External Commercial Borrowings refer to commercial loans raised by eligible resident entities from recognized non-resident entities. These loans can be in the form of bank loans, buyers’ credit, suppliers’ credit, or securitized instruments such as bonds and debentures. ECBs are a key source of financing for Indian corporates and public sector undertakings for their expansion and modernization needs. They provide access to international capital at potentially lower interest rates and allow diversification of funding sources.
Regulatory Framework for ECBs
The framework governing ECBs in India is laid down by the Reserve Bank of India and is governed under the Foreign Exchange Management Act, 1999. The primary regulations relevant to ECBs include the RBI Master Direction No.5/2018-19 titled ‘External Commercial Borrowings, Trade Credits and Structured Obligations’ issued via RBI/FED/2018-19/67. Additionally, the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018, and the Foreign Exchange Management (Guarantees) Regulations, 20,00 also govern different aspects of ECBs. These regulations are subject to amendments from time to time to reflect macroeconomic needs and financial stability considerations.
Statistical Overview of ECBs
On average, around 1000 ECBs are raised annually by Indian entities. However, global financial conditions significantly influence the volume of ECBs raised. For instance, in April 2022, there was a sharp decline in ECBs due to rising interest rates in global economies. To counter this decline and encourage borrowing through ECBs, liberalization measures were introduced on 1 August 2022. The key measures included increasing the automatic route limit from USD 750 million to USD 1.5 billion and raising the all-in-cost ceiling for eligible borrowers with investment-grade ratings from Indian credit rating agencies by 100 basis points. These measures were available for ECBs raised to 31 December 2022. As a result of this policy relaxation, ECBs amounting to over USD 5.2 billion were raised during August and September 2022 alone. Notably, in November 2022, ECBs again reached USD 5.2 billion, which was more than 3.6 times the volume in October 2022. However, the liberalization measures were not extended beyond December 2022.
Dependence on ECBs by Indian Entities
Many Indian businesses rely on ECBs to fund various operational and strategic requirements. Working capital requirements have emerged as the top reason for availing ECBs in recent times, followed by borrowing for new projects and modernization. ECBs are also increasingly being used for importing capital goods, which are crucial for manufacturing and infrastructure development. Non-Banking Financial Companies are using ECBs extensively for on-lending and sub-lending purposes.
Purpose-Wise Utilization of ECBs
Recent data indicates that working capital financing represents the largest portion of ECB usage. This is followed by funds raised for new projects and modernization efforts. ECBs have proven beneficial for importing capital goods as they can offer lower costs and longer repayment periods compared to domestic financing options. NBFCs continue to rely on ECBs for lending to other borrowers, effectively leveraging international funds for domestic credit expansion.
Source-Wise Distribution of ECBs
Foreign equity holders or foreign collaborators are the most frequent providers of ECBs to Indian entities. In terms of the amount raised, other commercial banks contribute the most, indicating their dominant role in facilitating large-ticket ECB transactions. Other recognized lenders include multilateral financial institutions, leasing companies, government-owned development financial institutions, and other non-bank entities.
Sector-Wise ECB Borrowing Trends
The financial services sector continues to dominate ECB borrowings in India. It is followed by the manufacturing sector, which spans various industries from basic goods to high-end technology manufacturing. Sectors such as information services, warehousing, air transport, and electricity have also shown significant participation in ECB markets. These sectors require long-term capital investment, for which ECBs are an attractive option due to their relatively favorable terms and repayment flexibility.
Structure of ECBs and Key Parameters
ECBs must conform to specific parameters such as minimum average maturity, permitted and non-permitted end uses, and an all-in-cost ceiling. These conditions must be satisfied collectively and cannot be considered in isolation. ECBs can be raised under two broad routes: the automatic route and the approval route. Under the automatic route, borrowers do not require prior approval from the RBI, provided they meet all eligibility criteria. Under the approval route, proposals are submitted to the RBI through an Authorized Dealer Category-I bank.
