The Reserve Bank of India (RBI) had recently issued Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 (‘Principal Regulations’ or ‘New Regulations’) in an attempt to consolidate and streamline the regulatory provisions dealing with borrowing and lending in foreign exchange as well as Indian Rupees (INR). This was in supersession of two existing regulations, Foreign Exchange Management (Borrowing and Lending in Foreign Exchange) Regulations, 2000 and Foreign Exchange Management (Borrowing and Lending in Rupees) Regulations, 2000.
In line with the principal regulation, RBI has issued the revised framework for External Commercial Borrowing (ECB) on January 16, 2019 by way of A.P. (DIR Series) Circular 17. The revised ECB framework aims to rationalize the various provisions regarding the eligible borrower, recognized lenders, minimum average maturity period (MAMP) etc.
Significant changes brought by the introduction of principal regulation and revised framework
- The various categories under the erstwhile regulation have been merged on currency basis. Track I and II (Medium Term and Long-term FCY denominated ECBs) have been merged into Foreign Currency Denominated ECB and Track III (Rupee denominated ECB) and Rupee denominated bonds have been merged into Rupee denominated ECB.
- Eligibility of borrower and lender– The entities eligible to raise ECB under New Regulations has widened. While the old Regulations categorized the eligible borrowers under different tracks, the New Regulations simply provide that the entities eligible to receive foreign direct investment as per the extant FDI Regulations are also eligible to raise ECB from person resident outside India. In addition, certain other entities such as Post Trusts, Units in Special Economic Zones (SEZ), the Small Industries Development Bank of India and the Export Import Bank of India have been expressly mentioned. As per the New Regulations, the recognized lender for ECB shall be a resident of FATF or IOSCO compliant county. Further, multilateral and regional financial institution where India is a member country shall also be considered as a recognized lender. Also, foreign branches / subsidiaries of Indian banks are permitted as lenders for ECB raised in foreign exchange. Previously, international debt funds and some pure-play international broker dealers did not qualify as “recognised lenders”, will now be treated as recognized lenders.
- Maturity Period– New Regulations have prescribed the MAMP of 3 years. It means that under the extant regulations, all the sectors are at par with reference to the MAMP. Except for ECB raised from (i) foreign equity holder and utilised for specific purposes, like working capital, general corporate or repayment of Rupee loans, MAMP will be 5 years, (ii) Companies in the manufacturing sector may raise ECB up to USD 50 million per financial year with the MAMP of 1 year.
- End use– New Regulation has given the inclusive list of restricted end use of ECB which is more rational as compared to the earlier regulation.
- Individual Limits of borrowing– All eligible borrowers are now entitled to raise ECB upto USD 750 million or its equivalent per financial year. However, for startups, the RBI has continued with its conservative approach by providing a limit of ECB for only USD 3 million or its equivalent per financial year. Further, an individual resident in India may borrow a sum upto USD 250,000 or its equivalent subject to the terms and conditions, which are yet to be notified.
- ECB Liability – Equity Ratio– The requirement of ECB Liability- Equity ratio of 7:1 for ECB raised under automatic route from foreign equity holder is only in case of foreign currency ECB. Hence, for ECB raised from foreign equity holder in INR, the leverage ratio will not be applicable.
- Introduction of Late Submission Fees (LSF)- Borrowers who are in compliance of ECB guidelines, except the delay in reporting of drawdown of ECB proceeds before obtaining LRN or delay in submission of ECB 2 returns, can regularize by paying LSF in the following manner:
The revised framework contains the Standard Operating Procedure (SOP) for Authorized Dealer Category -1 Banks to be followed in case of untraceable entities.Contraventions in the nature of non-payment of LSF shall be governed by the Foreign Exchange Management Act, 1999 (FEMA) and the regulations formulated there under.
With the revised guidelines, there has been a major liberalization in eligible borrower and lender group. Services sector has been greatly benefited as they can avail short-term ECBs. Entities in the trading sectors and limited liability partnerships (“LLPs”), can also avail ECBs. This removes a major bottleneck for LLPs, who could not raise ECBs before, and puts LLPs on par with a company.
Private equity and venture capital funds can lend monies without mandatorily having equity participation in the Indian borrower. Also, angel investors, foreigners or Persons of Indian Origin can be the recognized lender under ECB and lend to the Indian companies in which they have invested in their individual capacities and hold 25% of the equity of Indian companies.
It is unclear whether LLPs can avail ECBs for working capital, general corporate purposes or repayment of rupee loans as these end-uses are permitted only if the ECB is availed from a foreign “equity-holder,” and technically speaking, LLP does not have any equity holders. It only has partners. The RBI may clarify this issue in the future.