EXTERNAL COMMERCIAL

BORROWINGS (ECB)
RELEASE OF FOREIGN EXCHANGE Paragraph I
(A) and (ii) Approval Route outlined in
BY AUTHORISED DEALERS paragraph I
RELEASE OF FOREIGN EXCHANGE (B). (d) ECB for investment in real
BY AUTHORISED DEALERS sector –industrial sector, especially
A.1 General infrastructure sector-in India, are under
(a) External Commercial Borrowings (ECB) Automatic Route, i.e. Do not require
refer to commercial loans [in the form RBI/Government approval. In case of
of bank loans, buyers’ credit, suppliers’ doubt as regards eligibility to access
credit, securitized instruments (e.g. Automatic Route, applicants may take recourse
floating rate notes and fixed rate bonds)] to the Approval Route.
availed from non-resident lenders with I. (A) AUTOMATIC ROUTE
minimum average maturity of 3 years. (i) Eligible borrowers
(b) Foreign Currency Convertible bonds (a) Corporate (registered under the
(FCCBs) mean a bond issued by an Indian companies Act except financial
company expressed in foreign currency, intermediaries (such as banks, financial
and the principal and interest in respect institutions (FIs), housing finance
of which is payable in foreign currency. companies and NBFCs) are eligible to
Further the bonds are required to be raise ECB. Individuals, Trusts and Non-
issued in accordance with the scheme viz., Profit making Organizations are not
“Issue of Foreign Currency convertible eligible to raise ECB.
bonds and Ordinary Shares (Through (b) Units in Special Economic Zones (SEZ)
Depositary Receipt Mechanism) Scheme, are allowed to raise ECB for their own
1993”, and subscribed by a non-resident requirement. However, they cannot
in foreign currency and convertible into transfer or on-lend ECB funds to sister
ordinary shares of the issuing company concerns or any unit in the Domestic
in any manner, either in whole, or in Tariff Area.
part, on the basis of any equity related (ii) Recognized lenders
warrants attached to debt instruments. Borrowers can raise ECB from
The policy for ECB is also applicable internationally recognized sources such as (i)
to FCCBs. The issue of FCCBs is also international banks, (ii) international capital
required to adhere to the provisions of markets, (iii) multilateral financial institutions
Notification FEMA No. 120/RB-2004 (such as IFC, ADB, CDC, etc.,), (iv) export
dated July 7, 2004 as amended from time credit agencies, (v) suppliers of
to time. equipment,(vi) foreign collaborators and (vii)
(c) ECB can be accessed under two routes, foreign equity
viz., (i) Automatic Route outlined in
holders (other than erstwhile OCBs). A “foreign The all-in-cost ceilings for ECB are
equity holder’ to be eligible as “recognized reviewed from time to time. The
lender’ under the automatic route would require following ceilings are valid till reviewed:
minimum holding of equity in the borrower Average Maturity All-in-cost Ceilings
company as set out below: Period over 6 month LIBOR*
(i) For ECB up to USD 5 million – minimum Three years and upto 200 basis points
equity of 25 per cent held directly by the lender. five years
(ii) For ECB more than USD 5 million – More than five years 350 basis points * for the
minimum equity of 25 per cent held directly by respective currency of borrowing or applicable
the lender and debt-equity ratio not exceeding benchmark
4:1 (i.e. the proposed ECB not exceeding four (v) End-use
times the direct foreign equity holding). (a) Investment e.g. import of capital goods (as
(iii) Amount and Maturity classified by DGFT in the Foreign Trade
(a) The maximum amount of ECB which Policy), by new or existing production
can be raised by a corporate is USD 500 units, in real sector- industrial sector
million or equivalent during a financial including small and medium enterprises
year. (SME) and infrastructure sector – in
(b) ECB up to USD 20 million or equivalent India. Infrastructure sector is defined
in a financial year with minimum average as (i) power, (ii) telecommunication, (iii)
maturity of three years. railways, (iv) road including bridges, (v)
(c) ECB above USD 20 million and upto sea port and airport, (vi) industrial parks,
USD 500 million or equivalent with and (vii) urban infrastructure (water
a minimum average maturity average supply, sanitation and sewage projects);
maturity of five years. (b) Overseas direct investment in Joint
(d) ECB upto USD 20 million can have call Ventures (JV) / Wholly Owned
/ put option provided the minimum Subsidiaries (WOS) subject to the existing
average maturity of three years is guidelines on Indian Direct Investment
complied with before exercising call / in JV/WOS abroad.
