Final EC&IPL Book PDF

## Final EC&IPL Book.pdf ### REGULATORY FRAMEWORK - Foreign Exchange Management Act, 1999 - Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 as amended from time to time - Foreign Exchange Management (Guarantees) Regulations, 2000 as amended from time to time ### INTRODUCTION...

## Final EC&IPL Book.pdf ### REGULATORY FRAMEWORK - Foreign Exchange Management Act, 1999 - Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 as amended from time to time - Foreign Exchange Management (Guarantees) Regulations, 2000 as amended from time to time ### INTRODUCTION The ECB Policy framework has been incrementally calibrated over time taking into account the emerging financing needs of Indian companies, especially critical requirements of infrastructure sector entities, macroeconomic developments, and to promote ease of doing business. This has been done by permitting more resident entities as eligible borrowers, recognizing more entities as lenders, expanding end-uses, and rationalizing the all-in-cost and minimum maturity requirements for such borrowings. The recent changes that have been brought-out in the ECB policy are a part of this continued effort and are likely to help wider set of eligible borrowers i.e. corporates and other entities to avail ECBs to meet their capital needs with the Uniform Minimum Average Maturity Period requirements, uniform all-in-cost ceilings and small negative end-use list. ### External Commercial Borrowings (ECB) External Commercial Borrowings are commercial loans raised by eligible resident entities from recognised non-resident entities and should conform to parameters such as minimum maturity, permitted and non-permitted end-uses, maximum all-in-cost ceiling, etc. Transactions on account of External Commercial Borrowings (ECB) are governed by Section 6(3) (d) of the Foreign Exchange Management Act, 1999 (FEMA). Various provisions in respect of borrowings from overseas are included in the Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2018 and the Foreign Exchange Management (Guarantees) Regulations, 2000 as amended from time to time framed under FEMA. Within the contours of the Regulations, Reserve Bank of India also issues directions to Authorised Persons. ### ECB framework The framework for raising loans through ECB comprises the following two options: | Parameters | Foreign Currency denominated ECB | Indian Rupee denominated ECB | |----------------------------------------|----------------------------------------------------|----------------------------------| | Currency of Borrowing | Any freely convertible Foreign Currency | Indian Rupee (INR) | | Forms of ECB | Loans including bank loans; floating/ fixed rate notes/ bonds/ debentures (other than fully and compulsorily convertible instruments); Trade credits beyond 3 years; Foreign Currency Convertible Bonds; Foreign Currency Exchangeable Bonds and Financial Lease. | Loans including bank loans; floating/ fixed rate notes/bonds/debentures/ preference shares (other than fully and compulsorily convertible instruments); Trade credits beyond 3 years; and Financial Lease. Also, plain vanilla Rupee denominated bonds issued overseas, which can be either placed privately or listed on exchanges as per host country regulations. | It may be noted that Foreign Currency Convertible Bonds (FCCBs) refers to foreign currency denominated instruments which are issued in accordance with the Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993, as amended from time to time. Issuance of FCCBs shall also conform to other applicable regulations. Further, FCCBs should be without any warrants attached. Further, Foreign Currency Exchangeable Bonds (FCEBs) refers to foreign currency denominated instruments which are issued in accordance with the Issue of Foreign Currency Exchangeable Bonds Scheme, 2008, as amended from time to time. FCEBS are exchangeable into equity share of another company, to be called the Offered Company, in any manner, either wholly, or partly or on the basis of any equity related warrants attached to debt instruments. Issuance of FCEBs shall also conform to other applicable regulations. ### Eligible Borrowers | | | |---|---| | All entities eligible to receive Foreign Direct Investment (FDI). Further, the following entities are also eligible to raise ECB: | (a) All entities eligible to raise Foreign Currency ECB; and (b) Registered entities engaged in micro-finance activities, viz., registered Not for Profit companies, registered societies/trusts/ Non-cooperatives and Government Organisations. | | i. Port Trusts; | | ii. Units in SEZ; | | iii. SIDBI; and | | iv. EXIM Bank of India. | ### Recognised Lenders The lender should be resident of Financial Action Task Force (FATF) or International Organisation of Securities Commissions' IOSCO compliant country, including on transfer of ECB. However: - **(a) Multilateral and Regional Financial Institutions where India is a member country will also be considered as recognised lenders;** - **(b) Individuals as lenders can only be permitted if they are foreign equity holders or for subscription to bonds/debentures listed abroad; and ** - **(c) Foreign branches / subsidiaries of Indian banks are permitted as recognised lenders only for Foreign Currency ECB (except FCCBs and FCEBs).