Forms of ECBs
There are two broad types of ECBs based on currency denomination: foreign currency-denominated ECBs and Indian rupee-denominated ECBs. Foreign currency ECBs include loans such as bank loans, floating fixed-rate notes, bonds, debentures (excluding fully and compulsorily convertible instruments), trade credits beyond three years, and financial leases. They may also include foreign currency convertible bonds and exchangeable bonds. Indian rupee ECBs include similar instruments but are denominated in rupees. These can be issued as plain vanilla rupee bonds listed on overseas exchanges or placed privately as per host country regulations.
Entities Eligible to Raise ECBs
All entities eligible to receive foreign direct investment are eligible to raise ECBs. In addition, port trusts, units located in Special Economic Zones, the Small Industries Development Bank of India, and the Export-Import Bank of India are eligible borrowers. For Indian rupee-denominated ECBs, additional eligible borrowers include registered entities involved in microfinance activities, registered not-for-profit companies, registered societies, trusts, cooperatives, and non-governmental organizations. However, Limited Liability Partnerships are not eligible borrowers under the ECB framework because they are not eligible to receive FDI as per current foreign exchange regulations.
Recognition of ECB Lenders
Lenders must be residents of countries that are compliant with the Financial Action Task Force or the International Organization of Securities Commissions. Multilateral and regional financial institutions in which India is a member country are also recognized lenders. Individuals are allowed to lend under the ECB framework only if they are foreign equity holders or subscribe to listed bonds and debentures abroad. Foreign branches or subsidiaries of Indian banks are allowed to lend only for foreign currency-denominated ECBs and are restricted from participating in certain types of instruments, such as foreign currency convertible bonds and exchangeable bonds. However, they can act as arrangers, underwriters, traders, and market-makers for rupee-denominated bonds issued overseas, subject to specific restrictions.
Foreign Equity Holder as ECB Lender
A direct foreign equity holder must have at least a 25 percent equity holding in the borrowing entity. Indirect equity holders must maintain a minimum indirect holding of 51 percent. Group companies with a common overseas parent are also allowed to lend. During the tenure of the ECB, the disposal of shareholding by the lender is not permitted. This ensures that the foreign equity relationship continues throughout the loan period and aligns the interests of the lender and borrower.
Refinancing of Existing ECB
Refinancing of existing ECBs by raising fresh ECBs is allowed under certain conditions. The refinancing must not lead to a reduction in the outstanding maturity of the original ECB. The total costs of the new ECB must be lower than those of the existing one. In case of multiple borrowings, the weighted average maturity and weighted average cost must be considered. Refinancing is allowed even for ECBs raised under previous frameworks, provided the borrower is eligible under the current ECB framework. However, refinancing through foreign branches or subsidiaries of Indian banks is only permitted for highly rated entities such as AAA-rated corporates and major public sector undertakings. Refinancing an Indian rupee-denominated ECB with a foreign currency ECB is not allowed under current rules.
Strategic Uses of ECBs for Business Growth
ECBs allow businesses to raise large amounts of long-term capital, which can be critical for expansion, acquisition of assets, or repayment of existing high-cost debt. The cost of funds through ECBs is often lower compared to domestic loans, especially when sourced from countries with low-interest-rate environments. ECBs also offer the advantage of diversifying an organization’s investor base and reducing dependence on domestic lenders. ECBs are particularly useful for long-term infrastructure or manufacturing projects that require sustained capital investment.
Minimum Average Maturity Period Requirements
The ECB framework mandates a minimum average maturity period (MAMP) to ensure long-term stability and repayment discipline. The standard MAMP for ECBs is three years. Call and put options are not exercisable before this minimum maturity is met. Specific MAMP requirements vary based on the purpose and source of borrowing. For example, manufacturing companies reach 50 million per financial year with a reduced MAMP of one year. If the ECB is raised from a foreign equity holder for working capital, general corporate purposes, or repayment of rupee loans, the MAMP must be at least five years. When raised from any other eligible lender, and used for working capital or on-lending by NBFCs, the required MAMP increases to ten years. If the purpose is to repay rupee loans taken for capital expenditure, the minimum maturity is seven years. For other purposes, including non-capital expenditure, the maturity must be ten years. Although the repayment of ECB principal can start before completing the MAMP, the average maturity must still comply with the applicable minimum requirement.
