External Commercial Borrowings (ECB) – Revised regulations ...

1 25 January 21 April 2018. 2019. External Commercial Borrowings (ECB) Revised regulations and framework Borrowing and lending between a person resident in Since RDBs have been merged into INR. India and outside India were regulated vide denominated ECBs, prior RBI approval is no following regulations : longer required for issuing RDB provided all Foreign Exchange Management (Borrowing other conditions for an automatic route in and Lending in Foreign Exchange) regulations , respect of amount, maturity period, etc. are 2000 Notification no FEMA 3/2000-RB complied with.

2 2. Forms of ECB. Foreign Exchange Management (Borrowing and Lending in Rupees) regulations , 2000 FEMA 3(R) provides that presently certain Notification no FEMA 4/2000-RB. hybrid instruments such as optionally convertible debentures presently covered under The Reserve Bank of India ( RBI') vide its Notification ECB would be governed by specific hybrid no 3(R)/2018-RB dated 17 December 2018 has instruments regulations when notified by the subsumed both the regulations into a consolidated GoI. Regulation viz. Foreign Exchange Management (Borrowing and Lending) regulations , 2018.

3 The 3. Amendment to the definition of Revised Regulation provides scope for further amendments by the RBI in consultation with the Eligible Borrowers Government of India (GoI) FEMA 3(R) has amended the definition of In line with the changes introduced by the Revised an Indian entity to include a Limited Regulation, a New ECB Framework has been Liability Partnership (LLP) formed and issued vide (DIR Series) Circular No. 17 dated registered in India under the LLP. 16 January 2019 which is brought into force with Partnership Act, 2008, as amended from immediate effect.

4 Time to time Key changes introduced vide FEMA 3(R) and New Further, the New ECB framework defines ECB Framework are summarised below: Eligible borrowers to include all entities'. eligible to receive FDI under FEMA 20(R). 1. Removal of track-based ECB and also includes Port Trusts, Units in classification SEZ, SIDBI, EXIM Bank and registered Tracks I (medium-term foreign currency loans), entities engaged in micro-finance activities Track II (long term foreign currency loan) and viz., not for profit companies, registered Track III (INR denominated ECB) and Rupee societies/trusts /cooperatives and non- Denominated Bonds ( RDB' or Masala Bonds') government organisations.

5 From the existing framework have been merged and the new framework has the following 4. Recognised lenders simplified simplified two categories: The previous ECB framework defined recognized lender for each track. As per the Foreign currency denominated ECB. Revised ECB framework, the overseas lender needs to be a resident of FATF or IOSCO. INR denominated ECB. compliant country. 2019 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG. International ), a Swiss entity.

6 All rights reserved. 5. Minimum Average Maturity Period Borrower Category Eligible limit (MAMP) (USD in a million). The new framework has prescribed a uniform MAMP of three years for all types of ECB Entities engaged in micro 100. irrespective of the amount involved, except: finance activities Manufacturing sector companies raising Others 500. ECB up to USD50 million or equivalent per financial year can have MAMP of one year and The Revised ECB framework has provided a single limit of USD 750 million or equivalent per ECB raised from foreign equity holder financial year irrespective of the category of lending for meeting working capital needs, borrower.

7 The limit for Startup remains constant general corporate purpose or repayment of at USD three million or equivalent per financial rupee loan to have MAMP of five years. year either in INR or any convertible foreign currency or a combination of both. The reduced MAMP may impact the borrowers in the infrastructure sector which earlier enjoyed 8. ECB Liability - Equity Ratio MAMP of 10 years. The Revised ECB framework provides that the 6. All-in-cost ceiling ECB liability: Equity ratio of 7:1 shall be applicable only in case of foreign currency The definition of all-in-cost as per the Revised denominated ECB.

8 ECB framework specifies that various components of the all-in-cost have to be paid by 9. End uses the borrower without taking recourse to the drawdown of ECB/Trade Credit, ECB/Trade The new ECB framework has defined the term Credit proceeds cannot be used for payment of Real estate as under: interest/charges. "Real Estate Activity" means any activity 7. Individual limits involving own or leased property for buying, selling and renting of Commercial and The ECB framework prescribed the following residential properties or land and also includes borrowing limits basis the sector in which the activities either on a fee or contract basis borrower operates: assigning real estate agents for intermediating in buying, selling, letting or managing real Borrower Category Eligible limit estate.

9 However, this would not include the (USD in a development of integrated township, purchase/. million) long term leasing of industrial land as part of new project/modernisation or expansion of Companies in 750. existing units or any activity under infrastructure and infrastructure sectors' definition. manufacturing sectors, Non-Banking Financial 10. Hedging requirements Companies -Infrastructure Finance Companies The previous ECB framework mandated the (NBFC-IFCs), NBFCs- hedging requirement of 70 per cent of the ECB. Asset Finance Companies exposure for maturity period between three to five years for companies in infrastructure sector, (NBFC-AFCs), Holding NBFC-IFCs, NBFC-AFCs, Holding Companies Companies and Core and CICs and Housing Finance Companies, Investment Companies regulated by the National Housing Bank, Port (CICs) Trusts constituted under the Major Port Trusts Act, 1963 or Indian Ports Act, 1908.

10 Companies in the software 200. development sector The Revised framework has made the above hedging requirement mandatory for Infrastructure space companies' which has been defined as under: 2019 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG. International ), a Swiss entity. All rights reserved. Companies in infrastructure sector, Non-Banking Currency of borrowing: It can be Finance Companies (NBFCs) undertaking denominated in foreign currency as well as infrastructure financing, Holding Companies/ INR or any other currency as specified by Core Investment Companies undertaking the RBI in consultation with the GoI.