External Commercial Borrowings (ECB) From A Foreign Equity Holder Under Automatic Route

Yes. There are a lot of restrictions on receipts of unsecured loans in foreign currency from foreign parent company by its subsidiary company in India.

DISCLAIMER
This article represents laws related only with entities falling under ‘Track 1’ category under ‘Automatic Route’. Kindly check the categorisation of your respective entity.
These borrowings are called External Commercial Borrowings (ECB). These ECBs are governed by RBI. There are primarily 2 routes for this
• Automatic Route: In this route you can bring in the Debt and then you can report it to RBI. Hence this is an easier and practically feasible method (For any debt less than USD 50 Million per transaction)

• Approval Method: In this route, you need to first obtain the approval of RBI before the funds hit your bank account. This is a tedious process and hence not viable for any loan less than USD 50 Million

WHO CAN LEND UNDER AUTOMATIC ROUTE?
• International Banks
• International Capital Markets
• Multilateral Financial Institutions
• Export Credit Agencies
• Suppliers of Equipment
• Foreign Collaborators
• Foreign Equity Holders

WHO CAN BORROW UNDER AUTOMATIC ROUTE?

Track 1 Minimum Average Maturity Period
Companies in manufacturing sectors. 1 year <= USD  50 Million and
5 years > USD 50 Million
Companies in software development sectors. 3 year <= USD  50 Million and
5 years > USD 50 Million
Shipping and airlines companies. 3 year <= USD  50 Million and
5 years > USD 50 Million
SIDBI 3 year <= USD  50 Million and
5 years > USD 50 Million
Units in SEZ 1 to 5 years based on sector of the company
Companies in infrastructure sector,  NBFC-IFCs, NBFC-AFCs, CICs. Further, 3 years irrespective of amount of borrowing
*Shall have a board approved risk management policy; and
*ECB exposure shall be hedged 100% at all times.
*Verified by AD Cat I Bank

 

WHAT AMOUNT CAN BE BORROWED THROUGH ECB?
The limit on borrowing is 2 fold

1. Restriction by Company Law
Any private limited company in India cannot borrow more than the total of its Paid up capital and surplus cash reserves from all the sources combined (Foreign & Domestic)

2. Restriction by RBI on ECB
i. The individual limits of ECB that can be raised by eligible entities under the automatic route per financial year for all the three tracks are set out as under:

a. Up to USD 750 million or equivalent for the companies in infrastructure and manufacturing sectors, Non-Banking Financial Companies -Infrastructure Finance Companies (NBFC-IFCs), NBFCs-Asset Finance Companies (NBFC-AFCs), Holding Companies and Core Investment Companies;
b. Up to USD 200 million or equivalent for companies in software development sector;
c. Up to USD 100 million or equivalent for entities engaged in micro finance activities; and
d. Up to USD 500 million or equivalent for remaining entities.

ii. ECB proposals beyond aforesaid limits will come under the approval route.
iii. In case the ECB is raised from direct equity holder, aforesaid individual ECB limits will also subject to ECB liability: equity ratio requirement. The ECB liability of the borrower (including all outstanding ECBs and the proposed one) towards the foreign equity holder should not be more than seven times of the equity contributed by the latter.
Note:- This ratio will not be applicable if total of all ECBs raised by an entity is up to USD 5 million or equivalent.

THE FUNDS RAISED THROUGH ECB CAN BE USED FOR ALL ACTIVITIES EXCEPT:-
• Lending or investment in capital market or acquiring a company (or a part thereof) in India
• Utilisation in Real estate
• Working capital, general corporate purpose and repayment of existing Rupee loans

COMPLIANCE
Following is the compliance for ECB under automatic route
• Any loan should be transferred to the bank account of the borrower. This bank is called Designated dealer bank. The designated Authorised Dealer bank is also required to ensure that raising /utilization of ECB is in compliance with ECB guidelines at the time of certification.
• Once the Loan is obtained, the company needs to file Form-83 (Reporting of loan agreement details under Foreign Exchange Management Act, 1999) along with Loan Agreement. This form needs to be certified either by a Chartered Accountant or a Company Secretary and submitted to the designated dealer bank.
• Borrowers are supposed to submit details regarding actual transaction and utilisation of the ECB by filing ECB-2 (Reporting of actual transactions of External Commercial Borrowings (ECB)) Return for every month. This form has to be verified by the dealer bank and submitted to RBI (by the bank) within seven working days before the close of every month.

DEFINITIONS
The term ‘Foreign Equity Holder’ means (a) direct foreign equity holder with minimum 25% direct equity holding by the lender in the borrowing entity, (b) indirect equity holder with minimum indirect equity holding of 51%, and (c) group company with common overseas parent.
‘Group Company’ means two or more enterprises which, directly or indirectly, are in a position to:
(i) exercise twenty-six percent or more of voting rights in other enterprise; or
(ii) appoint more than fifty percent of members of board of directors in the other enterprise.



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