Compliance On External Commercial Borrowings (ECB) For NBFC-MFI

ECB are commercial loans raised by eligible resident entities from recognised non-resident entities and should conform to parameters such as minimum maturity, permitted and non-permitted end-uses, maximum all-in-cost ceiling, etc.

Non-Banking Financial Companies – Micro Finance Institutions (NBFC-MFI) are allowed to raise funds through ECB under Track III.

TRACK III: Indian Rupee (INR) denominated ECB with minimum average maturity of 3/5 years.

1. FORMS OF RAISING ECB: permitted resident entities are allowed to borrow from recognized non-resident entities in the following forms:

S.No.	Particulars	Route
1	Loans including bank loans	Automatic and Approval route
2	Securitized instruments
3	Buyers’ credit
4	Suppliers’ credit
5	Foreign Currency Convertible Bonds
6	Financial Lease
7	Foreign Currency Exchangeable Bonds	Approval route

Foreign Currency Convertible Bonds (FCCB): The issuance of FCCB was brought under the ECB guidelines in August 2005. Issuance of FCCB shall conform to the FDI guidelines including sectoral cap. In addition to the requirements of (i) minimum maturity of 5 years, (ii) the call & put option, if any, shall not be exercisable prior to 5 years, (iii) issuance without any warrants attached, (iv) the issue related expenses not exceeding 4 per cent of issue size and in case of private placement, not exceeding 2 per cent of the issue size, etc. as required in terms of provisions contained in Regulation 21 of the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2000 read with Schedule I to the Regulations, FCCB are also subject to all the regulations which are applicable to ECB.

Foreign Currency Exchangeable Bonds (FCEB): FCEB can be issued only under the approval route and shall have minimum maturity of 5 years. The bonds are exchangeable into equity share of another company, to be called the Offered Company, in any manner, either wholly, or partly or on the basis of any equity related warrants attached to debt instruments. Issuance of FCEB shall conform to the provisions contained in Regulation 21 of the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2000 read with Schedule IV to the Regulations which contain eligibilities in respect of the issuer, offered company, subscriber, permitted end-uses, etc. The all-in-cost of FCEB should be within the ceiling specified by RBI for ECB.

2. MINIMUM AVERAGE MATURITY PERIOD:

•         3 years for ECB up to USD 50 million or its equivalent.
•         5 years for ECB beyond USD 50 million or its equivalent.
•         5 years for FCCB/ FCEB irrespective of the amount of borrowing. The call and put option, if any, for FCCB shall not be exercisable prior to 5 years.

3. RECOGNISED LENDERS / INVESTORS: For NBFC-MFI, other eligible MFI, not for profit companies and NGOs, ECB can also be availed from –

1. Overseas organisations: Overseas Organizations proposing to lend ECB would have to furnish to the AD Bank of the borrower a certificate of due diligence from an overseas bank, which, in turn, is subject to regulation of host-country regulators and such host country adheres to the FATF guidelines on AML / combating the financing of terrorism (CFT). The certificate of due diligence should comprise the following:(i)   that the lender maintains an account with the bank at least for a period of two years,(ii) that the lending entity is organised as per the local laws and held in good esteem by the business/local community, and(iii)There is no criminal action pending against it.
2. Individuals: Individual lender has to obtain a certificate of due diligence from an overseas bank indicating that the lender maintains an account with the bank for at least a period of two years. Other evidence /documents such as audited statement of account and income tax return, which the overseas lender may furnish, need to be certified and forwarded by the overseas bank. Individual lenders from countries which do not adhere to FATF guidelines on AML / CFT are not eligible to extend ECB.

4. ALL IN COST (AIC) REQUIREMENT: The all-in-cost should be in line with the market conditions.

5. END USE OF ECB: NBFCs can use ECB proceeds only for:

NBFCs-MFI, other eligible MFIs, NGOs and not for profit companies registered under the Companies Act, 1956/2013 can raise ECB only for on-lending to self-help groups or for microcredit or for bonafide micro finance activity including capacity building.

6. INDIVIDUAL LIMITS FOR RAISING ECB: The individual limits refer to the amount of ECB which can be raised in a financial year under the automatic route by entities engaged in micro finance activities.

• Up to USD 100 million or equivalent – Automatic Route
• Beyond USD 100 million or equivalent – Approval Route

For computation of individual limits, exchange rate prevailing on the date of agreement should be taken into account.

For ECB raised directly through Equity Holder: aforesaid individual ECB limits will also subject to ECB liability

ECB Liability of Borrower towards Foreign Equity Holder

Automatic Route                                           Approval Route

        Up to 4 times the equity contributed            Up to 7 times the equity contributed

However, this ratio will not be applicable if total of all ECB raised by an entity is up to USD million or equivalent.