put option. vi) Ends-users not permitted
(iv). All-in-cost ceilings (a) Utilization of ECB proceeds is not
All-in-cost includes rate of interest, other fees permitted for on-lending or investment
and expenses in foreign currency except in capital market or acquiring a company
commitment fee, pre-payment fee, and fees (or a part thereof) in India by a
payable in Indian Rupees. Moreover, the corporate,
payment of withholding tax in Indian Rupees (b) Utilization of ECB proceeds is not
is excluded for calculating the all-in-cost. permitted in real estate,
(c) Utilization of ECB proceeds is not
permitted for working capital, general
Corporate purpose and repayment of existing x) Prepayment
Rupee loans. Prepayment of ECB upto USD 500 million
vii) Guarantees may be allowed by AD banks without prior
Issuance of guarantee, standby letter of approval of RBI subject to compliance with the
credit, letter of undertaking or letter of stipulated minimum average maturity period as
comfort by banks, Financial Institutions and applicable to the loan.
Non-Banking Financial Companies (NBFCs) xi) Refinancing of an existing ECB
relating to ECB is not permitted. The existing ECB may be refinanced by
viii) Security raising a fresh ECB subject to the condition
The choice of security to be provided to the that the fresh ECB is raised at a lower all-in-
lender / supplier is left to the borrower. cost and the outstanding maturity of the
However, creation of charge over immovable original ECB is maintained.
assets and financial securities, such as shares, xii) Debt Servicing
in favor of the overseas lender is subject to The designated Authorised Dealer (AD bank)
Regulation 8 of Notification No. FEMA has the general permission to make
21/RB-2000 dated May 3, 2000 and Regulation remittances of installments of principal,
3 of Notification No. FEMA 20/RB-2000 dated interest and other charges in conformity with
May 3, 2000 respectively, as amended from ECB guidelines issued by Government /
time to time. Reserve Bank of India from time to time.
ix) Parking of ECB proceed overseas xiii) Procedure
ECB raised for foreign currency Borrowers may enter into loan agreement
expenditure for permissible end-uses shall be complying with ECB guidelines with
parked overseas and not to be remitted to India. recognized lender for raising ECB under
ECB proceeds parked overseas can be invested Automatic Route without prior approval of RBI.
in the following liquid assets (a) deposits or The borrower must obtain a Loan Registration
Certificate of Deposit or other products Number (LRN) from the Reserve Bank of India
offered by banks rated not less than AA (-) by before drawing down the ECB. The procedure for
Standard and Poor / Fitch IBCA or Aa3 by obtaining LRN is detailed in para II (i) (b).
Moody’s; (b) deposits with overseas branch of
an Authorised Dealer in India; and (c) Treasury I. (B) APPROVAL ROUTE i). Eligible
bills and other monetary instruments of one year Borrowers
maturity having minimum rating as indicated
The following types of proposals for ECB are
above. The funds should be invested in such a
covered under the Approval Route
way that the investments can be liquidated as
and when funds are required by the borrower
in India.
a). Financial institutions dealing exclusively f). Multi-State Co-operate Societies engaged in
with infrastructure or export finance such as manufacturing activity satisfying the following
IDFC, IL&FS, Power Finance Corporation, criteria (i) the Co-operative Society is
Power Trading Corporation, IRCON and EXIM financially solvent and (ii) the Co-operative
Bank are considered on a case by case basis. Society submits its up-to-date audited balance
b). Banks and financial institutions which had sheet.
participated in the textile or steel sector g). Corporate engaged in industrial sector and
restructuring package as approved by the infrastructure sector in India can avail ECB for
Government are also permitted to the extent of Rupee expenditure for permissible end-uses.