** Foreign branches / subsidiaries of Indian banks, subject to applicable prudential norms, can participate as arrangers/ underwriters/market-makers/traders for Rupee denominated Bonds issued overseas. However, underwriting by foreign branches/subsidiaries of Indian banks for issuances by Indian banks will not be allowed. ### Minimum Average Maturity Period (MAMP) Minimum Average Maturity Period (MAMP) for ECB will be 3 years. Call and put options, if any, shall not be exercisable prior to completion of minimum average maturity. However, for the specific categories mentioned below, the Minimum Average Maturity Period (MAMP) are: | Category | Minimum Average Maturity Period (MAMP) | |---|---| | (A) ECB raised by manufacturing companies up to USD 50 million or its equivalent per financial year. | 1 year | | (B) ECB raised from foreign equity holder for working capital purposes, general corporate purposes or for repayment of Rupee loans. It may be noted that: (i) ECB cannot be raised from foreign branches / subsidiaries of Indian banks. (ii) the prescribed MAMP will have to be strictly complied with under all circumstances. | 5 years | | (C) ECB raised for (i) Working capital purposes or general corporate purposes. (ii) on-lending by NBFCs for working capital purposes or general corporate purposes. It may be noted that: (a) ECB cannot be raised from foreign branches / subsidiaries of Indian banks. (b) the prescribed MAMP will have to be strictly complied with under all circumstances. | 10 years | | (D) ECB raised for (i) repayment of Rupee loans availed domestically for capital expenditure. (ii) on-lending by NBFCs for the same purpose. It may be noted that: (a) ECB cannot be raised from foreign branches / subsidiaries of Indian banks. (b) the prescribed MAMP will have to be strictly complied with under all circumstances. | 7 years | | (E) ECB raised for (i) repayment of Rupee loans availed domestically for purposes other than capital expenditure. (ii) on-lending by NBFCs for the same purpose. It may be noted that for the categories mentioned at (B) to (E) (i) ECB cannot be raised from foreign branches / subsidiaries of Indian banks. (ii) the prescribed MAMP will have to be strictly complied with under all circumstances. | 10 years | ### End uses (Negative list) The negative list, for which the ECB proceeds cannot be utilised, would include the following: - Real estate activities. - Investment in capital market. - Equity investment. ### Working capital purposes, except ECB raised from foreign equity holder for working capital purposes, general corporate purposes or for repayment of Rupee loans and except ECB raised for (i) working capital purposes or general corporate purposes (ii) on-lending by Non-Banking Financial Companies (NBFCs) for working capital purposes or general corporate purposes. - General corporate purposes, except in case of ECB raised from foreign equity holder for working capital purposes, general corporate purposes or for repayment of Rupee loans and except ECB raised for (i) working capital purposes or general corporate purposes (ii) on-lending by NBFCs for working capital purposes or general corporate purposes. - Repayment of Rupee loans, except in case of ECB raised for (i) repayment of Rupee loans availed domestically for capital expenditure (ii) on-lending by NBFCs for the same purpose and except ECB raised for (i) repayment of Rupee loans availed domestically for purposes other than capital expenditure (ii) on-lending by NBFCs for the same purpose. - On-lending to entities for the above activities, except in case of ECB raised by NBFCs for (i) working capital purposes or general corporate purposes (ii) on-lending by NBFCs for working capital purposes or general corporate purposes and (i) repayment of Rupee loans availed domestically for capital expenditure (ii) on- lending by NBFCs for the same purpose and except ECB raised for (i) repayment of Rupee loans availed domestically for purposes other than capital expenditure (ii) on-lending by NBFCs for the same purpose. ### Exchange rate Change of currency of Foreign Currency ECB into Indian Rupee ECB can be at the exchange rate prevailing on the date of the agreement for such change between the parties concerned or at an exchange rate, which is less than the rate prevailing on the date of the agreement, if consented to by the ECB lender. For conversion to Rupee, the exchange rate shall be the rate prevailing on the date of settlement. ### Limit