TMI BlogMaster Direction - External Commercial Borrowings, Trade Credits and Structured Obligations (Updated as on December 22, 2023) (Supersedes Master Direction - External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers (Updated as on November 22, 2018))X X X X Extracts X X X X X X X X Extracts X X X X ..... cluded in the following Regulations framed under FEMA: Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 , notified vide Notification No. FEMA 3R/2018-RB dated December 17, 2018 , as amended from time to time; and Foreign Exchange Management (Guarantees) Regulations, 2000 , notified vide Notification No. FEMA 8/2000-RB dated May 03, 2000, as amended from time to time. 2. Within the contours of the Regulations, Reserve Bank of India also issues directions to Authorised Persons under Section 11 of the Foreign Exchange Management Act (FEMA), 1999 . These directions lay down the modalities as to how the foreign exchange business has to be conducted by the Authorised Persons with their customers/constituents with a view to implementing the regulations framed. 3. Instructions issued in respect of External Commercial Borrowings and Trade Credits have been compiled in this Master Direction in supersession of earlier directions contained in Master Direction - External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers, dated January 1, 2016, as amended from tim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Powers delegated to AD Category I banks to deal with ECB cases 7.1 Change of the AD Category I bank 7.2 Cancellation of LRN 7.3 Refinancing of existing ECB 7.4 Conversion of ECB into equity 7.5 Security for raising ECB 7.6 Additional Requirements 8 Special Dispensations under the ECB framework 8.1 ECB facility for Oil Marketing Companies 8.2 ECB facility for Start-ups 9 Borrowing by Entities under Investigation 10 ECB by entities under restructuring/ ECB facility for refinancing stressed assets 11 Dissemination of information 12 Compliance with the guidelines Part II Trade Credits Framework 13 Introduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Reserve Bank of India SEBI: Securities and Exchange Board of India SEZ: Special Economic Zone SIDBI: Small Industries Development Bank of India TC: Trade Credit USD: United States Dollar XBRL: eXtensible Business Reporting Language 1. Important terms used: 1.1. All-in-Cost: It includes rate of interest, other fees, expenses, charges, guarantee fees, ECA charges, whether paid in foreign currency or INR but will not include commitment fees and withholding tax payable in INR. In the case of fixed rate loans, the swap cost plus spread should not be more than the floating rate plus the applicable spread. Additionally, for FCCBs, the issue related expenses should not exceed 4 per cent of the issue size and in case of private placement, these expenses should not exceed 2 per cent of the issue size, etc. Under TC Framework, all-in-cost shall include rate of interest, other fees, expenses, charges, guarantee fees whether paid in foreign cu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should not be a country identified in the public statement of the FATF as (i) A jurisdiction having a strategic Anti-Money Laundering or Combating the Financing of Terrorism deficiencies to which counter measures apply; or (ii) A jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the Financial Action Task Force to address the deficiencies. 1.9. Foreign Currency Convertible Bonds (FCCBs): It refers to foreign currency denominated instruments which are issued in accordance with the Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993, as amended from time to time. Issuance of FCCBs shall also conform to other applicable regulations. Further, FCCBs should be without any warrants attached. 1.10. Foreign Currency Exchangeable Bonds (FCEBs): It refers to foreign currency denominated instruments which are issued in accordance with the Issue of Foreign Currency Exchangeable Bonds Scheme, 2008, as amended from time to time. FCEBs are exchangeable into equity share of another company, to be called the Offered Company, in any manner, ei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial Economic Zones Act 2005, as amended from time to time. PART I EXTERNAL COMMERCIAL BORROWINGS FRAMEWORK 2. Introduction: External Commercial Borrowings are commercial loans raised by eligible resident entities from recognised non-resident entities and should conform to parameters such as minimum maturity, permitted and non-permitted end-uses, maximum all-in-cost ceiling, etc. The parameters given below apply in totality and not on a standalone basis. 