External Commercial Borrowings (ECBs) refer to loans or borrowings that are raised by an Indian company from foreign lenders, including banks, financial institutions, or other eligible foreign entities. These borrowings are typically used for funding specific projects or general corporate purposes, such as capital expenditure, working capital needs, or refinancing existing debts.

The framework for ECBs in India is governed by the Reserve Bank of India (RBI) under the Foreign Exchange Management Act (FEMA), and the terms and conditions are further detailed in the ECB Guidelines issued by the RBI.

Key Features of External Commercial Borrowings (ECBs)

1. Eligible Borrowers:
   • Indian companies (except for those engaged in real estate, capital market activities, and certain other restricted sectors).
   • Entities involved in infrastructure projects.
   • Public sector enterprises (including government-owned entities).
   • Non-banking financial companies (NBFCs), subject to approval from the RBI.
2. Eligible Lenders:
   • Foreign commercial banks.
   • Multilateral financial institutions such as the World Bank, Asian Development Bank, etc.
   • Foreign financial institutions and export credit agencies.
   • Foreign direct investors (FDI) in the Indian company (subject to restrictions).
   • Other foreign entities meeting the RBI criteria.
3. Purpose of ECBs:
   • Capital expenditure for expansion, modernization, or setting up new facilities.
   • Refinancing of existing debts, provided the existing debt was originally raised in accordance with the RBI’s ECB guidelines.
   • Working capital requirements (subject to restrictions).
   • Foreign exchange reserve building by government institutions (in some cases).
   Note: Funds raised under ECB are typically not allowed for investment in real estate or capital market speculation.
4. Forms of ECBs:
   • Loans or credit facilities: This can be in the form of term loans or revolving credit lines.
   • Securitized instruments: Such as bonds or foreign currency convertible bonds (FCCBs).
   • Structured products: These may include hybrid instruments or debt equity products.

Regulations Governing ECBs

The RBI has laid out specific guidelines and regulations governing the issuance and use of ECBs. Key regulations include:

1. ECB Framework under FEMA:
   • ECB Guidelines specify the types of borrowers, the permissible end-use of funds, and the limits on the amount of ECBs that can be raised.
   • The ECB guidelines are divided into two categories: Automatic Route and Approval Route.
2. Types of ECBs:
   • ECB under Automatic Route:
     • Indian companies can raise ECBs from foreign lenders without prior RBI approval if the borrowing complies with certain end-use restrictions and credit rating requirements.
     • The borrowing limit and tenure are subject to the guidelines set by RBI.
   • ECB under Approval Route:
     • If a company or entity does not meet the criteria for automatic route ECBs, they must apply to the RBI for approval.
     • The approval will be granted subject to compliance with certain conditions regarding the borrowing terms, interest rates, and other relevant parameters.

ECB Guidelines and Conditions

1. Interest Rate:
   • The interest rate on ECBs is typically based on London Interbank Offered Rate (LIBOR) or other relevant international benchmarks, with an added spread to account for the risk.
   • RBI prescribes a ceiling rate on the interest, and excessive interest rates may not be allowed.
2. Maturity Period:
   • Minimum maturity period for ECBs:
     • 3 to 5 years for corporates raising funds under the automatic route.
     • Shorter durations may be allowed for specific purposes such as refinancing or working capital needs.
     • Medium-term borrowings are typically allowed for up to 10 years or more, depending on the project or sector.
3. Currency of Borrowing:
   • ECBs can be raised in foreign currencies such as USD, EUR, GBP, or any other currency approved by RBI.
   • Companies must comply with the foreign exchange risk management and hedging requirements if borrowing in foreign currencies.
4. End-Use Restrictions:
   • Permitted uses include:
     • Capital expenditure for expansion or modernization.
     • Refinancing of existing debt.
     • Working capital requirements (subject to approval).
   • Prohibited uses:
     • Funds cannot be used for speculative investment in real estate or capital markets.
     • Funds should not be used for repaying domestic loans unless they meet specific conditions set by the RBI.
5. Debt-to-Equity Ratio:
   • The company’s debt-to-equity ratio must be within the prescribed limits to qualify for ECBs under the automatic route.
   • The RBI may limit the amount that can be borrowed based on the borrower’s financial health and the project’s risk.
6. Security:
   • ECBs may be secured or unsecured depending on the agreement between the borrower and the lender.
   • In case of secured borrowings, collateral may be provided, typically in the form of immovable property or financial assets.
7. Documentation and Reporting:
   • Form ECB-2: The borrower must file a report with the RBI on the usage of the borrowed funds.
   • KYC Requirements: Both the borrower and lender must comply with the Know Your Customer (KYC) norms.
   • ECB-3: To report compliance with the conditions set by RBI, the company must file periodic compliance reports.
8. Prepayment and Buyback:
   • Prepayment of ECBs is allowed with certain conditions, including the need to comply with the RBI guidelines.
   • Buyback of ECBs can also be done, provided it is within the terms set by the RBI.

Eligible Borrowers under the ECB Guidelines

1. Indian Companies (except those involved in real estate or capital market activities).
2. Public sector enterprises.
3. Private sector companies with a sound financial track record.
4. Specialized financial institutions such as NBFCs.
5. Infrastructure companies like power generation or telecommunications companies.

Procedures for Raising ECBs

1. Determine the ECB Structure:
   • Decide the type of ECB, such as loans, bonds, or structured products.
   • Choose the appropriate lenders (foreign banks, multilateral institutions, etc.).
2. Compliance with RBI Guidelines:
   • Ensure that the borrowing complies with end-use restrictions and the interest rate ceiling.
   • Companies may need to get approval from the RBI if the ECB does not qualify for the automatic route.
3. Documentation and Filing:
   • File the ECM2 form with the RBI for approvals.
   • Comply with the KYC norms and ensure the proper due diligence is done.
4. Repayment Terms:
   • Arrange the repayment schedule as per the agreement, ensuring compliance with RBI rules on the repayment of foreign borrowings.

Benefits of ECBs

1. Access to Foreign Capital:
   • ECBs allow companies to access foreign capital at competitive interest rates, particularly when domestic funding is limited or costly.
2. Diversification of Funding Sources:
   • It helps diversify the sources of funds beyond traditional domestic financing options like banks and equity investors.
3. Cost Advantage:
   • ECBs often offer lower interest rates compared to domestic loans, especially for companies with a good credit rating.

Conclusion

External Commercial Borrowings (ECBs) are a vital tool for Indian companies seeking to raise funds from international markets. The RBI’s guidelines regulate the process to ensure that the funds are used for productive purposes and are compliant with FEMA and other regulations. Companies must ensure that they meet the eligibility criteria, comply with end-use restrictions, and adhere to reporting requirements to successfully raise and manage ECBs.