Example of Minimum Average Maturity Period Calculation
Consider a company that has drawn down and repaid ECBs at various stages. The minimum average maturity is calculated using a weighted formula that accounts for the amount outstanding and the period it remained with the borrower. For example, if a company draws down USD 2 million over several months and repays portions in stages, the product of the balance amount and number of days held is divided by the total loan amount multiplied by 360 days. This provides the average maturity in years. The formula ensures that early repayments or uneven schedules are fairly represented in calculating the maturity period, aligning with RBI requirements.
All-in-Cost Ceiling for ECBs
The all-in-cost ceiling is an important component of the ECB framework, as it determines the maximum permissible interest and charges that a borrower can incur. For foreign currency ECBs, the ceiling ithe s benchmark rate plus 550 basis points for existing ECBs that were linked to LIBOR but have transitioned to alternative reference rates. For new foreign currency ECBs, the ceiling ithe s benchmark rate plus 500 basis points. For Indian rupee-denominated ECBs, the all-in-cost ceiling is benchmark rate plus 450 basis points. Penalties or prepayment charges for defaults are capped at two percent over and above the agreed rate of interest. These penalty charges are excluded from the all-in-cost calculation. The RBI requires strict compliance with the ceiling at all times during the loan tenure. Even temporary breaches of the all-in-cost ceiling are not permitted, and averaging out the cost over time is not acceptable.
Limits and Leverage Regulations
All eligible borrowers can raise up to USD 750 million or its equivalent per financial year under the automatic route. If an ECB is raised from a foreign equity holder, then the ECB liability-to-equity ratio must not exceed 7:1 under the automatic route. However, this leverage requirement is not applicable if the total outstanding ECB amount, including the proposed loan, does not exceed USD 5 million or its equivalent. Borrowers must also follow the debt-equity ratio guidelines prescribed by any relevant sectoral or prudential regulator. These leverage caps are in place to ensure that companies do not become excessively dependent on foreign debt, which could create systemic risks or repayment challenges under adverse market conditions.
Calculation of ECB Liability-Equity Ratio
To compute the ECB liability-equity ratio, the ECB amount includes all outstanding ECBs other than rupee-denominated ones and the proposed ECB. The equity portion includes the paid-up capital and free reserves, such as share premium received in foreign currency, as per the latest audited balance sheet. When more than one foreign equity holder exists, only the share premium contributed by the lender in question is considered. If the borrowing company has a debit balance in its profit and loss account, this amount must be deducted from the equity while calculating the ratio. This ensures a conservative assessment of the borrower’s financial capacity and protects against excessive leveraging.
ECB Reporting Procedures
Borrowers are required to submit Form ECB in duplicate to their Authorized Dealer bank. The AD bank will forward one copy to the Reserve Bank of India’s Department of Statistics and Information Management, specifically to the Balance of Payments Statistics Division. Before any drawdown or payment of fees, the borrower must obtain a Loan Registration Number from the RBI. Any changes to the terms and conditions of the ECB must be reported in a revised Form ECB within seven days. In addition, borrowers must submit Form ECB-2 on a monthly basis to report actual transactions. This must be filed through the AD bank and submitted to the RBI within seven working days from the close of the month to which it relates. Any changes to the ECB parameters must be reflected in this monthly return as well.
Late Submission Fee for ECB Reporting
Delays in reporting ECB drawdowns or submitting the required forms can be regularized by paying a Late Submission Fee. The fee is calculated using the formula: INR 7,500 plus 0.025 percent of the amount involved multiplied by the number of years of delay. For Form ECB-2, the amount involved refers to the higher of the gross inflow or outflow. The number of years of delay is rounded up to the nearest month and expressed up to two decimal places. This fee mechanism incentivizes timely compliance while offering a regularization path for inadvertent delays. The facility to regularize reporting through the payment of LSF is available up to three years from the due date. The late submission fee applies to each instance of non-compliance, including nil returns.