ECB liability: equity ratio, the paid-up capital, free reserves (including the share premium received in foreign currency) as per the latest audited balance sheet can be reckoned for calculating the ‘equity’ of the foreign equity holder. Where there are more than one foreign equity holders in the borrowing company, the portion of the share premium in foreign currency brought in by the lender(s) concerned shall only be considered for calculating the ratio.

7. PROCEDURE OF RAISING ECB:

       A. For Approval Route Cases:

i.                    Application to RBI in FORM ECB through AD Category I Bank

ii.                  ECB proposals received in the RBI above certain threshold limit (refixed from time      to time) would be placed before the Empowered Committee set up by the RBI.

iii.               The Committee will have external as well as internal members and the RBI will take a final decision in the cases taking into account recommendation of the Committee.

       B. For Automatic Route Cases:

                  i.                 Application to AD Bank in FORM 83

8. CURRENCY OF BORROWING: In case of Rupee denominated ECB, the non-resident lender, other than foreign equity holders, should mobilise Indian Rupees through swaps/outright sale undertaken through an AD Category I bank in India.

Change of currency of ECB from one convertible foreign currency to any other convertible foreign currency as well as to INR is freely permitted. Change of currency from INR to any foreign currency is, however, not permitted.

9. REPORTING REQUIRMENTS:

      LOAN REGISTRATION NUMBER (LRN): Any draw-down in respect of an ECB as well as payment of any fees / charges for raising an ECB should happen only after obtaining the LRN from RBI. To obtain the LRN, borrowers are required to submit duly certified FORM 83, which also contains terms and conditions of the ECB, in duplicate to the designated AD Category I bank. In turn, the AD Category I bank will forward one copy to the Director, Balance of Payments Statistics Division, Department of Statistics and Information Management (DSIM), Reserve Bank of India, Bandra-Kurla Complex, Mumbai – 400 051, 22Contact numbers 022-26572513 and 022-26573612.

Copies of loan agreement for raising ECB are not required to be submitted to the Reserve Bank.

    CHANGES IN TERMS AND CONDITIONS OF ECB: Permitted changes in ECB parameters should be reported to the Department of Statistics and Information Management (DSIM) through REVISED FORM 83 at the earliest, in any case not later than 7 days from the changes effected. While submitting revised Form 83 the changes should be specifically mentioned in the communication.

     REPORTING OF ACTUAL TRANSACTIONS: The borrowers are required to report actual ECB transactions through ECB 2 Return through the AD Category I bank on monthly basis so as to reach DSIM within seven working days from the close of month to which it relates. Changes, if any, in ECB parameters should also be incorporated in ECB 2 Return.

     REPORTING ON ACCOUNT OF CONVERSION OF ECB INTO EQUITY: In case of partial or full conversion of ECB into equity, the reporting to the RBI will be as under:

i.                    For partial conversion: the converted portion is to be reported to the concerned Regional Office of the Foreign Exchange Department of RBI in Form FC-GPR prescribed for reporting of FDI flows, while monthly reporting to DSIM in ECB 2 Return will be with suitable remarks "ECB partially converted to equity".

ii.                  For full conversion: the entire portion is to be reported in Form FC-GPR, while reporting to DSIM in ECB 2 Return should be done with remarks “ECB fully converted to equity”. Subsequent filing of ECB 2 Return is not required.

iii.                For conversion of ECB into equity in phases: reporting through ECB 2 Return will also be in phases.

10. SECURITY FOR RAISING ECB:

STEP 1: AD Category I banks are permitted to allow creation of charge on immovable assets, movable assets, financial securities and issue of corporate and/ or personal guarantees in favour of overseas lender / security trustee, to secure the ECB to be raised / raised by the borrower, subject to satisfying themselves that:

I.                    the underlying ECB is in compliance with the extant ECB guidelines,

II.                  there exists a security clause in the Loan Agreement requiring the ECB borrower to create charge, in favour of overseas lender / security trustee, on immovable assets / movable assets / financial securities / issuance of corporate and / or personal guarantee, and

III.                No objection certificate, as applicable, from the existing lenders in India has been obtained

STEP 2: Once aforesaid stipulations are met, the AD Category I bank may permit creation of charge on immovable assets, movable assets, financial securities and issue of corporate and / or personal guarantees, during the currency of the ECB with security co-terminating with underlying ECB, subject to the following:

