In a caricatured simplified world, there are three broad sources of finance: equity, debt, and borrowing. In each case, in terms of origin, funds can come from domestic and foreign sources. Interestingly, when one looks at Balance of Payments (BoP) representation of a country, it majorly comprises of the following two components: investments and borrowing.

External Commercial Borrowings ("ECBs") have emerged as an important item of the capital account in India's BoP and is a key channel to facilitate access to foreign capital by Indian corporates. ECBs are commercial loans in the form of bank loans, buyers' credit, suppliers' credit or securitized instruments availed from non-resident lenders, and can be obtained through two routes, the automatic route and approval route. ECB regulations in India are monitored by the Reserve Bank of India (RBI) in consultation with the Ministry of Finance, Government of India, and are guided by the broad guidelines that govern the capital flows to India and fall within the framework of the Foreign Exchange Management Act, 1999 ("FEMA").

Indian corporates' access to foreign borrowing was limited to bilateral and multilateral arrangements during the initial three decades post independence. However, in the 1980s, when external assistance was not preferred because of the burgeoning debt, ECBs evolved as a preferred medium.

As India embarked on the path of globalization and liberalization following the BoP crisis in the early 1990s, the composition of capital flows witnessed a paradigm shift from official transfers to private capital inflows and ECBs emerged as the prime component of debt creating capital flows.

The RBI had notified the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 ("Regulations"), on December 17, 2018. In continuation, the RBI on January 16, 2019, revised the extant ECB framework ("New ECB Policy"). This signifies a major change in policy from the government. The Regulations define "External Commercial Borrowings (ECB)" as borrowing by an eligible resident entity from outside India in accordance with framework decided by the RBI in consultation with the Government of India.


Re-classification of the forms of ECBs

The bifurcation of ECBs into three distinct identified 'Tracks' under the erstwhile regulations has been largely modified by merging Track I and Track II as "Foreign Currency denominated ECB (FCY ECB)" and merging of Track III and Rupee Denominated Bonds (Masala Bonds) framework as 'INR denominated ECB'.

The clubbing of Track I and Track II ECB as a singleoption, i.e. the FCY ECB and the clubbing of Track III and RDBs into a single ECB option, i.e. INR ECB is a welcome move.The clubbing of the tracks will result in the ECB regulatory framework being simpler and less complex, and reduce regulatory arbitrage.

Wider Pool of Eligible Borrowers

The erstwhile regulations restricted eligible borrowers to manufacturing companies, special economic zone units, software companies, non-banking financial companies, etc. Service companies and trading entities were not eligible for ECB. The definition of 'eligible borrowers' has now been expanded to include all entities that are eligible to receive foreign direct investments and other specified entities like port trust, units in an SEZ, startups, etc. This would imply that Limited Liability Partnerships ("LLP"), trading entities, etc. would now also be allowed to avail the ECB facility.

One of the most important considerations for determining if ECB was a viable option for raising offshore debt was whether the proposed borrower was eligible to raise ECB. This was often considered to be a substantial bottleneck, considering that the ECB framework also provided for end-use restrictions in terms of the funds raised through the ECB. This is a positive move in considering that the list of entities eligible to raise FDI are sufficiently regulated in any case under the regulations applicable toFDI. An interesting aspect to be noted here is that FDI is also permitted in certain LLPs, and hence ECB may also be availed of by LLPs.

Expansion in list of Recognized Lenders

The earlier regulations restricted eligible lenders to international banks, multilateral financial institutions, direct and indirect equity holders, etc. The 'recognised lender' definition has been expanded to include any entity that is a member of the Financial Action Task Force and International Organization of Securities Commissions, for ECB raised in foreign exchange. Further, multilateral and regional financial institutions where India is a member country will also be considered as recognised lenders.Additionally, under the New ECB Policy, individuals are also permitted as 'recognised lenders' only if they are a foreign equity holder or for subscription to bonds/debentures listed abroad.

This would open up an entirely new set of lenders like private equity firms and venture capital funds, who would now be able to provide funding to Indian corporates without having any equity exposure.

Minimum Average Maturity Period Relaxed

The erstwhile regulations categorised ECBs under three tracks, Medium term ECB with minimum average maturity period ("MAMP") of 1/3/5 years, Long term ECB with MAMP of 10 years and Indian Rupee denominated ECB with MAMP of 3/5 years. The New ECB Policy has set out an overall MAMP of 3 years across all tracks/forms of ECB irrespective of the amount of borrowing.However, for oil marketing companies, the minimum maturity period is 3 years, provided that the overall borrowing does not exceed USD 10 billion or equivalent in a financial year.Similarly, for ECBs availed from foreign equity holders which are proposed to be utilised towards working capital purposes, general corporate purposes or for repayment of rupee loans, the MAMP remains 5 years.

This change increases the attractiveness for foreign lenders to provide short-term loans.

End-use Restrictions

Earlier, companies availing ECBs were prohibited in using the proceeds in capital market investments, investment in real estate or purchase of land, construction and the development of an SEZ / industrial park / integrated township. The New ECB Policy has introduced following further prohibition for the end-use of ECB funds: A chit fund business or Nidhi company Agricultural or plantation act. The New ECB Policy has sought to simplify and harmonize the end-use restrictions across the various tracks and Rupee Denominated Bond ("RDB") by prescribing a single negative / restrictive end-use prescription

An unwanted implication of harmonizing the end-use restriction is that the restrictions that were not applicable to Track II and RDBs earlier (most notably being general corporate purpose and working capital purposes) are now applicable to them. This may have major implications for ECBs through RDBs, since general corporate purposes / working capital purposes was one of the pre-dominant purposes for which ECB was raised.


The New ECB Policy is part of the on-going efforts of the Government of India to rationalise and liberalise multiple regulations framed under the FEMA.The Government appears to be opening up the debt market to attract potential foreign currency inflows by significantly expanding the list of eligible borrowers.

The revision of the regulatory framework for ECB by the RBI is a positive step in simplifying the extant regime for ECB, and has resulted in substantial easing of the regime for debt funding by foreign corporates. The tax sops that have been introduced for ECBs, coupled with relaxation on LLPs raising ECBs, bucket of eligible lenders and the purpose for which ECBs can be raised, should encourage further ECB flows into the country.

Recent Position in India

It is interesting to see how the revamp of the ECB framework has actually led to more ECBs in the month of February, 2019 vis-a-vis January, 2019. The total amount of ECBs under automatic route was worth Rs. 2,811,867,493/-. This figure is a stark contrast to the amount raised just 1 month prior, i.e. in the month of January 2019. An amount of Rs. 2,266,869,156/- was raised through ECBs in January. While no such increase was seen in ECBs under approval route, it will be interesting to see the impact on the inflow, both under automatic and approval route, in the near future.

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