External commercial borrowing is a loan obtained by an Indian entity (eligible borrower) from a non-resident entity (eligible lender). Such loan should confirm the parameters such as minimum average maturity, permitted end-use, all-in-cost ceiling etc. The loan should meet all the parameters in totality and not on standalone basis. The ECB has been divided into different frameworks based on the type of borrower, average maturity and currency. This again has impact on its all-in-cost ceiling and end use, which we will see in detail now. ECB is typically governed by the Master Director issued by Reserve Bank of India (RBI) as updated time to time.

Due to lesser cost of funds from external sources ECB is an attractive way of obtaining funds. Indian companies can usually borrow at lower rates from outside India as interest rates are lower there compared to the home country, India.

ECB is just a form of a loan and may not be of equity nature or convertible to equity. Hence, it does not dilute stake in the company and can be done without giving away control because debtors do not enjoy voting rights.

In order to obtain ECB it is required to first ascertain the following:

1. Eligible lender
2. Eligible borrower
3. Maturity period
4. All-in-cost
5. End-use of ECB

Automatic route: under the automatic route the cases are approved by the Authorised Dealer Category-I (AD Category-I) banks.

Approval route: under the approval route, the requests have to be sent to the RBI through the Authorised Dealer bank 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.

Thus, only credit on ‘input services’ can be distributed and not on input goods or capital goods.

1. 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);
2. Buyers’ credit;
3. Suppliers’ credit;
4. Foreign Currency Convertible Bonds (FCCBs);
5. Financial Lease; and

Foreign Currency Exchangeable Bonds (FCEBs) have to be raised under Approval route only.

Corporate registered under Companies Act, 1956/2013

• Supplier of equipments
• Foreign collaborators
• Foreign equity holders [other than erstwhile Overseas Corporate Bodies (OCBs)]
• ECB from indirect equity holders is permitted provided the indirect equity holding in the Indian company by the lender is at least 51 per cent.
• ECB from a group company is permitted provided both the borrower and the foreign lender are subsidiaries of the same parent.

1. Criteria for Foreign Equity Holder:

   The term foreign equity holder for the purpose of ECB 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.

The maximum amount of ECB which can be raised by corporate in miscellaneous services sector is USD 500 million or its equivalent during a financial year^$.

^$ECB proposals beyond aforesaid limits will come under the approval route

• ECB up to USD 50 million or its equivalent with minimum average maturity of three
• ECB above USD 50 million with a minimum average maturity of five years
• ECB above USD 50 million with a minimum average maturity of one year (manufacturing sector only)

All-in-cost includes rate of interest, other fees, expenses, charges, guarantee fees whether paid in foreign currency or INR but will not include commitment fees, pre-payment fees / charges, withholding tax payable in INR.

*or applicable bench mark for the respective currency

For ECB’s denominated in INR the all-in-cost should be in line with the market conditions.   But there is no clarity on the term ‘market conditions‘ hence one can follow above mentioned conditions as all-in-cost ceiling.

For eligible (as we are) entities, the ECB proceeds can be used for all purposes excluding the following:

1. Real estate activities
2. Investing in capital market
3. Using the proceeds for equity investment domestically;
4. On-lending to other entities with any of the above objectives;
5. Purchase of land

ECB is also allowed for general corporate purpose (working capital) (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 and no pre-payment.

In case the ECB is raised from direct equity holder, aforesaid individual ECB limits will also subject to ECB liability: equity ratio requirement. The ECB liability of the borrower (including all outstanding ECBs and the proposed one) towards the foreign equity holder should not be more than seven times of the equity contributed by the latter. This ratio will not be applicable if total of all ECBs raised by an entity is up to USD 5 million or equivalent.