Reporting Requirements under ECB Framework
Every borrower raising ECB must adhere to strict reporting requirements to ensure transparency and compliance with the Reserve Bank of India’s monitoring systems. Upon entering into a loan agreement for ECB, the borrower must submit Form ECB through the Authorised Dealer (AD) Category-I bank to the Department of Statistics and Information Management (DSIM), RBI within seven days from the date of agreement. Once the loan is drawn down, the borrower must submit Form ECB-2 on a monthly basis, certified by the AD bank, within seven working days from the close of the month. These filings help monitor the utilization and repayment status of ECBs, as well as verify compliance with sectoral caps, borrowing limits, and end-use restrictions.
Hedging Requirements for ECBs
To mitigate the risks arising from exchange rate volatility, the RBI has prescribed mandatory hedging requirements for certain categories of ECBs. All ECBs with average maturities less than five years, raised by entities in specified sectors such as infrastructure, must be fully hedged. The hedging should cover the principal as well as the coupon payments on a continuous basis. The hedging instrument should be through a derivative contract with a bank or financial institution regulated by the RBI or SEBI. The coverage of hedging is verified at every reporting interval, and failure to maintain adequate hedging could result in penal action. This framework ensures that the external debt does not adversely affect the financial stability of the borrower due to currency fluctuations.
Conversion of ECB into Equity
In certain cases, ECBs can be converted into equity shares of the borrowing company, subject to regulatory compliance and eligibility. This conversion must comply with the Foreign Direct Investment (FDI) policy of the Government of India, including pricing guidelines, sectoral caps, and entry routes. The conversion is treated as a fresh equity infusion and must be reported to the RBI using Form FC-GPR within 30 days from the date of issue of shares. If partial conversion is undertaken, the remaining ECB must still comply with all applicable regulations. This option can be beneficial for companies looking to reduce their debt burden or restructure their capital base.
ECB under Resolution Plans and IBC
With the evolution of the Insolvency and Bankruptcy Code (IBC), ECBs have also been allowed as a means to fund resolution applicants or repay existing financial debt of companies undergoing insolvency. Under this framework, resolution applicants may raise ECBs for meeting the requirements of approved resolution plans. However, such ECBs must comply with specific provisions, such as minimum average maturity, permitted end-uses, and sector-specific restrictions. This use of ECB helps attract foreign capital into distressed assets and supports revival efforts. All such ECBs must be routed through the approval route, and the AD bank must ensure end-use compliance.
Late Submission Fees and Non-Compliance
Non-compliance with reporting timelines for ECB attracts penalties in the form of Late Submission Fees (LSF). The amount of LSF is determined based on the duration of the delay and the type of return not submitted. For instance, delays in submitting Form ECB or Form ECB-2 can attract a fee ranging from INR 5,000 to INR 50,000 or more, depending on the delay. In case of serious violations, the RBI may also initiate compounding proceedings under FEMA regulations. Hence, timely reporting and compliance with ECB guidelines are essential to avoid regulatory scrutiny and financial penalties.
Monitoring Mechanism and Role of Authorised Dealers
Authorised Dealer Category-I banks play a crucial role in the ECB framework. They are responsible for verifying the eligibility of the borrower, ensuring the ECB complies with all regulatory norms, and certifying the required forms. AD banks also monitor the end-use of the funds, repayment schedules, and hedging requirements. They act as the first line of compliance enforcement and liaison between the borrower and the RBI. Without AD bank involvement, no ECB transaction can be executed, making them critical stakeholders in the ECB process.
Key Benefits and Risks of ECBs
ECBs offer several advantages, including access to global funds at potentially lower interest rates, longer repayment tenures, and diversified investor bases. They are particularly beneficial for capital-intensive sectors and companies seeking to finance long-term infrastructure or expansion projects. However, they also pose certain risks, such as exposure to foreign exchange volatility, increased debt-servicing burden, and regulatory compliance obligations. Improper use or mismanagement of ECB funds can adversely impact a company’s financial health. Hence, careful assessment, professional advisory, and robust financial planning are crucial when opting for ECBs.