their investment in the package and assessment h). Non-Government Organizations (NGOs)
by Reserve Bank based on prudential norms. engaged in micro finance activities are eligible
Any ECB availed for this purpose so far will be to avail ECB for Rupee expenditure for
deducted from their entitlement. permissible end-uses. Such NGO (i) should
c). ECB with minimum average maturity of 5 have a satisfactory borrowing relationship for
years by Non-Banking Financial Companies at least 3 years with a scheduled commercial
(NBFCs) from multilateral financial bank authorised to deal in foreign exchange and
institutions, reputable regional financial (ii) would require a certificate of due diligence
institution, official export credit agencies and on ‘ft and proper’ status of the board /
international banks to finance import of committee of management of the borrowing
infrastructure equipment for leasing to entity from designated AD Bank.
infrastructure projects. i). Corporate in services sector viz. hotels,
d). Foreign Currency Convertible Bonds hospitals and software companies can avail
(FCCBs) by housing finance companies ECB for import of capital goods.
satisfying the following minimum criteria: (i) j). Cases falling outside the purview of the
the minimum net worth of the financial automatic route limits and maturity period
intermediary during the previous three years indicated at paragraph I A (iii).
shall not be less than Rs.500 cores, (ii) a listing ii). Recognized Lenders
on the BSE or NSE, (iii) minimum size of (a) Borrowers can raise ECB from
FCCB is USD 100 million, (iv) the applicant internationally recognized sources such
should submit the purpose / plan of utilization as (i) international banks, (ii) international
of funds. capital markets, (iii) multilateral financial
e). Special Purpose Vehicles, or any other institutions (such as IFC, ADB, CDC,
entity notified by the Reserve Bank, set upto etc.), (iv) export credit agencies, (v)
finance infrastructure companies / projects suppliers’ of equipment, (vi) foreign
exclusively, will be treated as Financial collaborators and (vii) foreign equity
Institutions and ECB by such entities will be holders (other than erstwhile OCBs)
considered under the Approval Route. (b) From ‘foreign equity holder’ where the
minimum equity held directly by the
Foreign equity lender is 25 per cent but debt- iii). Amount and Maturity
equity ratio exceeds 4:1 (i.e. the proposed (a) Corporate can avail of ECB of an
ECB exceeds four times the direct foreign additional amount of USD 250 million
equity holding). (c) Overseas organizations with average maturity of more than 10
and individuals complying with following years under the approval route, over and
safeguards may provide ECB to Non- above the existing limit of USD 500
Government Organizations (NGOs) engaged in million under the automatic route, during
micro finance activities. a financial year. Other ECB criteria such
(i) Overseas Organizations proposing to lend as end-use, all-in-cost ceiling, recognized
ECB would have to furnish a Certificate of lender, etc., need to be complied with.
due diligence from an overseas bank which in Prepayment and call / put options,
turn is subject to regulation of host-country however, would not be permissible for
regulator and adheres to Financial Action Task such ECB upto a period of 10 years.
Force (FATF) guidelines to the AD bank of the (b) Corporate in infrastructure sector {as
borrower. The certificate of due diligence defined in paragraph 1(A) (v) (a)} can
should comprise the following (i) that the avail ECB up to USD 100 million and
lender maintains an account with the bank for at Corporate in industrial sector can avail
least a period of two years, (ii) that the lending ECB up to USD 50 million for Rupee
entity is organized as per the local law and held capital expenditure for permissible end-
in good esteem by the business / local uses within the overall limit of USD 500
community and (iii) that there is no criminal million per borrower, per financial year,
action pending against it. (ii) Individual under Automatic Route.
Lender has to obtain a certificate of due (c) NGOs engaged in micro finance activities
diligence from an overseas bank indicating that can raise ECB up to USD 5 million
the lender maintains an account with the bank during a financial year. Designated AD
for at least a period of two years. Other bank has to ensure that at the time of
evidence / documents such as audited statement drawdown the forex exposure of the
of account and income tax return which the borrower is hedged.
overseas lender may furnish need to be (d) Corporate in the services sector viz.
certified and forwarded by the overseas bank. hotels, hospitals and software companies
Individual lenders from countries wherein can avail ECB up to USD 100 million,
banks are not required to adhere to Know Your per borrower, per financial year, for
Customer (KYC) guidelines are not eligible to import of capital goods.
extend ECB. iv). All-in-cost ceilings
All-in-cost includes rate of interest, other fees
and expenses in foreign currency except
commitment fee, pre-payment fee, and fee
payable in Indian Rupees. Moreover, the
payment of withholding tax in Indian Rupees
is excluded for calculating the all-in-cost.
