ECB Compliance Advisory

Overview

External Commercial Borrowings (ECB) refer to the loans borrowed from foreign banks and institutions. All institutions that opt for ECBs must ensure compliance with requirements for using these loan forms. ECBs are low-interest rate loans borrowed from foreign banks and institutions for specific purposes. They are popular among companies and public sector undertakings (PSUs) in India.

Key Point Areas:

What is ECB Compliance?
An Overview of ECB Compliance
Benefits of ECB Compliance
Routes for External Commercial Borrowings (ECB Compliance)
Sectors with ECB Limits
Who Regulates External Commercial Borrowings?

ECB Compliance Advisory: Everything You Need to Know

What is ECB Compliance?

ECB compliance involves specific rules that companies and PSUs must follow before utilizing loans received from foreign investors. The borrowed funds must be utilized judiciously, considering business needs and long-term goals before opting for an ECB. Noncompliance with ECB provisions can attract penalties, emphasizing the importance of following rules and regulations for prudent use.

An Overview of ECB Compliance

ECB compliance is essential as these loans are only permitted for a specific commercial purpose. Borrowers must follow the rules to ensure the intended use of the borrowed funds meets the end- use requirement. Therefore, utilizing ECBs for purposes other than the commercial one listed in the end-use is prohibited.

Benefits of ECB Compliance

There are many benefits associated with ECB compliance. First, compliance is necessary for all forms of borrowers performing activities that align with ECB rules. Borrowers can additionally utilize ECB loans to carry out work related to specific activities. When compared to commercial bank loans, borrowing under ECB compliance rules offers lower interest rates, which is a positive benefit. Furthermore, foreign institutions offer better interest rates than public sector undertakings.

Routes for External Commercial Borrowings (ECB Compliance)

A company planning to borrow funds through ECB must follow ECB compliance requirements using one of two routes – Automatic or Government. The Automatic Route permits 100% foreign investment without any prior approval from the Indian government; however, borrowers must ensure ECB compliance requirements are met. For transactions exceeding ECB Limits for particular sectors, the Government Route, requiring prior government approval, must be followed. Companies can borrow under the Automatic Route, with specific cases requiring approval under the Government Route.

Sectors with ECB Limits

ECB compliance rules have set a limit for specific sectors - $750 million for infrastructure, real- industrial sectors, $200 million for hotels, hospitals and software development sectors, $100 million for microfinance activities, and $500 million for other entities. When a borrower exceeds the limit, the approval/government route must be utilized. Approval is also essential when situations arise where a service sector, SEZ developers, co-operative societies, or banks desire access to funds.

Who Regulates External Commercial Borrowings?

The Reserve Bank of India and the Foreign Exchange Management Act (FEMA) regulate ECB laws. Additionally, the Foreign Exchange Management (Borrowing and Lending) Regulations 2018 enable the RBI in consultation with the Indian government to adopt new changes.

ECB compliance is essential when using foreign loans; it ensures prudent use of funds and compliance with ECB regulations. Borrowers must utilize these loans for the specific commercial purpose listed in the end-use. Taking these loans offers several benefits, such as a lower interest rate and better terms than other public sector undertakings. Companies in India can follow two routes - Automatic and Government - when borrowing funds from foreign institutions. They must ensure ECB compliance requirements are met and seek prior approval when necessary.

Eligibility Criteria for External Commercial Borrowings (ECB Compliance)

To fulfill the requirements related to ECB Compliance, the following criteria must be met:

Manufacturers

This category includes all forms of industries involved in manufacturing products.

SIDBI

Small Industries Development Bank of India.

Units in Special Economic Zones (SEZs)

Companies operating in SEZs.

Shipping and Airlines Companies

Companies in the shipping and airlines industry.

Export-Import Bank of India (Exim Bank)

Eligible under the approval route.

Non-Banking Financial Companies (NBFCs)

Companies in the financial sector that are not banks.

Companies in the Infrastructure Sector

Companies involved in infrastructure development.

Holding Companies

Companies that hold shares of other companies.

Core Investment Companies (CICs)

Financial institutions involved in making long-term investments.

Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (INVITs)

Entities falling under the regulatory framework of the Securities and Exchange Board of India (SEBI).

NBFCs-Micro Finance Institutions (NBFCs-MFIs), Not for Profit Companies, Societies, Trusts, and Co-operatives

Various non-banking entities engaged in microfinance activities.

Companies Engaged in Miscellaneous Services

Includes research and development (R&D) companies, training companies (excluding educational institutes), companies supporting infrastructure, and companies providing logistics services.

Developers of Special Economic Zones (SEZs) or National Manufacturing and Investment Zones (NMIZs)

Entities involved in developing SEZs or NMIZs.

Eligibility Criteria for ECB Compliance for Lenders

Lenders that have to comply with rules related to ECB Compliance include:

International Banks

Banks located outside of India.

International Capital Markets

Global capital markets.

Multilateral Financial Institutions

Institutions such as IFC, ADB, and CDC.

Export Credit Agencies

Agencies that provide credit for exports.

Suppliers of Equipment

Entities supplying equipment.

Foreign Collaborators and Foreign Equity Holders

Partnerships and individuals holding foreign equity (excluding erstwhile OCBs).

Procedure for External Commercial Borrowings (ECB Compliance)

External Commercial Borrowings can be done through the Automatic Route or the Approval/ Government Route.

