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 ..... auzdar) Chief General Manager INDEX 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vertible, optionally convertible or partially convertible) for issue of which, funds have been received on or after May 1, 2007 would be considered as debt and should conform to the ECB policy. Accordingly, all the norms applicable for ECBs, viz. eligible borrowers, recognised lenders, amount and maturity, end use stipulations, etc. shall apply. Since these instruments would be denominated in Rupees, the rupee interest rate will be based on the swap equivalent of LIBOR plus the spread as permissible for ECBs of corresponding maturity. (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies, (v) suppliers of equipments, (vi) foreign collaborators and (vii) foreign equity holders (other than erstwhile Overseas Corporate Bodies (OCBs)). A "foreign equity holder" to be eligible as recognized lender under the automatic route would require minimum holding of paid-up equity in the borrower company as set out below: i. For ECB up to USD 5 million - minimum paid-up equity of 25 per cent held directly by the lender, ii. For ECB more than USD 5 million - minimum paid-up equity of 25 per cent held directly by the lender and debt-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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... viewed: Average Maturity Period All-in-cost Ceilings over 6 month LIBOR* 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 In the case of fixed rate loans, the swap cost plus margin should be the equivalent of the floating rate plus the applicable margin. v) End-use ECB can be raised for investment [such as import of capital goods (as classified by DGFT in the Foreign Trade Policy), new projects, modernization/expansion of existing production units] in real sector - industrial 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tegory - I banks have been delegated powers to convey no objection under the Foreign Exchange Management Act (FEMA), 1999 for creation of charge on immovable assets, financial securities and issue of corporate or personal guarantees in favour of overseas lender / security trustee, to secure the ECB to be raised by the borrower. Before according no objection under FEMA, 1999 , AD Category - I banks should ensure and satisfy themselves that (i) the underlying ECB is strictly in compliance with the extant ECB guidelines, (ii) there exists a security clause in the loan agreement requiring the borrower to create charge on immovable assets / financial securities / 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gulation. If further approval or permission is required from any other regulatory / statutory authority or Government under the relevant laws / regulations, the applicant should take the approval of the authority concerned before undertaking the transaction. Further, the 'no objection' should not be construed as regularizing or validating any irregularities, contravention or other lapses, if any, under the provisions of FEMA or any other laws or regulations. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on-lending to the infrastructure sector as defined under the ECB policy, subject to their complying with the following conditions: i) compliance with the norms prescribed in the DNBS Circular DNBS.PD.CCNo.168 / 03.02.089 / 2009-10 dated February 12, 2010 ii) hedging of the currency risk in full. Designated Authorised Dealer should ensure compliance with the extant norms while certifying the ECB application. Foreign Currency Convertible Bonds (FCCBs) by Housing Finance Companies satisfying the following minimum criteria: (i) the minimum net worth of the financial intermediary during the previous three years shall not be less than Rs. 500 crore, (ii) a listing on the BSE or NSE, (iii) minimum size of FCCB is USD 100 million and (iv) the applicant should submit the purpose / plan of utilization of funds. Special Purpose Vehicles, or any other entity notified 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-operati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te, during a financial year. Other ECB criteria, such as end-use, recognized lender, etc., need to be complied with. Prepayment and call/put options, however, would not be permissible for such ECB up to a period of 10 years. iv) All-in-cost ceilings All-in-cost includes rate of interest, other fees and expenses in foreign currency except commitment fee, pre-payment fee, and fees payable in Indian Rupees. The payment of withholding tax in Indian Rupees is excluded for calculating the all-in-cost. The all-in-cost ceilings for ECB are reviewed from time to time. The following ceilings are valid until reviewed: Average Maturity Period All-in-cost Ceilings over 6 month LIBOR* 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 In the case of fixed rate 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), implementati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... letter of credit or letter of comfort by banks, financial institutions relating to ECB in the case of SME will be considered on merit subject to prudential norms. With a view to facilitating capacity expansion and technological upgradation in Indian textile industry, issue of guarantees, standby letters of credit, letters of undertaking and letters of comfort by banks in respect of ECB by textile companies for modernization or expansion of textile units will be considered under the Approval Route subject to prudential norms. viii) Security The choice of security to be provided to the lender / supplier is left to the borrower. However, creation of charge over immovable assets and financial securities, such as shares, in favour of the overseas lender is subject to Regulation 8 of Notification No. FEMA 21/RB-2000 dated May 3, 2000 and Regulation 3 of Notification No. FEMA 20/RB-2000 dated May 3, 2000 as amended from time to time, respectively. Powers have been delegated to Authorised Dealer Category 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y or on the basis of any equity related warrants attached to debt instruments. The FCEB may be denominated in any freely convertible foreign currency. Eligible Issuer: The Issuing Company shall be part of the promoter group of the Offered Company and shall hold the equity share/s being offered at the time of issuance of FCEB. Offered Company : The Offered Company shall be a listed company, which is engaged in a sector eligible to receive Foreign Direct Investment and eligible to issue or avail of Foreign Currency Convertible Bond (FCCB) or External Commercial Borrowings (ECB). Entities not eligible to issue FCEB : An Indian company, which is not eligible to raise funds from the Indian securities market, including a company which has been restrained from accessing the securities market by the SEBI shall not be eligible to issue FCEB. Eligible subscriber : Entities complying with the Foreign Direct Investment policy and adhering to the sectoral caps at the time of issue of FCEB can