The current all-in-cost ceilings are as under: The vi). End-uses not permitted
following ceilings are valid till reviewed: (a) Utilization of ECB proceeds is not
Average Maturity All-in-cost Ceilings permitted for on-lending or investment
Period over 6 month LIBOR* in capital market or acquiring a company
Three years and upto 200 basis points (or a part thereof) in India by a corporate
five years except banks and financial institutions
More than five years 350 basis points eligible under paragraph I(B)(i)(A) and
* For the respective currency of borrowing or I(b)(i)(b),
applicable benchmark
(b) Utilization of ECB proceeds is not
v). End-Use
permitted in real estate,
(a) Investment [such as import of capital
(c) Utilization of ECB proceeds is not
goods (as classified by DGFT in the
permitted for working capital, general
Foreign Trade Policy), implementation
corporate purpose and repayment of
of new projects, modernization /
existing Rupee loans
expansion of existing production
vii). Guarantee
units] in real sector – industrial sector
Issuance of guarantee standby letter of credit,
including small and medium enterprises
letter of undertaking or letter of comfort by
(SME) and infrastructure sector – in
banks, financial institutions and NBFCs
India. Infrastructure sector is defined
relating to ECB is not normally permitted
as (i) power, (ii) telecommunication, (iii)
Applications for providing guarantee /
railways, (iv) road including bridges, (v)
standby letter of credit or letter of comfort by
sea port and airport, (vi) industrial parks
banks, financial institutions relating to ECB in
and (vii) urban infrastructure (water
the case of SME will be considers on merit
supply, sanitation and sewage projects);
subject to prudential norms. With a view to
(b) Overseas direct investment in Joint
facilitating capacity expansion and
Ventures (JV) / Wholly Owned
technological up gradation in Indian Textile
Subsidiaries (WOS) subject to the existing
industry issue of guarantees, standby letters
guidelines on Indian Direct investment
of credit, letters of undertaking and letters
in JV/WOS abroad.
of comfort by banks in respect of ECB by
(c) The first stage acquisition of shares
textile companies for modernization or
in the disinvestment process and also
expansion of textile units will be
in the mandatory second stage offer
considered under the Approval Route subject
to the public under the Government’s
to prudential norms.
disinvestment programme of PSU
viii). Security
shares.
The choice of security to be provided to the
(d) Import of capital goods by Corporate in
lender / supplier is left to the borrower.
the service sector, viz., hotels, hospitals
However, creation of charge over immovable
and software companies.
assets and financial
Securities, such as shares, in favour of the xi). Refinancing of an existing ECB
overseas lender are subject to Regulation 8 of Existing ECB may be refinanced by raising a fresh
Notification No. FEMA 21/RB-2000 dated ECB subject to the condition that the fresh ECB
May 3, 2000 and Regulation 3 of Notification is raised at a lower all-in-cost and the
No. FEMA 20/RB-2000 dated May 3, 2000 as outstanding maturity of the original ECB is
amended from time to time, respectively. maintained.
ix). Parking of ECB proceeds overseas xii). Debt Servicing
ECB raised for foreign currency The designated AD bank has general
expenditure for permissible end-uses permission to make remittances of
shall be parked overseas and not remitted to installments of principal, interest and other
India and ECB raised for Rupee expenditure charges in conformity with ECB guidelines
for permissible end-uses shall be parked issued by Government / Reserve Bank of
overseas until actual requirement in India. India from time to time.
