The Reserve Bank of India (the “RBI”) has revised the external commercial borrowings (“ECB”) framework on a regular basis in a bid to make foreign borrowings a lucrative method of raising capital. On December 17, 2018, the RBI replaced the erstwhile regulations on ECBs and notified the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018. These regulations put in place a new and simplified framework for Indian entities to borrow monies from foreign lenders. Thereafter, on January 16, 2019, the RBI issued a circular with more details on the new ECB framework.
In our view, the new framework has significantly simplified the ECB regime by introducing uniform requirements for all ECBs, which was not the case under the erstwhile regime. Moreover, the services sector stands to benefit greatly from the new framework as they can avail short-term ECBs.
Under the automatic route (i.e., without requiring the RBI’s prior approval), a uniform limit of US$750 million has been introduced for all ECBs, thereby replacing the sector-based individual limits applicable before. As a result, all eligible borrowers can raise larger amount ECBs without requiring prior RBI approval, which will be a big time saver.
Merging of various tracks
The erstwhile Track I (which dealt with medium-term foreign currency denominated ECBs (“FC ECBs”)) and Track II (which dealt with long-term FC ECBs) have been merged into a single framework. Similarly, Indian Rupee denominated ECBs (“INR ECBs”)) and Rupee denominated bonds (popularly known as masala bonds) in the erstwhile Track III have been merged to cover all INR ECBs. Now, all FC ECBs will be governed by the same terms, and all INR ECBs will also be governed by their same terms regardless of the maturity period. This has simplified the ECB framework significantly.
A major change to the ECB regime is that all entities that are eligible to receive foreign direct investment under India’s foreign exchange regulations will now be eligible to avail both, FC ECBs and INR ECBs. Additionally, registered micro-finance entities, which were entitled to avail only INR ECBs, can now avail FC ECBs as well. As the list of eligible borrowers has been expanded to all entities eligible to receive foreign direct investment, entities in the trading and service sectors, and limited liability partnerships (“LLPs”), can also avail ECBs. This removes a major bottleneck for LLPs, who could not raise ECBs before, and puts LLPs on par with a company.
- Multilateral financial institutions, regional financial institutions (if India is a member country of that financial institution), any resident of a country who is a member of the Financial Action Task Force (FATF) or a signatory to the MOU of the International Organization for Securities Commissions (IOSCO) or similar body can lend under the ECB route.
- Individuals can grant ECBs; provided that, they are foreign equity holders of the Indian borrower. For this purpose, a foreign equity holder means a direct foreign equity holder with at least 25% shareholding in the Indian borrower, an indirect foreign equity holder with at least 51% shareholding in the Indian borrower or a group company with a common overseas parent. Angel investors, foreigners or Persons of Indian Origin who have invested in their individual capacities in Indian ventures and hold 25% of the equity of Indian companies can now lend to these companies, instead of having to always capitalize through an additional issuance of shares.
- If the ECB is in the form of bonds or debentures to be issued by an Indian borrower and listed on an overseas exchange, any individual can now subscribe to such bonds and debentures.
- Private equity and venture capital funds can lend monies without mandatorily having equity participation in the Indian borrower.
Minimum average maturity period
The revised ECB framework encourages short-term ECBs, as the minimum average maturity period will now be three (3) years for both, FCY ECBs and INR ECBs. Further, manufacturing sector companies can avail ECBs up to US$50 million or its equivalent per financial year with a minimum average maturity of one (1) year. However, ECBs from foreign equity holders for working capital or general corporate purposes or for repayment of rupee loans, will have a minimum average maturity of five (5) years.
The list of end-use restrictions largely remains unchanged. However, repayment of rupee loans, which was a permitted end-use for long-term FC ECBs, is now a prohibited end-use unless it is availed from a foreign equity holder. It is unclear whether LLPs can avail ECBs for working capital, general corporate purposes or repayment of rupee loans as these end-uses are permitted only if the ECB is availed from a foreign “equity-holder,” and technically speaking, an LLP does not have any equity holders. It only has partners. The RBI will do well to clarify this issue.
Late submission fees for delay in reporting
The reporting requirements for ECBs including the Form ECB to be filed prior to drawdown and the monthly reporting in the Form ECB 2 return remain unchanged under the new framework.
Any delay in filing Form ECB up to three (3) years from the date of drawdown will attract a late submission fee of INR50,000 (US$715) per year. For delays above three (3) years, a fee of INR100,000 (US$1,430) per year will be payable.
Any delay in filing the monthly return will entail a late submission fee of INR5,000 (US$71) if the delay is up to thirty (30) days, INR50,000 (US$715) per year if the delay is up to three (3) years or INR100,000 (US$1,430) per year if the delay is above three (3) years.
An Indian borrower who is compliant with the ECB regulations (except the reporting requirements listed above) can avail of the late submission fee benefits, without having to go through a lengthy compounding procedure for non-reporting and paying a higher penalty.
Standard operating procedure for untraceable entities
A standard operating procedure for untraceable entities that have raised ECBs has been introduced. If an entity is not responsive (by itself or through its auditors, directors or promoters) for at least two (2) quarters pursuant to six (6) or more documented communications from the authorized dealer bank (the “AD Bank”), and if the entity:
- is not found to be operative at the registered office as per the records available with the AD Bank;
- is not found to be operative during a visit by the officers of the AD Bank; or
- has not submitted a statutory auditor’s certificate for two (2) years,
it can be treated as an “untraceable entity.” In this case, the AD Bank can file the reporting forms without certification from the Indian borrower and mention that the borrower is not traceable so that the outstanding amount may be written-off by the RBI from India’s external debt liability. Further, the AD Bank must not permit any new ECB applications from such entity or permit inward remittance or debt servicing under the automatic route. Lastly, the information of the untraceable entity will be reported to the Directorate of Enforcement, RBI.
This move is aimed at identifying ECB transactions by shell companies in a timely manner, and also reducing the foreign exchange liability of the state.