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External Commercial Borrowings: A Brief Analysis Of The New Framework

Karan Upadhyay
21 Feb 2021 4:38 AM GMT
External Commercial Borrowings: A Brief Analysis Of The New Framework

As part of development tactics, India has always encouraged all kinds of capital inflow. So, what is ECB? Extra Commercial Borrowings are in simple terms, a type of loan which is generally availed by an Indian entity from a non-resident for commercial purposes. Such loans include but are not limited to, commercial bank loans, bonds & securities, fixed rate bonds, floating rate notes...

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As part of development tactics, India has always encouraged all kinds of capital inflow. So, what is ECB? Extra Commercial Borrowings are in simple terms, a type of loan which is generally availed by an Indian entity from a non-resident for commercial purposes. Such loans include but are not limited to, commercial bank loans, bonds & securities, fixed rate bonds, floating rate notes etc. RBI regulates the norms governing such loans/debts/borrowings under FEMA Regulations. However, a new ECB Framework was introduced the minimum period of maturity for an ECB is 3 years. The advantages of having an ECB are stated as following:

  • ECBs help the private sector companies is borrowing large sums of money.
  • The funds received from ECBs have a long term of maturity.
  • In comparison to domestic borrowings/debts, the rate of interest for an ECB is low.

However, there is a limit to the amount which can be withdrawn as an ECB. This amount, at present is $40 billion.


Enlisted hereinunder is a list of eligible borrowers:

  • Corporate Companies, including the hotel industry, hospital, IT firms and other corporates which have been incorporated under the Companies Act, 2013. However, trusts and Non-Profit Organizations are not eligible to claim an ECB.
  • NGOs which indulge in micro finance are also allowed to take external commercial borrowings.
  • Companies working in Special Economic Zones.
  • Oil Marketing Companies.
  • SIDBI is also a legitimate borrower.
  • All such entities which are eligible for FDIs.
  • All Limited Liability Partnerships.
  • Venture Capital Funds.

Moving on to the lenders, the following list mentions a few key players who lend money as ECB:

  • Any member of the Financial Action Task Force (FATF).
  • International Organization of Securities Commissions.
  • Multilateral and Regional FIs.
  • Foreign Equity Holders.
  • Foreign branches of Indian Banks.

Prior to January of 2019, the ECBs were governed under Foreign Exchange Management (Borrowing and Lending in Foreign Exchange) Regulations, 2000 and Foreign Exchange Management (Borrowing and Lending in Rupees), 2000. However, RBI vide its notification number 3(R)/2018-RB consolidated both the regulations into a single and simple framework, which came to be known as Foreign Exchange Management (Borrowing & Lending) Regulations, 2018. With this, another framework was also devised which came into effect from January 16, 2019. The changes that came into effect via these regulations have been summarized hereinunder:

  1. STRIKING DOWN OF TRACK BASED ECB CLASSIFICATION: Previously, there used to 4 types of ECBs, namely, Track I (medium term foreign currency loan), Track II (long term foreign currency loan), Track III (INR denominated ECB) and Rupee Denominated Bonds. However, as per the new regulations which came out on 16th January 2019, effective immediately, has simplified the classification into two categories:
  2. Foreign Currency Denomination
  3. INR Denomination

Before the new regulation, to issue a Rupee Denominated Bond, a.k.a. Masala Bonds, prior permit from RBI was required. However, as per the new regulation, RDB was merged with INR Denominated ECBs, thereby making a prior permit from RBI unnecessary.

  1. Definition of Eligible Borrowers Amended: The old regulations defined eligible borrowers as "All entities eligible to receive foreign direct investment, in terms of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017, notified vide Notification No. FEMA 20(R)/ 2017-RB dated November 07, 2017, as amended from time to time, including Start-ups. Further, Reserve Bank, in consultation with the Government of India may specify any other entity/sector eligible to raise ECBs or amend the existing eligibility norms."[i]

However, as per the FEMA 3(R) regulations, the definition of Eligible Borrower also includes Limited Liability Partnerships, which have been formed and registered as per the LLP Act, 2008.