ECB proceeds parked overseas can be xiii). Procedure
invested in the following liquid assets (a) Applicants are required to submit an
deposits or certificate of deposits or other application in form ECB through designated
products offered by banks rated not less than AA(- AD bank to the Chief General Manager-
) by Standard and Poor / Fitch IBCA or Aa3 in-Charge, Foreign Exchange Department,
by Moody’s; (b) deposits with overseas branch Reserve Bank of India, Central Office, Central
of an AD bank in India; and (c) Treasury bills Office, External Commercial Borrowings
and other monetary instruments of one year Division, Mumbai – 400 001, along with
maturity having minimum rating as indicated necessary documents.
above. The funds should be invested in such a xiv). Empowered Committee
way that the investments can be liquidated as Reserve Bank has set up an Empowered
and when funds are required by the borrower Committee to consider proposals coming under
in India.
the Approval Route.
x). Prepayment
II. REPORTING ARRANGEMENTS
(a) Prepayment of ECB upto USD 500
AND DISSEMINATION OF
million may be allowed by AD bank
INFORMATION
without prior approval of Reserve Bank
subject to compliance with the stipulated i). Reporting Arrangements
minimum average maturity period as a). With a view to simplify the procedure,
submission of copy of loan agreement is
applicable to the loan.
(b) Pre-payment of ECB for amounts dispensed with.
exceeding USD 500 million would be b). For allotment of loan registration
considered by the Reserve Bank under
the Approval Route.
Number, borrowers are required to submit Domestic rupees denominated structured
Form 83, in duplicate, certified by the Company obligations are permitted to be credit enhanced
Secretary (CS) or Chartered Accountant (CA) to by international banks / international financial
the designated AD bank. One copy is to be institutions / joint venture partners. Such
forwarded by the designated AD bank to the applications will be considered under the
Director, Balance of Payments Statistics Approval Route.
Division, Department of Statistics and IV. COMPLIANCE WITH ECB
Information System (DSIM), Reserve Bank of GUIDELINES
India, Bandra-Kurla Complex, Mumbai – 400 The primary responsibility to ensure that ECB
051 [Note: copies of loan agreement, offer raised / utilized are in conformity with the ECB
documents for FCCB are not required to be guidelines and the Reserve Bank regulations /
submitted with Form 83]. directions is that of the concerned borrower
c). The borrower can draw-down the loan only and any contravention of the ECB guidelines
after obtaining the loan registration number will be viewed seriously and will invite penal
from DSIM, Reserve Bank of India. action under FEMA 1999 ( cf. A.P. (DIR
d). Borrowers are required to submit ECB-2 Series) Circular No.31 dates February 1, 2005).
Return certified by the designated AD bank on The designated AD bank is also required to
monthly basis so as to reach DSIM, RBI within ensure that raising / utilization of ECB is in
seven working days from the close of month to compliance with ECB guidelines at the time of
which it relates. certification.
[Note: All previous returns relating to ECB viz. ECB 3 – V. CONVERSION OF ECB INTO
ECB 6 have been discontinued with effect from January
31, 2004]. EQUITY
ii). Dissemination of Information (i). Conversion of ECB into equity is
For providing greater transparency, permitted subject to the following
information with regard to the name of the conditions:
borrower, amount, purpose and maturity of (a) The activity of the company is covered
ECB under both Automatic Route and under the Automatic Route for Foreign
Approval Route are put on the Reserve Bank Direct investment or Government
website on a monthly basis with a lag of one approval for foreign equity participation
month to which it relates. has been obtained by the company,
III. STRUCTURED OBLIGATIONS (b) The foreign equity holding after such
In order to enable Corporate to raise resources conversion of debt into equity is within
domestically and hedge exchange rate risks, the sectoral cap, if any,
(c) Pricing of shares is as per SEBI and
erstwhile CCI guidelines / regulations in
the case listed / unlisted companies as
the case may be.
(ii). Conversion of ECB may be reported VII. ECB UNDER THE ERSTWHILE
to the Reserve Bank as follows: USD 5 MILLION SCHEME
(a) Borrowers are required to report full Designated AD banks are permitted to approve
conversion of outstanding ECB into elongation of repayment period for loans
equity in the form FC-GPR to the raised under the erstwhile USD 5 Million
concerned Regional Office of the Scheme, provided there is a consent letter from
Reserve Bank as well as in form ECB-2 the overseas lender for such reschedulement
submitted to the DSIM, RBI within seven without any additional cost. Such approval with
working days from the close of month to existing and revised repayment schedule along
which it relates. The words “ECB wholly with the Loan Key / Loan Registration Number
converted to equity” should be clearly should be initially communicated to the Chief
indicated on top of the ECB-2 form. General Manager-in-Charge, Foreign Exchange
Once reported, fling of ECB-2 in the Department, Reserve Bank of India, Central
subsequent months is not necessary. Office, ECB Division, and Mumbai within
(b) In case of partial conversion of seven days of approval and subsequently in ECB
outstanding ECB into equity, borrowers – 2.