Automatic Route

The applicant seeking external commercial borrowings should approach the concerned/ designated authorized dealer, such as a bank or money changer.
The borrower must obtain the Loan Registration Number (LRN) from the Reserve Bank of India before proceeding with the external commercial borrowings.
To obtain the LRN, the applicant must submit Form 83 in duplicate along with all the required documents. Form 83 must be certified by a Chartered Accountant or Company Secretary.
The form should be forwarded to the designated bank and a copy should be submitted to the Reserve Bank of India.
The borrower can proceed with the loan only after obtaining the LRN from the Reserve Bank of India.
Borrowers are required to submit the ECB-2 Return, certified by the designated authorized dealer, monthly to the Department of Statistics and Information Management (DSIM), Reserve Bank within seven working days from the close of the month.
The borrower also needs to submit the ECB form to the RBI.
After reviewing the application, the RBI will grant permission.

Approval Route

For the approval route, the applicant must meet the requirements related to ECB Compliance and submit the ECB form to the Reserve Bank of India.
All the necessary information and documents must be submitted to the RBI.

Documents Required for ECB Compliance

To comply with ECB requirements, the following documents are needed:

Loan Agreement (Borrowers need to enter into a loan agreement with the Authorised Dealer)
Loan Registration Number (LRN)
The authorised dealer must submit the form to the RBI to obtain the Loan Registration Number.
Form-ECB-2 Return (Reporting of Monthly Transactions related to ECB compliance)
Form-ECB
Copy of the respective offer letter furnishing the details of the offer
Copy of the import contract/ performa invoice or bill of lading
Undertaking that the ECB will be utilized only for permitted purposes

FAQ on ECB Compliance:

What is ECB Compliance?
ECB Compliance refers to the adherence to the regulations and guidelines set by the Reserve Bank of India (RBI) for external commercial borrowings in India.

What are the eligibility criteria for ECB Compliance?
The eligibility criteria for ECB Compliance include various categories such as manufacturers, SIDBI, units in SEZs, shipping and airlines companies, Exim Bank, NBFCs, infrastructure sector companies, holding companies, CICs, REITs and INVITs, NBFCs-MFIs, not-for-profit companies, societies, trusts, cooperatives, companies providing miscellaneous services, and developers of SEZs or NMIZs.

Who falls under the category of manufacturers for ECB Compliance?
All forms of industries involved in manufacturing products fall under the category of manufacturers for ECB Compliance.

What is SIDBI and its role in ECB Compliance?
SIDBI stands for Small Industries Development Bank of India. It falls under the eligibility criteria for ECB Compliance and plays a role in providing funding to small- scale industries.

Which companies in India are eligible for ECB Compliance under the infrastructure sector?
Companies involved in infrastructure development in India are eligible for ECB Compliance under the infrastructure sector.
What is the role of Holding Companies in ECB Compliance?
Holding companies, which hold shares of other companies, are eligible for ECB Compliance.
Can Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (INVITs) participate in ECB Compliance?
Yes, REITs and INVITs that fall under the regulatory framework of the Securities and Exchange Board of India (SEBI) are eligible to participate in ECB Compliance.
What types of Non-Banking Financial Companies (NBFCs) are eligible for ECB Compliance?
Various types of NBFCs, such as NBFCs-MFIs (Micro Finance Institutions), are eligible for ECB Compliance.
Are there any specific criteria for lending institutions to comply with ECB regulations?
Yes, international banks, international capital markets, multilateral financial institutions, export credit agencies, and suppliers of equipment are some of the lending institutions that need to comply with ECB regulations.
Can international banks participate in ECB Compliance in India?
Yes, international banks can participate in ECB Compliance in India and provide external commercial borrowings.
What is the Automatic Route for ECB Compliance?
The Automatic Route is one of the ways to obtain ECB Compliance. Under this route, borrowers can approach the authorized dealer, obtain a Loan Registration Number (LRN) from the RBI, and proceed with the loan.
How can a borrower obtain the Loan Registration Number (LRN) for ECB Compliance?
To obtain the LRN, the borrower must submit Form 83, along with the necessary documents, to the designated authorized dealer.
What is Form 83 and how is it used in the ECB Compliance process?
Form 83 is a form that needs to be filled out and certified by a Chartered Accountant or Company Secretary. It is used to apply for the Loan Registration Number (LRN) from the RBI.
What are the reporting requirements for borrowers under ECB Compliance?
Borrowers are required to submit the ECB-2 Return, certified by the designated authorized dealer, monthly to the Department of Statistics and Information Management (DSIM), Reserve Bank within seven working days from the close of the month.
Can borrowers utilize the loan only after obtaining the LRN from the Reserve Bank of India?
Yes, borrowers can utilize the loan only after obtaining the Loan Registration Number (LRN) from the Reserve Bank of India.
What is the Approval Route for ECB Compliance?
The Approval Route is another way to obtain ECB Compliance. Under this route, the borrower must meet the criteria and submit the necessary information and documents to the RBI for approval.
How can borrowers apply for ECB Compliance under the Approval Route?
Borrowers can apply for ECB Compliance under the Approval Route by submitting the ECB form, along with all required documents, to the Reserve Bank of India.
What documents are required for ECB Compliance?
Documents required for ECB Compliance include the Loan Agreement, Loan Registration Number (LRN), Form-ECB-2 Return, Form-ECB, offer letter, import contract or bill of lading, and an undertaking regarding the utilization of the loan.
What is the role of the Reserve Bank of India (RBI) in the ECB Compliance process?
The RBI reviews the ECB applications, grants permission, and issues the Loan Registration Number (LRN) for ECB Compliance.
What are the permitted purposes for utilizing loans obtained through ECB Compliance?
The loans obtained through ECB Compliance can be utilized for specific permitted purposes, which may include investment in projects or business activities, import of capital goods, modernization or expansion projects, and working capital requirements.

I hope these answers provide the information you were seeking! For More Details contact us

Keywords: External Commercial Borrowings, ECB Compliance, eligibility criteria, procedure, lenders, documents required, RBI, Loan Registration Number, LRN For ECB.

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