ECBs in Startups and New Economy Sectors
To encourage innovation and entrepreneurship, the RBI has extended ECB access to startups under relaxed norms. Startups recognized by the Department for Promotion of Industry and Internal Trade (DPIIT) can raise ECBs up to USD 3 million or its equivalent per financial year under the automatic route. These ECBs can be in the form of loans, non-convertible, optionally convertible, or partially convertible preference shares. The funds can be used for various permitted end-uses including business expansion, product development, or operational costs, provided they are not used for prohibited activities. This policy aims to broaden funding options for startups, which often face challenges in securing domestic credit.
ECBs by Non-Profit and NGO Entities
While ECBs are primarily meant for commercial enterprises, certain non-profit organizations, such as NGOs engaged in microfinance activities, are also permitted to access ECBs under specific conditions. These entities must meet eligibility criteria set by the RBI and require prior approval through the approval route. The funds must be utilized for core activities such as extending microfinance loans or developing rural livelihoods. ECBs for non-profit purposes generally come with stricter scrutiny on end-use and reporting, reflecting the sensitive nature of such funding. The cost of borrowing and terms of repayment must also conform to the social mandate of the borrowing entity.
Regulatory Changes and Evolving Framework
The ECB policy framework in India is dynamic and subject to periodic revisions by the RBI and the Ministry of Finance in response to domestic macroeconomic conditions, global financial trends, and industry feedback. Over the years, several amendments have been introduced, such as relaxation of end-use restrictions, enhancement of borrowing limits, liberalization of the approval route, and expansion of eligible lenders. These changes aim to make ECBs more attractive and flexible while maintaining financial stability. Stakeholders must stay informed of regulatory updates to ensure continued compliance and to leverage opportunities in cross-border financing.
ECBs vs. Domestic Borrowings
One of the critical decisions for companies is choosing between ECBs and domestic borrowings. While ECBs may offer lower interest rates and longer maturity periods, they come with foreign exchange risk and tighter compliance requirements. Domestic loans, on the other hand, are easier to structure, carry no currency risk, and are governed by local regulations. The choice depends on factors such as the borrower’s credit profile, the purpose of the funds, prevailing market interest rates, and currency outlook. Companies often adopt a blended financing strategy that includes both ECB and domestic instruments to optimize their capital structure.
Role of Professionals and Advisory Services
Given the technical complexities, compliance obligations, and dynamic policy environment surrounding ECBs, the involvement of qualified professionals is critical. Chartered accountants, company secretaries, legal experts, and financial advisors play a significant role in structuring ECB transactions, ensuring adherence to RBI guidelines, preparing documentation, managing forex risks, and filing mandatory returns. Advisory firms also help in negotiating favorable terms with lenders, assessing hedging strategies, and evaluating tax implications. Their role is indispensable in minimizing risk and ensuring that ECBs add strategic value to the business.
Future Outlook for ECBs in India
The outlook for ECBs in India remains positive as global investors continue to view India as a high-growth market. The government’s emphasis on infrastructure, digitization, and manufacturing, coupled with stable macroeconomic indicators, makes India a favorable destination for cross-border debt. Furthermore, as Indian companies expand their global footprint, access to international capital markets becomes increasingly relevant. With enhanced regulatory clarity and institutional support, ECBs are expected to play a more prominent role in financing India’s development goals. However, maintaining a balance between access to foreign debt and macroeconomic stability will remain a critical regulatory focus.
Conclusion
External Commercial Borrowings are an important instrument for Indian companies to access offshore funding. The ECB framework, governed by the RBI under FEMA, balances the need for capital with the imperative of financial stability. While offering cost-effective and long-term funding options, ECBs also impose strict compliance, reporting, and risk management requirements. A well-planned and professionally advised ECB transaction can offer substantial strategic advantages, but missteps can lead to regulatory and financial repercussions. Therefore, a comprehensive understanding of ECB guidelines, proactive compliance, and prudent financial management are essential for leveraging the full potential of external commercial borrowings.