1999 (FEMA).
Reserve Bank of India has issued
various Regulations and directions to Authorized 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 Authorized
Persons with their customers/constituents with a view to implementing the
regulations framed.
ECB are the commercial loans raised by
eligible resident entities from recognized non-resident entities & which
conform to parameters such as minimum maturity, permitted and non-permitted
end-uses, maximum all-in-cost ceiling and it is not applicable in respect of
the investment in Non-Convertible Debentures in India made by Registered
Foreign Portfolio Investors. ECB proceeds are permitted to be parked abroad as
well as domestically.
ECB proceeds which are meant only for
foreign currency expenditure can be parked abroad pending utilization till then
they can be invested in the following liquid assets
a)
Deposits
/ 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 foreign branches/subsidiaries of Indian banks abroad.
On the other hand, which are 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 max period of
12 months cumulatively. These term deposits should be kept in unencumbered
position.
Any Indian banks, All India Financial
Institutions and NBFCs cannot issue of any type of guarantee relating to ECB.
Further, financial intermediaries (viz., Indian banks, All India Financial
Institutions, or NBFCs) shall not invest in FCCBs/ FCEBs in any manner
whatsoever.
What is the procedure of
raising ECB?
There are two modes of raising ECB
i.e. Automatic Route and Approval Route, if you conform to the parameters
prescribed then you can raise ECB via automatic route by approaching an AD
Category I bank with your proposal along with duly filled in Form ECB and for
approval route the process is:
1)
Approach
the RBI with an application in prescribed format (Form ECB) for examination
through their AD Category I bank.
2)
AD
bank would scrutinize the application after keeping in view the overall
guidelines, macroeconomic situation and merits of the specific proposals.
3)
ECB
proposals received in the Reserve Bank above certain threshold limit would be
placed before the Empowered Committee set up by the Reserve Bank.
4)
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.
Reporting Requirements:
1)
For
draw down in respect of ECB, first obtain Loan Registration Number (LRN), for
which you are required to submit duly certified Form ECB, containing the
T&C of ECB (in duplicate) to AD category I Bank and the bank would forward
one copy to the Director, Reserve Bank of India, Department of Statistics and
Information Management, External Commercial Borrowings Division,
2)
Further
any changes in the T&C shall be reported to the DSIM through revised Form
ECB within 7 days from changes, changes should be specifically mentioned in the
communication.
3)
Borrowers
have to make sure to report the actual ECB transactions through Form ECB 2
Return through the AD Category I bank on monthly basis so as to reach DSIM
within 7 working days from the close of month. In case of any delay the
borrower is required to pay the Late Submission Fees (LSF) Such payment should
be accompanied with the requisite return(s). Form ECB and Form ECB 2 returns
reporting contraventions will be treated separately.
Are there any steps
prescribed by the RBI for defaulting entities?
Yes, RBI has prescribed the Standard
Operating Procedure (SOP) for Untraceable Entities who fail in reporting provisions for ECBs via prescribed return(s) under
the ECB framework, either physically or electronically, for past 8 quarters or
more
When a company be treated as
Untraceable?
If borrower
entity/auditor(s)/director(s)/ promoter(s) are not reachable over
email/letters/phone for a period of not less than 2 quarters with documented
communication/ reminders numbering 6 or more and fulfill both conditions:
a)
Entity
not operative at the registered office address as per records available with
the AD Bank or operative during the visit by the officials of the AD Bank or
any other agencies authorized by the AD bank;
b)
Entities
have not submitted Statutory Auditor’s Certificate for last 2 years or more;
So what
are the actions that AD bank can take against such Untraceable Entities?
The followings
actions will be undertaken in respect of ‘untraceable entities’:
a)
File
Revised Form ECB, if required, and last Form ECB 2 Return without certification
from company with ‘UNTRACEABLE ENTITY’ written in bold on top. The outstanding
amount will be treated as written-off from external debt liability of the
country but may be retained by the lender in its books for recovery through
judicial/ non-judicial means;
b)
No
fresh ECB application by the entity should be examined/processed by the AD
bank;
c)
Directorate
of Enforcement should be informed whenever any entity is designated ‘UNTRACEABLE
ENTITY’; and
d)
No
inward remittance or debt servicing will be permitted under auto route.
