External Commercial Borrowings (ECB) have emerged as a pivotal mechanism for Indian companies to secure financing beyond domestic sources, bridging the gap in long-term funding options available within the country. Overseen by the Reserve Bank of India (RBI), ECB facilitates overseas fundraising by Indian entities and has witnessed a significant uptick in activity over time. Understanding the ECB framework, its regulatory nuances, and recent developments is crucial for Indian businesses navigating the global financial landscape.

Understanding ECB: External Commercial Borrowings entail commercial loans obtained by eligible resident entities from recognized non-resident counterparts, aimed at meeting the long-term funding requirements of Indian companies. These borrowings are subject to stringent regulatory parameters established by the RBI, encompassing aspects such as minimum maturity, permitted end-uses, maximum cost ceilings, among others. Compliance with these regulations is mandatory, ensuring responsible borrowing practices and safeguarding the interests of all stakeholders involved.

Regulatory Framework: Debt financing through ECB is regulated by the RBI, which revamped the ECB provisions on January 16, 2019, introducing new guidelines aimed at liberalizing the borrowing process and enhancing accessibility for Indian entities. These guidelines marked a significant shift towards simplification and convenience in raising funds from foreign sources, thereby facilitating greater participation in the global financial markets by Indian businesses.

Salient Features of ECB Framework: The Master Direction – External Commercial Borrowings, Trade Credits, and Structured Obligations delineate key aspects of the ECB framework:

Eligible Borrowers: Entities eligible to receive foreign direct investment can raise ECB, broadening the scope of potential borrowers and facilitating greater participation in overseas fundraising activities.

Amount: Under the automatic route, eligible borrowers can raise ECB up to USD 750 million or equivalent per financial year, providing flexibility and scalability in securing financing based on the entity's requirements and financial capabilities.

Minimum Average Maturity Period (MAMP): ECBs must have a minimum average maturity period of 3 years for all types, ensuring that the borrowings are of a long-term nature and conducive to sustainable financial management.

End Use (Negative List): The ECB framework provides a negative list delineating purposes for which ECB proceeds cannot be utilized. Prohibited activities include real estate activities, investment in capital markets, equity investment, and working capital purposes, among others. These restrictions aim to channel ECB funds towards productive uses and mitigate risks associated with speculative or non-essential activities.

Recognized Lender: Lenders must be residents of Financial Action Task Force (FATF) or International Organization of Securities Commissions (IOSCO) compliant countries, ensuring adherence to international regulatory standards and promoting transparency in lending practices. Additionally, multilateral and regional financial institutions, individuals as lenders (under certain conditions), and foreign branches/subsidiaries of Indian banks are recognized lenders under the ECB guidelines, expanding the pool of potential financiers for Indian entities.

Currency: ECBs can be raised in any freely convertible currency or Indian Rupee (INR), providing flexibility in structuring financing arrangements to suit the entity's specific requirements. Borrowings may take various forms, including loans, debentures, preference shares, securitized instruments, financial lease, etc., catering to diverse financing needs and preferences.

Eligibility of Startups to Raise ECB: In a landmark move aimed at fostering innovation and entrepreneurship, the RBI, through its circular dated January 16, 2019, extended the ECB framework to startups. Authorized Dealer (AD) Category-I Banks are permitted to allow recognized startups to raise ECB under the automatic route, subject to compliance with RBI's prescribed framework. This initiative underscores the RBI's commitment to supporting the startup ecosystem and facilitating access to global funding sources for emerging ventures.

Recent Developments and Relaxations: Recognizing the evolving needs of Indian businesses and the imperative of facilitating ease of doing business, the RBI, through its circular dated July 30, 2019, provided relaxations related to end-use restrictions for ECB. Corporates can now raise ECB for working capital requirements, general corporate purposes, and repayment of rupee loans availed domestically for capital expenditure. Furthermore, non-banking financial companies (NBFCs) are permitted to on-lend ECB proceeds for specified purposes, enhancing liquidity and promoting investment activity in the economy.