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TMI BlogMaster Circular on External Commercial Borrowings and Trade Credits.X X X X Extracts X X X X X X X X Extracts X X X X ..... X PART I EXTERNAL COMMERCIAL BORROWINGS (ECB) I.(A) AUTOMATIC ROUTE i) Eligible Borrowers ii) Recognised Lenders iii) Amount and Maturity iv) All-in-cost ceilings v) End-use vi) End Uses not permitted vii) Guarantees viii) Security ix) Parking of ECB proceeds x) Prepayment xi) Refinancing of an existing ECB xii) Debt Servicing xiii) Procedure I.(B) APPROVAL ROUTE i) Eligible Borrowers ii) Recognised Lenders iii) Amount and Maturity iv) All-in-cost ceilings v) End-use vi) End-uses not permitted vii) Guarantee viii) Security ix) Parking of ECB proceeds x) Prepayment xi) Refinancing of an existing ECB xii) Debt Servicing xiii) Procedure xiv) Foreign Currency Exchangeable Bonds xv) Empowered Committee II. REPORTING ARANGEMENTS AND DISSEMINATION OF INFORMATION i) Reporting Arrangements ii) Dissemination of Information iii) STRUCTURED OBLIGATIONS iv). TAKE-OUT FINANCE v) COMPLIANCE WITH ECB GUIDELINES vi) CONVERSION OF ECB INTO EQUITY vii) CRYSTALLISATION OF ECB viii) ECB UNDER THE ERSTWHILE USD 5 MILLION SCHEME ix) RATIONALIZATION OF PROCEDURES- DELEGATION OF POWERS TO AD (a) Changes/modifications in the drawdown/repayment schedule (b) Changes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty. (d) Foreign Currency Exchangeable Bond (FCEB) means a bond expressed in foreign currency, the principal and interest in respect of which is payable in foreign currency, issued by an Issuing Company and subscribed to by a person who is a resident outside India, in foreign currency and 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. The FCEB must comply with the "Issue of Foreign Currency Exchangeable Bonds (FCEB) Scheme, 2008", notified by the Government of India, Ministry of Finance, Department of Economic Affairs vide Notification G.S.R.89(E) dated February 15, 2008. The guidelines, rules, etc governing ECBs are also applicable to FCEBs. (e) ECB can be accessed under two routes, viz., (i) Automatic Route outlined in paragraph I (A) and (ii) Approval Route outlined in paragraph I (B). (f) ECB for investment in real sector-industrial sector, infrastructure sector-in India, and specified service sectors as indicated under para I (A) (i) (a) are under Automatic Route, i.e. do not require Reserve Bank / Government of India appr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equity ratio not exceeding 4:1 (i.e. the proposed ECB not exceeding four times the direct foreign equity holding) Overseas organizations and individuals complying with following safeguards may provide ECB to Non-Government Organizations (NGOs) engaged in micro finance activities. (i) Overseas Organizations proposing to lend ECB would have to furnish to the AD bank of the borrower a certificate of due diligence from an overseas bank, which in turn is subject to regulation of host-country regulator and adheres to the Financial Action Task Force (FATF) guidelines. The certificate of due diligence should comprise the following (i) that the lender maintains an account with the bank for at least a period of two years, (ii) that the lending entity is organised as per the local laws and held in good esteem by the business/local community and (iii) that there is no criminal action pending against it. (ii) Individual Lender has to obtain a certificate of due diligence from an overseas bank indicating that the lender maintains an account with the bank for at least a period of two years. Other evidence /documents such as audited statement of account and income tax return which the overseas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial sector including small and medium enterprises (SME), infrastructure sector and specified service sectors namely hotel, hospital, software in India. Infrastructure sector is defined as (i) power, (ii) telecommunication, (iii) railways, (iv) roads including bridges, (v) sea port and airport, (vi) industrial parks, (vii) urban infrastructure (water supply, sanitation and sewage projects), (viii) mining, exploration and refining and (ix) cold storage or cold room facility, including for farm level pre-cooling, for preservation or storage of agricultural and allied produce, marine products and meat. * Overseas direct investment in Joint Ventures (JV)/ Wholly Owned Subsidiaries (WOS) subject to the existing guidelines on Indian Direct Investment in JV/ WOS abroad. * Utilization of ECB proceeds is permitted for first stage acquisition of shares in the