What are the powers
given to AD bank to deal with ECB Cases?
AD banks can approve
any requests from the borrowers for changes in respect of ECBs, except for FCCBs/FCEBs,
duly ensuring that the changed conditions, including change in name of borrower/lender,
transfer of ECB and any other parameters, comply with ECB norms and are with
the consent of lender(s).
Also note that
1)
AD
Category I bank can be changed subject to obtaining NOC from the existing AD
Category I bank and they may directly approach DSIM for cancellation of LRN,
subject to ensuring that no draw down against the said LRN has taken place and
the monthly ECB-2 have been submitted to DSIM.
2)
Existing
ECB can be refinanced by fresh ECB provided that outstanding maturity of the
original borrowing is not reduced and all-in-cost of fresh ECB is lower than
the all-in-cost of existing ECB. Further, refinancing of ECBs 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 corporate
(AAA) and for Maharatna/Navratna public sector undertakings.
3)
Conversion
of ECBs, including those which are matured but unpaid, into equity is permitted
subject to the following conditions:
I.
The
activity of the borrowing company is covered under the automatic route for FDI
or Government approval is received, wherever applicable,
II.
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;
III.
Applicable
pricing guidelines for shares are complied;
IV.
In
case of partial or full conversion of ECB into equity, the reporting to the
Reserve Bank will be as under:
a.
For
partial conversion, the converted portion is to be reported in Form FC-GPR
prescribed for reporting of FDI flows, while monthly reporting to DSIM in Form
ECB 2 Return will be with suitable remarks, viz., "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.
V.
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 Reserve Bank, including guidelines on restructuring are complied with;
VI.
Consent
of other lenders, if any, to the same borrower is available or atleast information
regarding conversions is exchanged with other lenders of the borrower.
VII.
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.
Is there any security
required for raising ECB?
AD
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:
I.
the
underlying ECB is in compliance with the extant ECB guidelines,
II.
there
exists a security clause in the Loan Agreement requiring the ECB borrower to
create/cancel charge, in favour of overseas lender/security trustee, on
immovable assets/movable assets/financial securities/issuance of corporate
and/or personal guarantee, and
III.
NOC,
as applicable, from the existing lenders in India has been obtained in case of
creation of charge.
Other Provisions:
Borrowing by Entities
under Investigation: Entities
may raise ECBs as per the applicable norms, if they are otherwise eligible,
notwithstanding the pending investigations / adjudications / appeals, without
prejudice to the outcome of such investigations / adjudications / appeals
subject to informing AD bank / RBI about such pending investigation and accordingly,
in case of all applications where the borrowing entity has indicated about the
pending investigations / adjudications / appeals, the AD Banks / Reserve Bank
while approving the proposal shall intimate the agencies concerned by endorsing
a copy of the approval letter.
ECB by entities under
restructuring/Resolution Applicants under CIRP:
An entity which is
under restructuring scheme/ CIRP can raise ECB only if specifically permitted
under the resolution plan.
Eligible borrowers
under the ECB framework, who are participating in the CIRP under IBC, 2016 as
resolution applicants, can raise ECBs from all recognized lenders, except
foreign branches/subsidiaries of Indian banks, for repayment of Rupee term
loans of the target company. Such ECBs will be considered under the approval
route.
Dissemination of
information: For
providing greater transparency, information with regard to the name of the
borrower, amount, purpose and maturity of ECB under both Automatic and Approval
routes are put on the RBI’s website, on a monthly basis.
Compliance with the
guidelines: The
primary responsibility for ensuring that the borrowing is in compliance with
the applicable guidelines is that of the borrower concerned. Any contravention
of the applicable provisions of ECB guidelines will invite penal action under
the FEMA. The designated AD bank is also expected to ensure compliance with
applicable ECB guidelines by their constituents.