and Leverage All eligible borrowers can raise ECB up to USD 750 million or equivalent per financial year under the automatic route. Further, in case of Foreign Currency denominated ECB raised from direct foreign equity holder, ECB liability-equity ratio for ECB raised under the automatic route cannot exceed 7:1. However, this ratio will not be applicable if the outstanding amount of all ECB, including the proposed one, is up to USD 5 million or its equivalent. Further, the borrowing entities will also be governed by the guidelines on debt equity ratio, issued, if any, by the sectoral or prudential regulator concerned. ### Issuance of Guarantee, etc. by Indian banks and Financial Institutions Issuance of any type of guarantee by Indian banks, All India Financial Institutions and NBFCs relating to ECB is not permitted. Further, financial intermediaries (viz., Indian banks, All India Financial Institutions, or Non-Banking Financial Companies) shall not invest in Foreign Currency Convertible Bonds/ Foreign Currency Exchangeable Bonds in any manner whatsoever. ### Parking of ECB proceeds ECB proceeds are permitted to be parked abroad as well as domestically in the manner given below: - **Parking of ECB proceeds abroad**: ECB proceeds meant only for foreign currency expenditure can be parked abroad pending utilisation. Till utilisation, these funds can be invested in the following liquid assets: (a) deposits or Certificate of Deposit or other products offered by banks rated not less than AA (-) by Standard and Poor / Fitch IBCA or Aa3 by Moody's; (b) Treasury bills and other monetary instruments of one-year maturity having minimum rating as indicated above and (c) deposits with foreign branches/subsidiaries of Indian banks abroad. - **Parking of ECB proceeds domestically**: ECB proceeds meant for Rupee expenditure should be repatriated immediately for credit to their Rupee accounts with AD Category I banks in India. ECB borrowers are also allowed to park ECB proceeds in term deposits with AD Category I banks in India for a maximum period of 12 months cumulatively. These term deposits should be kept in unencumbered position. ### Procedure of raising ECB | Serial Number | Activities | |:--:|:--:| | 1 | All ECB can be raised under the automatic route if they conform to the parameters prescribed under this framework. | | 2 | For approval route cases, the borrowers may approach the RBI with an application in prescribed format (Form ECB) for examination through their AD Category 1 bank. | | 3 | Such cases shall be considered keeping in view the overall guidelines, macroeconomic situation and merits of the specific proposals. | | 4 | ECB proposals received in the Reserve Bank above certain threshold limit (refixed from time to time) would be placed before the Empowered Committee set up by the Reserve Bank. | | 5 | The Empowered Committee will have external as well as internal members and the Reserve Bank will take a final decision in the cases taking into account recommendation of the Empowered Committee. | | | Entities desirous to raise ECB under the automatic route may approach an AD Category I bank with their proposal along with duly filled in Form ECB. | ### Whose Responsibility is it to Ensure Compliance with ECB Guidelines? The primary responsibility for ensuring that the borrowing is in compliance with the applicable ECB guidelines is that of the borrower concerned. Structures which bypass / circumvent ECB guidelines in any manner and / or raising borrowings in any other manner which is not permitted / disguising borrowing under the wrap of other kind of transactions and / or contravening provisions of Foreign Exchange Management (Borrowing and Lending in Foreign Exchange) Regulations, 2018 would also invite penal action under FEMA. ### Reporting Requirements Borrowings under ECB Framework are subject to following reporting requirements apart from any other specific reporting required under the framework: - **Loan Registration Number (LRN)**: Any draw-down in respect of an ECB should happen only after obtaining the LRN from the Reserve Bank. To obtain the LRN, borrowers are required to submit duly certified Form ECB, which also contains terms and conditions of the ECB, in duplicate to the designated AD Category I bank. In turn, the AD Category I bank will forward one copy to the Director, Reserve Bank of India, Department of Statistics and Information Management, External Commercial Borrowings Division, Bandra-Kurla Complex, Mumbai - 400 051. Copies of loan agreement for raising ECB are not required to be submitted to the Reserve Bank. - **Changes in terms and conditions of ECB**: Changes in ECB parameters in consonance with the ECB norms, including reduced repayment by mutual agreement between the lender and borrower, should be reported to the Department of Statistics and Information Management through revised Form ECB at the