subscribe to FCEB. Prior approval of the Foreign Investment Promotion Board, wherever required under the Foreign Direct Investment policy, should be obtained. Entities not eligible to sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... promoter group company only for the permitted end-uses prescribed under the ECB policy. The issuing company should also submit audit trail of the end-use of the proceeds by the issuing company / promoter group companies to the Reserve Bank duly certified by the designated AD bank. Operational Procedure Issuance of FCEB shall require prior approval of the Reserve Bank under the Approval Route for raising ECB. The Reporting arrangement for FCEB shall be as per the extant ECB policy. xv) Empowered Committee Reserve Bank has set up an Empowered Committee to consider proposals coming under the Approval Route. II. REPORTING ARANGEMENTS AND DISSEMINATION OF INFORMATION i) Reporting Arrangements With a view to simplifying the procedure, submission of copy of loan agreement is dispensed with. For allotment of Loan Registration Number (LRN), borrowers are required to submit Form 83, in duplicate, certified by the Company Secretary (CS) or Chartered Accountant (CA) to the designated AD bank. One copy is to be forwarded by the designated AD bank to the Director, Balance of Payments Statistics Division, Department of Statistics and Information Systems (DSIM), Reserve Bank ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made by credit to the FCNR(B)/NRE/NRO account of the guarantor provided, the amount remitted/credited shall not exceed the rupee equivalent of the amount paid by the non-resident guarantor against the invoked guarantee. The facility of credit enhancement by eligible non-resident entities may be extended to domestic debt raised through issue of capital market instruments, such as debentures and bonds, by Indian companies engaged exclusively in the development of infrastructure and by the Infrastructure Finance Companies (IFCs), which have been classified as such by the Reserve Bank in terms of the guidelines contained in the circular DNBS.PD. CC No. 168 / 03.02.089 / 2009-10 dated February 12, 2010, subject to the following conditions: i. credit enhancement should be provided by multilateral / regional financial institutions and Government owned development financial institutions; ii. the underlying debt instrument should have a minimum average maturity of seven years; iii. prepayment and call / put options are not permissible for such capital market instruments up to an average maturity period of 7 years; iv. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreement with domestic banks and overseas recognized lenders for either a conditional or unconditional take-out of the loan within three years of the scheduled Commercial Operation Date (COD). The scheduled date of occurrence of the take-out should be clearly mentioned in the agreement. ii. The loan should have a minimum average maturity period of seven years. iii. The domestic bank financing the infrastructure project should comply with the extant prudential norms relating to take-out financing. iv. The fee payable, if any, to the overseas lender until the take-out shall not exceed 100 bps per annum. v. On take-out, the residual loan agreed to be taken- out by the overseas lender would be considered as ECB and the loan should be designated in a convertible foreign currency and all extant norms relating to ECB should be complied with. vi. Domestic banks / Financial Institutions will not be permitted to guarantee the take-out finance. vii. The domestic bank will not be allowed to carry any obligation on its balance sheet after the occurrence of the take-out event. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay make an application to the Chief General Manager-in-Charge, Foreign Exchange Department, External Commercial Borrowings Division, Reserve Bank of India, Central Office, Mumbai 400 001, giving full details viz., name of the borrower, amount raised, maturity, circumstances leading to invocation of guarantee /letter of comfort, date of default, its impact on the liabilities of the overseas branch of the AD bank concerned and other relevant factors. VIII. ECB UNDER THE ERSTWHILE USD 5 MILLION SCHEME Designated AD banks are permitted to approve elongation of repayment period for loans raised under the erstwhile USD 5 Million Scheme, provided there is a consent letter from the overseas lender for such reschedulement without any additional cost. Such approval with existing and revised repayment schedule along with the Loan Key/Loan Registration Number should be initially communicated to the Chief General Manager-in-Charge, Foreign Exchange Department, ECB Division Reserve Bank of India, Central Office, Mumbai within seven days of approval and subsequently in ECB - 2. IX. RATIONALIZATION OF PROCEDURES - DELEGATION OF POWERS TO AD Any changes in the terms and conditio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of less than three years. It may be noted that buyers credit and suppliers credit for three years and above come under the category of External Commercial Borrowings (ECB) which are governed by ECB guidelines. a) Amount and Maturity AD banks are permitted to approve trade credits for imports into India up to USD 20 million per import transaction for imports permissible under the current Foreign Trade Policy of the DGFT with a maturity period up to one year (from the date of shipment). For import of capital goods as classified by DGFT, AD banks may approve trade credits up to USD 20 million per import transaction with a maturity period of more than one year and less than three years (from the date of shipment). No roll-over/extension will be permitted beyond the permissible period. AD banks shall not approve trade credit exceeding USD 20 million per import transaction. b) All-in-cost Ceilings The current all-in-cost ceilings are as under : Maturity period All-in-cost ceilings over 6 months LIBOR* Up to one year 200 basis points More than one year but less than three years * for the respective currency of credit or ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 5. FEMA 142/2005-RB December 6, 2005 6. FEMA.157/2007-RB August 30, 2007 7. FEMA.194/2009-RB June 17, 2009 8. FEMA.197/2009-RB September 22, 2009 1. A.P.(DIR Series) Circular No.41 April 29, 2002 2. A.P.(DIR Series) Circular No.29 October 18, 2003 3. A.P.(DIR Series) Circular No.60 January 31, 2004 4. A.P.(DIR Series) Circular No.75 February 23, 2004 5. A.P.(DIR Series) Circular No.82 April 1, 2004 6. A.P.(DIR Series) Circular No.87 April 17, 2004 7. A.P.(DIR Series) Circular No.15 October 1, 2004 8. A.P.(DIR Series) Circular No.24 November 1, 2004 9. A.P.(DIR Series) Circular No.40 April 25, 2005 10. A.P.(DIR Series) Circular No.5 August 1, 2005 11. A.P.(DIR Series) Circular No.15 November 4, 2005 12. A.P.(DIR Series) Circular No.23 January 23, 2006 13. A.P.(DIR Series) Circular No.34 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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