disinvestment process and also in the mandatory second stage offer to the public under the Government's disinvestment programme of PSU shares. * For lending to self-help groups or for micro-credit or for bonafide micro finance activity including capacity building by NGOs engaged in micro finance activities. * Payment for Spectrum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties / furnish corporate or personal guarantee, (iii) the loan agreement has been signed by both the lender and the borrower and (iv) the borrower has obtained Loan Registration Number (LRN) from the Reserve Bank. On compliance with the above conditions, AD Category - I banks may convey their 'no objection', under FEMA, 1999 for creation of charge on immovable assets, financial securities and issue of personal or corporate guarantee, subject to the conditions indicated below: a) The 'no objection' for creation of charge on immovable assets may be conveyed under FEMA, 1999 either in favour of the lender or the security trustee, subject to the following conditions: * i. 'No objection' shall be granted only to a resident ECB borrower. * ii. The period of such charge on immovable assets has to be co-terminus with the maturity of the underlying ECB. * iii. Such 'no objection' should not be construed as a permission to acquire immovable asset (property) in India, by the overseas lender / security trustee. * iv. In the event of enforcement / invocation of the charge, the immovable asset (property) will have to be sold only to a person resident in India and the sale proceeds shal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Treasury bills and other monetary instruments of one year maturity having minimum rating as indicated above, and (c) deposits with overseas branches / subsidiaries of Indian banks abroad. The funds should be invested in such a way that the investments can be liquidated as and when funds are required by the borrower in India. ECB funds may also be repatriated to India for credit to the borrowers' Rupee accounts with AD Category I banks in India, pending utilization for permissible end-uses. x) Prepayment Prepayment of ECB up to USD 500 million may be allowed by AD banks without prior approval of Reserve Bank subject to compliance with the stipulated minimum average maturity period as applicable to the loan. xi) Refinancing of an existing ECB The existing ECB may be refinanced by raising a fresh ECB subject to the condition that the fresh ECB is raised at a lower all-in-cost and the outstanding maturity of the original ECB is maintained. xii) Debt Servicing The designated AD bankhas the general permission to make remittances of installments of principal, interest and other charges in conformity with the ECB guidelines issued by Government / Reserve Bank of India from time to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Reserve Bank, set up to finance infrastructure companies / projects exclusively, will be treated as Financial Institutions and ECB by such entities will be considered under the Approval Route. * Multi-State Co-operative Societies engaged in manufacturing activity and satisfying the following criteria i) the Co-operative Society is financially solvent and ii) the Co-operative Society submits its up-to-date audited balance sheet. * SEZ developers can avail of ECBs for providing infrastructure facilities within SEZ, as defined in the extant ECB policy like (i) power, (ii) telecommunication, (iii) railways, (iv) roads including bridges, (v) sea port and airport, (vi) industrial parks, (vii) urban infrastructure (water supply, sanitation and sewage projects), (viii) mining, exploration and refining and (ix) cold storage or cold room facility, including for farm level pre-cooling, for preservation or storage of agricultural and allied produce, marine products and meat. * Corporates in the services sector viz. hotels, hospitals and software sector can avail of ECB beyond USD 100 million per financial year. * Corporates which have violated the extant ECB policy and are unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loans, the swap cost plus the margin should be the equivalent of the floating rate plus the applicable margin. v) End-use a) ECB can be raised only for investment [such as import of capital goods (as classified by DGFT in the Foreign Trade Policy), implementation of new projects, modernization/expansion of existing production units] in real sector - industrial sector including small and medium enterprises (SME) and infrastructure sector - in India. Infrastructure sector is defined as (i) power (ii) telecommunication (iii) railways (iv) roads including bridges (v) sea port and airport (vi) industrial parks (vii) urban infrastructure (water supply, sanitation and sewage projects) (viii) mining, exploration and refining and (ix) cold storage or cold room facility, including for farm level pre-cooling, for preservation or storage of agricultural and allied produce, marine products and meat. b) Overseas direct investment in Joint Ventures (JV)/Wholly Owned Subsidiaries (WOS) subject to the existing guidelines on Indian Direct Investment in JV/WOS abroad. c) The payment by eligible borrowers in the Telecom sector, for spectrum allocation may, initially, be met out of Rupee resources ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I banks to issue necessary NOCs under FEMA as detailed in para I (A) (viii) ibid. ix) Parking of ECB proceeds Borrowers are permitted to either keep ECB proceeds abroad or to remit these funds to India, pending utilization for permissible end-uses. ECB proceeds parked overseas 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 overseas branches / subsidiaries of Indian banks abroad. The funds should be invested in such a way that the investments can be liquidated as and when funds are required by the borrower in India. ECB funds may also be repatriated to India for credit to the borrowers' Rupee accounts with AD Category I banks in India pending utilization for permissible end-uses. x) Prepayment (a) Prepayment of ECB up to USD 500 million may be allowed by the AD bank without prior approval of the Reserve Bank subject to compliance with the stipulated minimum average maturity period as applicable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Foreign Investment Promotion Board, wherever required under the Foreign Direct Investment policy, should be obtained. Entities not eligible to subscribe to FCEB : Entities prohibited to buy, sell or deal in securities by the SEBI will not be eligible to subscribe to FCEB. End-use of FCEB proceeds: Issuing Company: (i) The proceeds of FCEB may be invested by the issuing company overseas by way of direct investment including in Joint Ventures or Wholly Owned Subsidiaries abroad, subject to the existing guidelines on overseas investment in Joint Ventures / Wholly Owned Subsidiaries. (ii) The proceeds of FCEB may be invested by the issuing company in the promoter group companies. Promoter Group Companies: Promoter group companies receiving investments out of the FCEB proceeds may utilize the amount in accordance with end-uses prescribed under the ECB policy. End-uses not permitted: The promoter group company receiving such investments will not be permitted to utilise the proceeds for investments in the capital market or in real estate in India. All-in-cost : The rate of interest payable on FCEB and the issue expenses incurred in foreign currency shall be within the all-in-co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, Balance of Payments Statistics Division, Department of Statistics and Information Systems (DSIM), Reserve Bank of India, Bandra-Kurla Complex, Mumbai - 400 051. (Note: copies of loan agreement and offer documents for FCCB are not required to be submitted with Form 83). * The borrower can draw-down the loan only after obtaining the LRN from DSIM, Reserve Bank. * Borrowers are required to submit ECB-2 Return certified by the designated AD bank on monthly basis so as to reach DSIM, Reserve Bank within seven working days from the close of month to which it relates. [Note: All previous returns relating to ECB viz. ECB 3 - ECB 6 have been discontinued with effect from January 31, 2004]. ii) Dissemination of Information For providing greater transparency, information with regard to the name of the borrower, amount, purpose and maturity of ECB under both Automatic and Approval routes are put on the Reserve Bank's website, on a monthly basis, with a lag of one month to which it relates. III. STRUCTURED OBLIGATIONS Borrowing and lending of Indian Rupees between two residents does not attract any provisions of the Foreign Exchange Management Act, 1999. In cases where a Rupee loa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... average maturity period of 7 years; * iv. guarantee fee and other costs in connection with credit enhancement will be restricted to a maximum 2 per cent of the principal amount involved; * on invocation of the credit enhancement, if the guarantor meets the liability and if the same is permissible to be repaid in foreign currency to the eligible non-resident entity, the all-in-cost ceilings, as applicable to the