For large projects in India, financial support can be obtained from a foreign country through external commercial loans, giving foreign investors an opportunity to invest in India. IT is a commercial loan with a minimum average term of 3 years. External commercial credits are the key components of the overall external aid of India, which includes external aid, buyer credits, non-resident deposits, short-term credits and rupee debt. External commercial loans are accessed through either the automatic route or the approval route. The automatic way does not require the approval of the RBI or the Government, but the approval way requires the prior approval of the RBI and the Government of India.
This article explains the policy, procedure and practice of external commercial borrowing under the automatic route:
Listed below are the eligible borrowers who can avail external commercial loans through the automatic route;
- Companies registered under the Companies Act including those in the hotel, hospital, software etc sectors
- Infrastructure finance companies that are not financial intermediaries, such as banks, real estate finance companies, financial institutions and non-bank financial companies
- Units in special economic zones can borrow for their own needs. You should not transfer or sub-lend such funds to sister companies or entities in the domestic tariff area.
- To avail external commercial loans, the non-governmental organizations engaged in microfinance activities. must meet certain conditions such as They should have a satisfactory credit relationship with a reputable commercial bank licensed to deal in foreign exchange in India for a minimum of 3 years and have a “Fit and Proper” status due diligence letter from the Board or Committee of Administration from the nominated bank of AD category the borrowing agency.
Individuals, non-profit organizations and trusts are not eligible to obtain external commercial credit automatically;
IInternational banks, export credit agencies, foreign employees, equipment suppliers, foreign shareholders, multilateral financial institutions or regional financial institutions are the approved lenders for external commercial loans under the automatic route.
“Foreign Shareholder” to qualify as an “Approved Lender” under the automatic route would require a minimum paid-up equity interest in the Lending Company, as set out below;
- For the ECB up to $5 million a minimum paid-up capital of 25 percent held directly by the lender
- For the ECB over $5 million, a minimum paid-up equity of 25 percent held directly by the lender and a leverage ratio of no more than 4:1
- Overseas organizations and individuals can provide ECB to NGOs involved in microfinance activities, but they must provide a foreign bank due diligence certificate in the prescribed format.
ECB raise limit during a financial year:
- Non-hotel, hospital and software companies – $500 million or equivalent.
- Service Sector Companies i.e. Hotels, Hospitals and Software Sectors – USD 100 million or equivalent to cover foreign currency and/or rupee capital expenditures for eligible end uses.
- Non-governmental organizations engaged in microfinance activities – ECB up to USD 5 million or equivalent.
- ECB up to USD 20 million or equivalent in any financial year with a minimum average maturity of three years.
- ECB up to USD 20 million or equivalent and up to USD 500 million or equivalent with a minimum average maturity of five years.
- ECB up to USD 20 million or equivalent may have call/put options provided the average minimum tenor is three years
The following are the permitted end-uses of external commercial borrowing proceeds:
- Investing in real estate and industrial sectors including certain service sectors like hotel, hospital and software, small and medium sized enterprises, infrastructure sector in India.
- Acquisition of shares in the first phase of the divestment process and in the mandatory second phase offering to the public under the government’s divestment program for PSU shares.
- Payments for frequency assignment.
End uses not approved for Investing in the capital market or acquiring a business, general corporate purpose, working capital, repayment of outstanding loans and real estate sector
Procedure for taking out external commercial loans:
- Borrowers can enter into a loan agreement with approved lenders that comply with ECB guidelines without prior approval from the Reserve Bank to borrow the ECB through the automatic route. The borrower must obtain a loan registration number from the Reserve Bank of India before availing the ECB.
- Borrowers must submit Form 83 in duplicate, certified by the Company Secretary or Chartered Accountant, to the designated AD bank for loan registration number assignment. A copy is to be forwarded by the AD nominated bank to the Director, Balance of Payments Statistics Division, Department of Statistics and Information Systems, Reserve Bank of India.
- The borrower can only avail the loan after getting the loan registration number from the Department of Statistics and Information Systems, Reserve Bank of India.
- Borrowers are required to submit ECB-2 Return certified by the designated AD Bank on a monthly basis to reach the Department of Statistics and Information Systems, Reserve Bank within seven business days of the end of the month to which they relate.
Conclude; The primary responsibility for ensuring that ECB funds borrowed/used are in accordance with ECB guidelines and Reserve Bank regulations/instructions rests with the relevant borrower and any breach of ECB guidelines will be subject to serious scrutiny and penalties according to FEMA 1999.