earliest, in any case not later than 7 days from the changes effected. While submitting revised Form ECB the changes should be specifically mentioned in the communication. - **Monthly Reporting of actual transactions**: The borrowers are required to report actual ECB transactions through Form ECB 2 Return through the AD Category I bank on monthly basis so as to reach Department of Statistics and Information Management within seven working days from the close of month to which it relates. Changes, if any, in ECB parameters should also be incorporated in Form ECB 2 Return. - **Late Submission Fee (LSF) for delay in reporting:**: Any borrower, who is otherwise in compliance of ECB guidelines, can regularise the delay in reporting of drawdown of ECB proceeds before obtaining LRN or delay in submission of Form ECB 2 returns, by payment of prescribed late submission fees. - **Standard Operating Procedure (SOP) for Untraceable Entities:** The following SOP has to be followed by designated AD Category-l banks in case of untraceable entities who are found to be in contravention of reporting provisions for ECB by failing to submit prescribed return(s) under the ECB framework, either physically or electronically, for past eight quarters or more. Any borrower who has raised ECB will be treated as 'untraceable entity', if entity/auditor(s)/director(s)/promoter(s) of entity are not reachable/responsive/reply in negative over email/letters/phone for a period of not less than two quarters with documented communication/ reminders numbering 6 or more and it fulfills both of the following conditions: - Entity not found to be operative at the registered office address as per records available with the AD Bank or not found to be operative during the visit by the officials of the AD Bank or any other agencies authorised by the AD bank for the purpose; - Entities have not submitted Statutory Auditor's Certificate for last two years or more; The followings actions are to be undertaken in respect of 'untraceable entities': - File Revised Form ECB, if required, and last Form ECB 2 Return without certification from company with 'UNTRACEABLE ENTITY' written in bold on top. The outstanding amount will be treated as written- off from external debt liability of the country but may be retained by the lender in its books for recovery through judicial/ non-judicial means; - No fresh ECB application by the entity should be examined/processed by the AD bank; - Directorate of Enforcement should be informed whenever any entity is designated 'UNTRACEABLE ENTITY'; and - No inward remittance or debt servicing will be permitted under auto route. ### Conversion of ECB into Equity Conversion of ECB, including those which are matured but unpaid, into equity is permitted subject to the following conditions: - **i. The activity of the borrowing company is covered under the automatic route for Foreign Direct Investment or Government approval is received, wherever applicable, for foreign equity participation as per extant Foreign Direct Investment policy.** - **ii. The conversion, which should be with the lender's consent and without any additional cost, should not result in contravention of eligibility and breach of applicable sector cap on the foreign equity holding under Foreign Direct Investment policy;** - **iii. Applicable pricing guidelines for shares are complied with;** - **iv. In case of partial or full conversion of ECB into equity, the reporting to the Reserve Bank will be as under:** - For partial conversion, the converted portion is to be reported in Form FC-GPR prescribed for reporting of FDI flows, while monthly reporting to DSIM in Form ECB 2 Return will be with suitable remarks, viz., "ECB partially converted to equity". - For full conversion, the entire portion is to be reported in Form FC-GPR, while reporting to DSIM in Form ECB 2 Return should be done with remarks "ECB fully converted to equity". Subsequent filing of Form ECB 2 Return is not required. - For conversion of ECB into equity in phases, reporting through Form FC-GPR and Form ECB 2 Return will also be in phases. - **v. If the borrower concerned has availed of other credit facilities from the Indian banking system, including foreign branches/subsidiaries of Indian banks, the applicable prudential guidelines issued by the Department of Banking Regulation of Reserve Bank, including guidelines on restructuring are complied with;** - **vi. Consent of other lenders, if any, to the same borrower is available or atleast information regarding conversions is exchanged with other lenders of the borrower;** - **vii. For conversion of ECB dues into equity, the exchange rate prevailing on the date of the agreement between the parties concerned for such conversion or any lesser rate can be applied with a mutual agreement with the ECB lender. It may be noted that the fair value of the equity shares to be issued shall be worked out with reference to the date of conversion only.