are required to report the converted TRADE CREDITS FOR IMPORTS
portion in form FC-GPR to the
concerned Regional Office as well as INTO INDIA
in form ECB-2 clearly differentiating ‘Trade Credits’ (TC) refer to credits extended
the converted portion from the for imports directly by the overseas supplier,
unconverted portion. The words “ECB bank and financial institution for maturity of
partially converted to equity” should be less than three years. Depending on the source
indicated on top of the ECB-2 form. of finance, such trade credits include suppliers’
In subsequent months, the outstanding credit or buyers’ credit. Suppliers credit relates
portion of ECB should be reported in to credit for imports in to India extended by the
ECB-2 form to DSIM. overseas supplier, while buyers’ credit refers
VI. CRYSTALLISATION OF ECB to loans for payment of imports in to India
AD banks design to crystallize their foreign arranged by the importer from a bank or
exchange liability arising out of guarantees financial institution outside India for maturity
provided for ECB raised by corporate in India of less than three years. It may be noted that
into Rupees, may make an application to the buyers’ credit and suppliers’ credit for three
Chief General Manager-in-Charge, Foreign years and above come under the category of
Exchange Department, External Commercial External Commercial Borrowings (ECB) which
Borrowing Division, Reserve Bank of India, are governed by ECB guidelines.
Central Office, Mumbai, giving full details viz., a). Amount and Maturity
name of the borrower, amount raised, maturity, AD banks are permitted to approve trade credits
circumstances leading to invocation of guarantee / for imports into India up to USD 20 million
letter of comfort, date of default, its impact on per import transaction for imports permissible
the liabilities of the overseas branch of the AD under the current Foreign Trade Policy of the
concerned and other relevant factors.
DGFT with a maturity period up to one year prudential guidelines issued by Reserve Bank
(from the date of shipment). For import of from time to time. The period of such Letters
capital goods as classified by DGFT, AD banks of credit / guidelines / Lou / Loc has to be
may approve trade credits up to USD 20 million co-terminus with the period of credit,
per import transaction with a maturity period reckoned from the date of shipment.
of more than one year and less than three years. d). Reporting Arrangements
No roll-over / extension will be permitted AD banks are required to furnish details of
beyond the permissible period. approvals, drawl, utilization, and repayment
AD banks shall not approve trade credit exceeding of trade credit granted by all its branches, in a
USD 20 million per import transaction. consolidated statement, during the month, in
b). All-in-cost Ceilings form TC from April 2004 onwards to the
The current all-in-cost ceilings are as under. Director, Division of International Finance,
Average Maturity All-in-cost Ceilings Department of Economic Analysis and
Period over 6 month LIBOR* Policy, Reserve Bank of India, Central Office
Up to one year 75 basis points More than Building, 8th Floor, For, Mumbai – 400 001
one year but 125 basis points less than three years (and in MS-Excel flee through email to
*For the respective currency of credit or applicable deapdif@rbi.org.in) so as to reach not later than
benchmark. 10th of the following month. Each trade credit
The all-in-cost ceilings include arranger fee, may be given a unique identification number
upfront fee, management fee, handling / by the AD bank.
processing charges, out of pocket and legal AD banks are required to furnish data on
expenses, if any. issuance of LCs / guarantees / Lou / Loc by all
c). Guarantee its branches, in a consolidated statement, at
AD Bank are permitted to issue Letters of quarterly intervals to the Chief General
Credit / guarantees / Letter of Manager-in-Charge, Foreign Exchange
Undertaking (Lou) / Letter of Comfort (Loc) in Department, ECB Division, Reserve Bank
favor of overseas supplier, bank and financial of India, Central Office Building, Fort,
institution, upto USD 20 million per transaction Mumbai – 400 001 (and in MS-Excel flee
for a period up to one year for import of all non- through email to fedcoecbd@rbi.org.in)
capital goods permissible under Foreign Trade from December 2004 onwards so as to reach
Policy (except gold) and up to three years for the department not later than 10th of the
import of capital goods, subject to following month.