The Recent Changes made under External Commercial Borrowing (ECB) Norms by Reserve Bank of India (RBI)
External Commercial Borrowings (ECB) from the foreign equity holders:
- To rationalise the policy RBI has made certain clarifications:-
- The term ˜debt™ in the debt-equity ratio has been replaced with ˜ECB liability™ to make the term signify true position as other borrowings/ debt are not considered in working out this ratio.
- The paid- up capital contributed by the foreign equity holder is considered under the guidelines for the purpose of calculation of equity for ECB™s of or beyond USD 5 million from direct foreign equity holders. Now, besides paid up capital, free reserves including the share premium received in foreign currency as per the latest audited balance sheet shall be reckoned for the purpose of calculating the equity of the foreign equity holder.
- To benefit eligible borrowers, ECB proposals from foreign equity holders (direct/indirect) and group companies under the approval route will be considered by the RBI.
- Service sector units, in addition to those in hotels, hospitals and software, could also be considered as eligible borrowers if the loan is obtained from foreign equity holders.
- This would facilitate borrowing by training institutions, R&D, and miscellaneous service companies.
- ECB from indirect equity holders may be considered provided the indirect equity holding by the lender in the Indian company is at least 51 per cent.
- ECB from a group company may also be permitted provided both the borrower and the foreign lender are subsidiaries of the same parent.
- While submitting their proposals, eligible companies have to ensure that total outstanding stock of ECBs (including the proposed ECBs) from a foreign equity lender does not exceed seven times the equity holding, either directly or indirectly of the lender.
Structured Obligations for infrastructure sector:
- To further liberalise the ECB policy in respect of the infrastructure sector RBI has made following changes:-
- Direct foreign equity holder (holding minimum 25 per cent of the paid-up capital) and indirect foreign equity holder holding at least 51% of the paid-up capital, will be permitted to provide credit enhancement for the domestic debt raised by Indian companies engaged exclusively in the development of infrastructure and by Infrastructure Finance Companies (IFCs) through issue of capital market instruments.
- No prior approval will be required from the Reserve Bank for providing such credit enhancements.
Rationalisation and Liberalization of ECB:
- As per revised policy the limit for eligible borrowers to avail of ECB under the automatic route per financial year has been enhanced as follows:-
- Corporate in real sector-industrial sector-infrastructure sector USD 750 million or equivalent as against the present limit of USD 500 million or equivalent.
- Corporate in specified service sectors viz. hotel, hospital and software – USD 200 million or equivalent as against the present limit of USD 100 million or equivalent.
- All eligible borrowers have been permitted to avail of ECBs designated in INR from foreign equity holders, under the automatic/approval route, as the case may be, subject to compliance with extant ECB guidelines.
- Corporate in the infrastructure sector can avail of ECBs for Interest During Construction (IDC) as a permissible end-use, under the automatic/approval route, as the case may be, subject to IDC being a part of project cost and is capitalized.
Bridge Finance for Infrastructure Sector:
- Infrastructure companies can import capital goods by utilising short-term credit (including buyers’ credit / suppliers’ credit) in the nature of ˜bridge finance’, under the approval route if the conditions as mentioned below are fulfilled:-
- The bridge finance shall be replaced with a long term ECB;
- The long term ECB shall comply with all the extant ECB norms; and
- Prior approval shall be sought from the Reserve Bank for replacing the bridge finance with a long term ECB.
- The AD Category I bank shall monitor the end use of funds and banks in India will not be permitted to provide any form of guarantees. The bank shall evidence the import of capital goods by verifying the bill of entry.
ECB Norms for Infrastructure Sector Liberalised:
- The Reserve Bank of India has relaxed norms for infrastructure companies with direct foreign equity up to 25 per cent to raise fund overseas without government permission subject to the following conditions:-
- At least 75 per cent of the fresh ECB proposed to be raised should be utilised for capital expenditure towards a ‘new infrastructure’ project(s), where infrastructure is as defined in terms of the extant guidelines on ECB.
- In respect of remaining 25 per cent, the refinance shall only be utilized for repayment of the Rupee loan availed of for ‘capital expenditure’ of earlier completed infrastructure project(s); and
- The refinance shall be utilized only for the Rupee loans which are outstanding in the books of the financing bank concerned.
- Such company may submit their applications in Form ECB through their designated authorised dealer bank with the required documents.
- The AD Category I bank shall monitor the end use of funds and bank in India will not be permitted to provide any form of guarantee.
ECB in Renminbi (RMB):
- To avail ECB in Renminbi (RMB) under the approval route subject to an annual cap of USD one billion pending further review. Once approved the same will be valid for 3 months from the date of issue of approval letter and the loan agreement should be executed within this period itself.
- The company may submit a Form 83 to the Department of Statistics and Information Management (DSIM), RBI for allotment of loan registration number (LRN) within 7 days from the date of signing the loan agreement between the borrower and the lender.
- The AD Category- I bank will be permitted to open Nostro accounts in RMB. The bank shall monitor the end-use of funds and banks in India will not be permitted to provide any form of guarantee.
 Notification – A.P. (DIR Series) Circular No. 29, dated 26th September, 2011- External Commercial Borrowings (ECB) from the foreign equity holders
 Notification – A.P. (DIR Series) Circular No. 28, dated 26th September, 2011 External Commercial Borrowings (ECB) Policy Structured Obligations for infrastructure sector
 Notification – A.P. (DIR Series) Circular No.27, dated 23rd September, 2011- External Commercial Borrowings (ECB) Rationalisation and Liberalisation
 Notification- A.P. (DIR Series) Circular No. 26, dated 23rd September, 2011 External Commercial Borrowings (ECB) Bridge Finance for Infrastructure Sector
 Notification – A.P. (DIR Series) Circular No. 25, dated 23rd September, 2011- External Commercial Borrowings (ECB) for the Infrastructure Sector Liberalisation
 Notification – A.P. (DIR Series) Circular No. 30, dated 27th September, 2011 External Commercial Borrowings (ECB) in Renminbi (RMB)