** ### ECB facility for Oil Marketing Companies Public Sector Oil Marketing Companies (OMCs) can raise ECB for working capital purposes with minimum average maturity period of 3 years from all recognised lenders under the automatic route without mandatory hedging and individual limit requirements. The overall ceiling for such ECB shall be USD 10 billion or equivalent. However, OMCs should have a Board approved forex mark to market procedure and prudent risk management policy, for such ECB. All other provisions under the ECB framework will be applicable to such ECB. ### ECB facility for Startups AD Category-I banks are permitted to allow Startups to raise ECB under the automatic route as per the following framework: - **Eligibility**: An entity recognised as a Startup by the Central Government as on date of raising ECB. - **Maturity**: Minimum average maturity period will be 3 years. - **Recognised lender**: Lender / investor shall be a resident of a FATF compliant country. However, foreign branches/subsidiaries of Indian banks and overseas entity in which Indian entity has made overseas direct investment as per the extant Overseas Direct Investment Policy will not be considered as recognised lenders under this framework. - **Forms**: The borrowing can be in form of loans or non-convertible, optionally convertible or partially convertible preference shares. - **Currency**: The borrowing should be denominated in any freely convertible currency or in Indian Rupees (INR) or a combination thereof. In case of borrowing in INR, the non-resident lender, should mobilise INR through swaps/outright sale undertaken through an AD Category-I bank in India. - **Amount**: The borrowing per Startup will be limited to USD 3 million or equivalent per financial year either in INR or any convertible foreign currency or a combination of both. - **All-in-cost**: Shall be mutually agreed between the borrower and the lender. - **End uses**: For any expenditure in connection with the business of the borrower. - **Conversion into equity**: Conversion into equity is freely permitted subject to Regulations applicable for foreign investment in Startups. - **Security**: The choice of security to be provided to the lender is left to the borrowing entity. Security can be in the nature of movable, immovable, intangible assets (including patents, intellectual property rights), financial securities, etc. and shall comply with foreign direct investment / foreign portfolio investment / or any other norms applicable for foreign lenders / entities holding such securities. Further, issuance of corporate or personal guarantee is allowed. Guarantee issued by a non-resident(s) is allowed only if such parties qualify as lender under ECB for Startups. However, issuance of guarantee, standby letter of credit, letter of undertaking or letter of comfort by Indian banks, all India Financial Institutions and NBFCs is not permitted. - **Hedging**: The overseas lender, in case of INR denominated ECB, will be eligible to hedge its INR exposure through permitted derivative products with AD Category - I banks in India. The lender can also access the domestic market through branches/ subsidiaries of Indian banks abroad or branches of foreign bank with Indian presence on a back to back basis. Startups raising ECB in foreign currency, whether having natural hedge or not, are exposed to currency risk due to exchange rate movements and hence are advised to ensure that they have an appropriate risk management policy to manage potential risk arising out of ECB. - **Conversion rate**: In case of borrowing in INR, the foreign currency - INR conversion will be at the market rate as on the date of agreement. - **Other Provisions**: Other provisions like parking of ECB proceeds, reporting arrangements, powers delegated to AD banks, borrowing by entities under investigation, conversion of ECB into equity will be as included in the ECB framework. ### Borrowing by Entities under Investigation All entities against which investigation / adjudication / appeal by the law enforcing agencies for violation of any of the provisions of the Regulations under FEMA pending, may raise ECB as per the applicable norms, if they are otherwise eligible, notwithstanding the pending investigations / adjudications / appeals, without prejudice to the outcome of such investigations / adjudications / appeals. The borrowing entity shall inform about pendency of such investigation / adjudication / appeal to the AD Category-l bank / RBI as the case may be. Accordingly, in case of all applications where the borrowing entity has indicated about the pending investigations / adjudications/ appeals, the AD Category I Banks / Reserve Bank while approving the proposal shall intimate the agencies concerned by endorsing a copy of the approval letter.