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 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 However, there is a limit to the amount which can be withdrawn as an ECB.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. LIST OF ENTITIES WHO CAN BORROW AND CAN LEND: 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.KEY CHNAGES IN THE NEW REGULATION: 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: 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:Foreign Currency DenominationINR 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. 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. 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. 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...

External Commercial Borrowings: A Brief Analysis Of The New Framework

Karan Upadhyay

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