External Commercial Borrowings (ECBs) in India

Within a narrow span of two years, foreign debt more than doubled, as domestic lenders adopted a cautious stance upon considering the fallout of a liquidity crisis, and as India's Central Bank eased rules for using overseas borrowings. As depicted by the data of Reserve Bank of India (RBI), the total external commercial borrowings – i.e. loans granted by non-resident entities to eligible Indian borrowers in foreign currency, increased by a whopping 61.45 percent year-on-year to USD 50.15 billion, as of December 2019. This happens to be a 117 percent jump from the numbers of 2017.

External Commercial Borrowings (ECB) refers to the debt shouldered by an eligible entity in India for solely commercial purposes, that has been extended by external sources, i.e. from any recognized entity outside India. These borrowings are expected to conform to norms and conditions put forth by the RBI. The ECBs fall under the umbrella of RBI regulations as postulated under the Master Direction - External Commercial Borrowings, Trade Credits and Structured Obligations (Master Direction), and the Foreign Exchange Management Act, 1999 (FEMA).

ECBs have proven to be instruments that greatly aid Indian firms and organizations in their efforts to raise funds from beyond India's borders, especially with regard to bringing in fresh investments. One might recognize that structures similar to ECBs include those of Foreign Currency Convertible Bonds (FCCBs) and Foreign Currency Exchangeable Bonds (FCEBs). It is vital to note that while the main purpose underlying the issuance of FCCBs is the raising of capital, ECBs are more expansively applicable; within the latter's ambit lies commercial loans that can include securitized instruments, bank loans, suppliers' credit, buyers' credit, and bonds. The minimum maturity period of the aforementioned instruments is, on average, three years.

Availing of External Commercial Borrowing

As of today, there exist two paths to raise funds by employing ECBs- the approval route, and the automatic route. There are a variety of eligibility regulations created by the government for availing of finance under the automatic route. These regulations are in relation to amounts, industry, the end-use of the funds, etc. Companies that desire to raise finance via ECB must necessarily meet these eligibility criteria; thereafter, funds can be raised without the need for approval.

The approval route, on the other hand, mandates that companies which fall under certain pre-specified sectors must obtain the RBI's or the government's explicit permission, prior to raising funds through External Commercial Borrowing. The RBI has issued circulars and formal guidelines, specifying the borrowing structure.

In order to ensure that the inflow stays clean, the RBI has created the categorization of "eligible entities" amongst the borrowers, and that of "recognized non-residents" amongst potential lenders. Furthermore, it has maintained checks via forms of ECB, end-use restriction, minimum maturity period etc.

Eligible Borrowers and Recognized Lenders

The ECBs come in two configurations: Foreign Currency ECB (FCY ECB) and Indian Currency ECB (INR ECB). Eligible borrowers could be a label that fits any entity that is eligible to seek Foreign Direct Investment (FDI). It can also include specific entities the likes of Port Trusts, Units in Special Economic Zones, Small Industries Development Bank of India and the EXIM Bank of India. The ECBs are to be obtained from 'recognized lenders'. These terms could refer to any entity that is a member of the International Organization of Securities Commissions (IOSCO) and Financial Action Task Force (FATF). In addition to IOSCO and FATF, multilateral and regional financial institutions where India is a member country, foreign subsidiaries of Indian banks (subject to applicable prudential norms), and individuals (if they are foreign equity holders), also fit the bill of recognized lenders, as per the ECB Master Direction.

End-use Restrictions

Over the passage of time, RBI has relaxed the stringent restrictions on end-use of ECBs raised, and as per the circular dated July 30, 2019, the utilization of ECB proceeds is now permitted to satisfy general corporate purposes, working capital requirements, repayment of INR loans and for such on-lending purposes, subject to limit and leverage requirements detailed in the Master Direction. The most notable development with regard to the relaxation in policy is that of the new permissibility of ECB usage for working capital, and general corporate purposes with a minimum average maturity period (MAMP) of 10 years. Furthermore, the ECB proceeds can also be harnessed for the repayment of rupee loans availed domestically with a MAMP of 7 years.

Notably, the Master Direction imposes restrictions of the manner in which these funds are used. The funds borrowed through External Commercial Borrowing may be used for the expansion of companies, but they cannot be employed for the purposes of onward lending, repaying existing loans, or investing in real estate.

Benefits of External Commercial Borrowing

Aside from the obvious, the ECB structure is possessive of a variety of intrinsic benefits, some of which shall be detailed upon. First and foremost, the value of funds is generally lower when borrowed from external sources. For instance, there are a multitude of economies that have a lower interest rate; if Indian firms and organizations were to borrow at lower interest rates from the Eurozone and the United States, they would indubitably stand to benefit. Since the markets are larger while raising funds through ECB, companies' capacity to meet larger requirements from international players is magnified, in comparison with domestic player interaction.

Another boon is the fact that ECBs are, by virtue of their most fundamental nature, simple loans. Given that they do not necessarily have to be of equity nature, the company's stakes shall not be diluted. The borrowers can necessarily raise funds without relinquishing control since debtors will not have any voting rights in the company.

While ECBs enable the borrower to diversify the investor base, they also open up a vista to global markets, affording borrowers greater exposure to worldwide opportunities, which is not to say that ECB does not feed the local economy. The inflows can be directed into the sector by the government of India, thereby increasing the potential for growth. For example, a greater percentage of funding through ECB can be permitted by the government for the SME and infrastructure industry, thus contributing to the growth of the country.

Disadvantages of External Commercial Borrowing

While a multitude of ECBs' strong points has been discussed, some disadvantages are worth considering too. One could hypothesize that the company could develop a lax attitude, as they increasingly come across funds available at lower rates. This could lead to companies borrowing with abandon and could lead to higher debt on the balance sheet of the company, thereby adversely affecting financial ratios.

The fact is that rating agencies view companies with higher debt on their balance sheets with a negative perspective, which could lead to a market demotion of such companies. Additionally, the shares of the company could also be subject to a fall in market value over a period of time.

Since raising funds through External Commercial Borrowing is done in foreign currencies, the principal and the interest shall have to be paid in foreign currencies. As such, the company opens itself up to the risks associated with exchange rates. This could even lead the company to engage in cost-hedging.

It is established that the ECBs can be availed at lower rates; however, there are several guidelines and restrictions that cannot be evaded. These restrictions primarily apply to the amount that can be borrowed, and the maturity of the External Commercial Borrowing. While amounts in excess of USD 20 million will have maturity periods of at least five years, amounts under USD 20 million will have maturity periods of at least three years on average.

The External Commercial Borrowings are among the most commonly available sources of funding. Nonetheless, it goes without saying that companies must exercise caution with regard to the impact that the borrowing can have on their balance sheets, and exchange risks.


What with the RBI delineating industry-specific distinctions for the automatic route and the approval route to ECB procurement, putting forth end-use restrictions and minimum average maturity periods, it is clear that ECBs are going to harnessed as one of the primary vehicles to bring investment in India.

Given that the RBI now permits ECB proceeds to see through the repayment of loans, the Indian GDP is expected to maintain stability; at the same time, Indian corporations have been afforded grand leeway to seek much-required funds from the overseas market with refreshingly modest interest rates.

Originally published 18 August, 2020

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.