relevant maturity period of the Trade Credit / ECBs, is applicable to the novated loan. The all-in-cost ceilings, depending on the average maturity period, are applicable as follows: Average maturity period of the loan on invocation All-in-cost ceilings over 6 month LIBOR* Up to 3 years 200 basis points Three years and up to five years 300 basis points More than five years 500 basis points *for the respective currency of borrowing or applicable benchmark * vi. In case of default and if the loan is serviced in Indian Rupees, the applicable rate of interest would be the coupon of the bonds or 250 bps over the prevailing secondary market yield of 5 years Government of India security, as on the date of novation, whichever is higher; * vii. IFCs proposing to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y with the ECB guidelines and the Reserve Bank regulations / directions is that of the borrower concerned and any contravention of the ECB guidelines will be viewed seriously and will invite penal action under FEMA 1999 (cf. A. P. (DIR Series) Circular No. 31 dated February 1, 2005). The designated AD bank is also required to ensure that raising / utilisation of ECB is in compliance with ECB guidelines at the time of certification. VI. CONVERSION OF ECB INTO EQUITY (i) Conversion of ECB into equity is permitted subject to the following conditions: * The activity of the company is covered under the Automatic Route for Foreign Direct Investment or Government (FIPB) approval for foreign equity participation has been obtained by the company, wherever applicable. * The foreign equity holding after such conversion of debt into equity is within the sectoral cap, if any, * Pricing of shares is as per the pricing guidelines issued under FEMA, 1999 in the case of listed/ unlisted companies. (ii) Conversion of ECB may be reported to the Reserve Bank as follows: * Borrowers are required to report full conversion of outstanding ECB into equity in the form FC-GPR to the Regional Offic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (a) Changes/modifications in the drawdown/repayment schedule Designated AD Category-I banks may approve changes/modifications in the drawdown/repayment schedule of the ECBs already availed, both under the approval and the automatic routes, subject to the condition that the average maturity period, as declared while obtaining the LRN, is maintained. The changes in the drawdown/repayment schedule should be promptly reported to the DSIM, RBI in Form 83. However, any elongation/rollover in the repayment on expiry of the original maturity of the ECB would require the prior approval of the Reserve Bank. (b) Changes in the currency of borrowing Designated AD Category-I banks may allow changes in the currency of borrowing, if so desired, by the borrower company, in respect of ECBs availed of both under the automatic and the approval routes, subject to all other terms and conditions of the ECB remaining unchanged. Designated AD banks should, however, ensure that the proposed currency of borrowing is freely convertible. (c) Change of the AD bank Designated AD Category-I banks may allow change of the existing designated AD bank by the borrower company for effecting its transactions pert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supplier, bank and financial institution, up to USD 20 million per transaction for a period up to one year for import of all non-capital goods permissible under Foreign Trade Policy (except gold, palladium, platinum, Rodium, silver etc.) and up to three years for import of capital goods, subject to prudential guidelines issued by Reserve Bank from time to time. The period of such Letters of credit / guarantees / LoU / LoC has to be co-terminus with the period of credit, reckoned from the date of shipment. d) Reporting Arrangements AD banks are required to furnish details of approvals, drawal, utilisation, and repayment of trade credit granted by all its branches, in a consolidated statement, during the month, in form TC (format in Annex IV) from April 2004 onwards to the Director, Division of International Finance, Department of Economic Analysis and Policy, Reserve Bank of India, Central Office Building, 8th floor, Fort, Mumbai - 400 001 (and in MS-Excel file through email) so as to reach not later than 10th of the following month. Each trade credit may be given a unique identification number by the AD bank. AD banks are required to furnish data on issuance of LCs / guarantees ..... X X X X Extracts X X X X X X X X Extracts X X X X
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