Also, the new ECB Framework further widens the scope of the term "Eligible Borrower" by adding all such entities who are eligible to take FDIs as Eligible Borrowers of ECBs. It also adds units in Special Economic Zones, SIDBI, Port Trusts etc., engaged in micro financial activities to the definition.

  1. Recognized Lenders redefined: As per the old regulations, recognized lenders were defined in various tracks. However, the new regulation has simplified the definition by stating that to be a recognized lender, an entity must be a member of FATF or IOSCO.
  2. Minimum Average Maturity Period (MAMP): The previous regulations did not have a uniform average period as the minimum maturity period. However, the new regulation suggests that a period of 3 years must be a minimum average maturity period. This clause has a few exceptions as well which have been enlisted as following:
  3. Companies in the manufacturing sector which raise up to USD $50 million as ECB have a MAMP of one year.
  4. ECBs claimed by Corporates for general debt payoff or other corporate purposes to have MAMP of 5 years.
  5. All-In Cost ceiling: An All-In Cost is every such expense which is involved in a transaction. Right from the rate of interests to the ECA charges, guarantee fees etc., are included in All-In Costs, however, withholding taxes are excluded from All-In Costs. The new regulation has specified that all such "All-In Costs" are to be paid by the borrower without any recourse.
  6. Individual Limits: The new ECB Framework has defined a proper borrowing limits based on the sectors as:



Companies in the manufacturing sector, NBFCs, IFCs, AFCs, Holding Companies and CICs

750 Million USD

Companies in the Software Development Industry

200 Million USD

Entities engaged in Micro Finance Activities

100 Million USD


50 Million USD

  1. Liability Equity Ratio: The new framework has specified that the liability equity ratio will be 7:1 only in cases of foreign currency denominated ECB.
  2. End Uses: RBI has relaxed the restriction on end uses of ECB. As per the new regulations, use of ECB funds has been permitted for capital requirements, general corporate expenses, and repayment of rupee loans etc. However, the Master Direction has placed certain restrictions to the use of ECBs, which are:
  3. Real Estate Activities
  4. Investment in Capital Markets
  5. Equity Investments
  6. On lending to entities except in case of NBFCs.
  7. Hedging Requirements: As per the previous Regulations, 70% of the ECB was mandated to be hedged for a maturity period of 3-5 years for the NBFCs, companies in the infrastructure sector, AFCs, IFCs, CICs etc. However, the revised framework has not included the AFCs, IFCs and CICs under the meaning of "infrastructure space companies".
  8. Reporting Structure redefined: For obtaining LRN under approval route as per previous regulations, Form ECB and Form 83 are used however, now they must be submitted under a single form to gain LRN both under automatic and approval routes.
  9. Introduction of Late Submission Fee: Any delay in the submission of Form ECB2 shall be penalized with a late submission fee as detailed hereinunder:

Type of Return/Form

Period of Delay

Applicable LSF

Form ECB 2

Up to 30 days

INR 5,000

Form ECB 2/ Form ECB

Up to 3 years

INR 50,000

Form ECB/ Form ECB 2

Beyond 3 years

INR 100,000 per year

  1. Trade Credit: The new Regulations noted the following changes in the Trade Credit:
  2. The amount of trade credit was increased from 20 million USD to 50 million USD.
  3. Trade Credit can be borrowed either in foreign currency denominations or in INR denominations.
  4. The maturity period has been reduced to 3 years in comparison to the previously mentioned 5 years.
  5. The All-In-Cost ceiling has been reduced to 250 basis points over 6 months LIBOR.

ECB is a very significant part of commercial transactions and businesses. The new framework has highly simplified the Framework and Legislations governing External Commercial Borrowings. The new Framework, according to the author, has been made keeping in mind the national interest and for boosting the Economy of India. However, the companies need to keep in mind the Exchange Rate Risk and the effect on its financial books due to debts.

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