CHARGE ON IMMOVABLE ASSETS	CHARGE ON MOVABLE ASSETS	CHANRGE ON FINANCIAL SECURITIES	CHARGE ON CORPORATE OR PERSONAL GUARANTEE
Such security shall be subject to provisions contained in the Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2000.	In the event of enforcement/ invocation of the charge, the claim of the lender, whether the lender takes over the movable asset or otherwise, will be restricted to the outstanding claim against the ECB. Encumbered movable assets may also be taken out of the country subject to getting ‘No Objection Certificate’ from domestic lender/s, if any.	Pledge of shares of the borrowing company held by the promoters as well as in domestic associate companies of the borrower is permitted. Pledge on other financial securities, viz. bonds and debentures, Government Securities, Government Savings Certificates, deposit receipts of securities and units of the Unit Trust of India or of any mutual funds, standing in the name of ECB borrower/promoter, is also permitted.	A copy of Board Resolution for the issue of corporate guarantee for the company issuing such guarantee, specifying name of the officials authorised to execute such guarantees on behalf of the company or in individual capacity should be obtained
The permission should not be construed as a permission to acquire immovable asset (property) in India, by the overseas lender/ security trustee.		security interest over all current and future loan assets and all current assets including cash and cash equivalents, including Rupee accounts of the borrower with ADs in India, standing in the name of the borrower/promoter, can be used as security for ECB. The Rupee accounts of the borrower/promoter can also be in the form of escrow arrangement or debt service reserve account	Specific requests from individuals to issue personal guarantee indicating details of the ECB should be obtained.
In the event of enforcement / invocation of the charge, the immovable asset/ property will have to be sold only to a person resident in India and the sale proceeds shall be repatriated to Liquidate the outstanding ECB.		In case of invocation of pledge, transfer of financial securities shall be in accordance with the extant FDI/FII policy including provisions relating to sectoral cap and pricing as applicable read with the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000.	Such security shall be subject to provisions contained in the Foreign Exchange Management (Guarantees) Regulations, 2000.
			ECB can be credit enhanced / guaranteed / insured by overseas party/ parties only if it/ they fulfil/s the criteria of recognised lender under extant ECB guidelines.

 Issuance of Guarantee, etc. by Indian Banks and Financial Institutions: Issuance of guarantee, standby letter of credit, letter of undertaking or letter of comfort by Indian banks, All India Financial Institutions and NBFCs relating to ECB is not permitted. Further, financial intermediaries (viz. Indian banks, All India Financial Institutions, or NBFCs) shall not invest in FCCBs in any manner whatsoever.

11. DEBT EQUITY RATIO: The borrowing entities will be governed by the guidelines on debt equity ratio issued, if any, by the sectoral or prudential regulator concerned.

12. PARKING OF ECB PROCEEDS

PARKING OF ECB PROCEEDS ABROAD

PARKING OF ECB PROCEEDS DOMESTICALLY

ECB proceeds meant only for foreign currency expenditure can be parked abroad pending utilization. Till utilisation, these funds can be invested in the following liquid assets (a) deposits or Certificate of Deposit or other products offered by banks rated not less than AA (-) by Standard and Poor/ Fitch IBCA or Aa3 by Moody’s; (b) Treasury bills and other monetary instruments of one year maturity having minimum rating as indicated above and (c) deposits with overseas branches/ subsidiaries of Indian banks abroad.

ECB proceeds meant for Rupee expenditure should be repatriated immediately for credit to their Rupee accounts with AD Category I banks in India. ECB borrowers are also allowed to park ECB proceeds in term deposits with AD Category I banks in India for a maximum period of 12 months. These term deposits should be kept in unencumbered position

13. CONVERSION OF ECB INTO EQUITY:

Conversion of ECBs, including those which are matured but unpaid, into equity is permitted subject to the following conditions:

i.                    The activity of the borrowing company is covered under the automatic route for Foreign Direct Investment (FDI) or approval from the Foreign Investment Promotion Board (FIPB), wherever applicable, for foreign equity participation has been obtained as per the extant FDI policy;

ii.                  The conversion, which should be with the lender’s consent and without any additional cost, will not result in breach of applicable sector cap on the foreign equity holding;

iii.                Applicable pricing guidelines for shares are complied with;

iv.                 Reporting requirements as required to be fulfilled;

v.                   If the borrower concerned has availed of other credit facilities from the Indian banking system, including overseas branches/subsidiaries, the applicable prudential guidelines issued by the Department of Banking Regulation of RBI, including guidelines on restructuring are complied with; and

vi.                 Consent of other lenders, if any, to the same borrower is available or at least information regarding conversions is exchanged with other lenders of the borrower.

Exchange rate for conversion of ECB dues into equity: For conversion of ECB dues into equity, the exchange rate prevailing on the date of the agreement between the parties concerned for such conversion or any lesser rate can be applied with a mutual agreement with the ECB lender. It may be noted that the fair value of the equity shares to be issued shall be worked out with reference to the date of conversion only.

14. REFINANCING OF ECB: Refinancing of existing ECB with fresh ECB is permitted provided the fresh ECB is raised at a lower all-in-cost and residual maturity is not reduced. Indian banks are not permitted to participate in refinancing of existing ECB.

References:

RBI Master Circular

Contact:

CS Divyanshu Bansal

Email ID: divyanshubansal401@gmail.com

Ph: 9958381905