Annexure A

ECB Framework

The main features of the ECB route for lending into India are as follows:

• Eligible lender

  A lender who is resident in a FATF or IOSCO compliant country shall be eligible to provide ECB facilities to Eligible Borrowers. In addition, multilateral and regional financial institutions where India is a member have also been recognized as lenders. Individuals as lenders shall only be permitted if they are foreign equity holders or are subscribing to bonds/debentures listed abroad. Indian banks having foreign branches or subsidiaries can provide only foreign currency ECB facilities.

  It is pertinent to note that a foreign portfolio investor investing in non-convertible debentures in India is not required to comply with the ECB framework.

• Eligible borrower

  Any entity which is eligible to receive foreign direct investment shall be permitted to raise ECB.

• Minimum Average Maturity Period (“MAMP”)

  Raising of funds by way of ECB is subject to certain minimum maturity, referred to as minimum average maturity period (MAMP). The MAMP varies depending on the sector, the status of the lender or the end use of the funds raised. The MAMP is computed on an weighted average method basis the outstanding amount of the ECB.

  • Minimum average maturity period for the ECB will be 3 years.

  • For manufacturing sector, borrowers may raise ECBs with MAMP of 1 year (for ECB up to USD 50 million or its equivalent per financial year).

  • If the ECB is raised from foreign equity holder, the MAMP will be 5 years if the ECB is raised for working capital purposes, general corporate purposes or repayment of Rupee loans.

  • Any call and put option agreed upon the parties in any ECB transaction document shall not be exercisable prior to completion of MAMP.

• All in cost ceiling

  The ‘all-in cost’ ceiling has been set at ‘Benchmark Rate’ plus 450 points. ‘Benchmark Rate’ in case of FCY is defined as 6-months LIBOR rate of different currencies or any other 6-month interbank interest rate applicable to the currency of borrowing. In case of INR ECB, Benchmark Rate is the prevailing yield of the Government of India securities of corresponding maturity.

• End use restriction

  As opposed to having a negative and a positive list earlier, the revised ECB framework only proposes negative list. These include real estate activities, investment in capital market, equity investment, working capital purposes (except from foreign equity holder), general corporate purposes (except from foreign equity holder), repayment of Rupee loans (except from foreign equity holder), on-lending to entities for the above activities. In addition, ECB cannot be used for repayment of any interest / charges.

• Security permitted

  The ECB framework permits 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. For the purpose of creating a valid security, the ECB facility shall have to be in compliance with the ECB guidelines and the transaction document should contain a clause for the creation of security of any nature described hereinbefore and the overseas lender/ security trustee shall obtain a ‘No-Objection Certificate from existing lenders in India and the security should be co-terminus with the ECB. Depending on the nature of security, certain other conditions are required to be fulfilled for the AD bank to permit the creation of charge.

  The authorized dealers are authorized to permit creation of certain charges. These are:

  • Immovable property: These are subject to certain conditions, including the immovable asset/ property to be sold only to a person resident in India in case of an invocation, and the sale proceeds shall be repatriated to liquidate the outstanding ECB.

  • Creation of Charge on Movable Assets.

  • Creation of charge over financial securities: These include shares, 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. Invocation of pledge and subsequent sale of such securities must comply with the requirements on exchange control norms with respect to ownership of securities (Foreign direct investment guidelines)

  • 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.

  • Issue of Corporate or Personal Guarantee

• Hedging requirement For Foreign Currency ECB

  The Indian borrower is required to follow the guidelines for hedging issued by the concerned sectoral or prudential regulator in respect of foreign currency exposure. Companies borrowing in FCY are mandatorily required to hedge 70 per cent of their ECB exposure in case average maturity of ECB is less than 5 years.