2.1. ECB Framework: The framework for raising loans through ECB (hereinafter referred to as the ECB Framework) comprises the following two options: Sr. No. Parameters FCY denominated ECB INR denominated ECB i Currency of borrowing Any freely convertible Foreign Currency Indian Rupee (INR) ii Forms of ECB Loans including bank loans; floating/ fixed rate notes/ bonds/ debentures (other than fully and compulsorily convertible instruments); Trade credits beyond 3 years; FCCBs; FCEBs and Financial Lease. Loans incl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 year (b) ECB raised from foreign equity holder for working capital purposes, general corporate purposes or for repayment of Rupee loans 5 years 4 (c) ECB raised for (i) working capital purposes or general corporate purposes (ii) on-lending by NBFCs for working capital purposes or general corporate purposes 10 years (d) ECB raised for (i) repayment of Rupee loans availed domestically for capital expenditure (ii) on-lending by NBFCs for the same purpose 7 years (e) ECB raised for (i) repayment of Rupee loans availed domestically for purposes other than capital expenditure (ii) on-lending by NBFCs for the same purpose 10 years for the categories mentioned at (b) to (e) (i) ECB cannot be raised from foreign branches / subsidiaries of Indian banks ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to follow the guidelines for hedging issued, if any, by the concerned sectoral or prudential regulator in respect of foreign currency exposure. Infrastructure space companies shall have a Board approved risk management policy. Further, such companies are required to mandatorily hedge 70 per cent of their ECB exposure in case the average maturity of the ECB is less than 5 years. The designated AD Category-I bank shall verify that 70 per cent hedging requirement is complied with during the currency of the ECB and report the position to RBI through Form ECB 2. The following operational aspects with respect to hedging should be ensured: a. Coverage: The ECB borrower will be required to cover the principal as well as the coupon through financial hedges. The financial hedge for all exposures on account of ECB should start from the time of each such exposure (i.e. the day the liability is created in the books of the borrower). b. Tenor and rollover: A minimum tenor of one year for the financial hedge would be required with periodic rollover, duly ensuring that the exposure on account of ECB is not unhedged at any point during the currency of the ECB. c. N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... limit stands increased from USD 750 million or equivalent to USD 1.5 billion or equivalent. This relaxation is available for ECBs to be raised till December 31, 2022. 3. Issuance of Guarantee, etc. by Indian banks and Financial Institutions: Issuance of any type of guarantee by Indian banks, All India Financial Institutions and NBFCs relating to ECB is not permitted. Further, financial intermediaries (viz., Indian banks, All India Financial Institutions, or NBFCs) shall not invest in FCCBs/ FCEBs in any manner whatsoever. 4. Parking of ECB proceeds: ECB proceeds are permitted to be parked abroad as well as domestically in the manner given below: 4.1. Parking of ECB proceeds abroad: ECB proceeds meant only for foreign currency expenditure can be parked abroad pending utilisation. Till utilisation, these funds 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 foreign branches/subsidiaries of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vision, Bandra-Kurla Complex, Mumbai 400 051 (Contact numbers 022-26572513 and 022-26573612). Copies of loan agreement for raising ECB are not required to be submitted to the Reserve Bank. 6.2. Changes in terms and conditions of ECB: Changes in ECB parameters in consonance with the ECB norms, including reduced repayment by mutual agreement between the lender and borrower, should be reported to the DSIM through revised Form ECB at the earliest, in any case not later than 7 days from the changes effected. While submitting revised Form ECB the changes should be specifically mentioned in the communication. 6.3. Monthly Reporting of actual transactions: The borrowers are required to report actual ECB transactions through Form ECB 2 Return through the AD Category I bank on monthly basis so as to reach DSIM within seven working days from the close of month to which it relates. Changes, if any, in ECB parameters should also be incorporated in Form ECB 2 Return. 6.4. Late Submission Fee (LSF) for delay in reporting: 6.4.1. Any borrower, who is otherwise in compliance of ECB guidelines, can regularise the delay in reporting of drawdown of ECB proceeds before obtaining LRN ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs, comply with extant ECB norms and are with the consent of lender(s). Further, the following can also be undertaken under the automatic route: 7.1. Change of the AD Category I bank: AD Category I bank can be changed subject to obtaining no objection certificate from the existing AD Category I bank. 7.2. Cancellation of LRN: The designated AD Category I banks may directly approach DSIM for cancellation of LRN for ECB contracted, subject to ensuring that no draw down against the said LRN has taken place and the monthly ECB-2 returns till date in respect of the allotted LRN have been submitted to DSIM. 7.3. Refinancing of existing ECB: Refinancing of existing ECB by fresh ECB provided the outstanding maturity of the original borrowing (weighted outstanding maturity in case of multiple borrowings) is not reduced and all-in-cost of fresh ECB is lower than the all-in-cost (weighted average cost in case of multiple borrowings) of existing ECB. Further, refinancing of ECB raised under the previous ECB frameworks may also be permitted, subject to additionally ensuring that the borrower is eligible to raise ECB under the extant framework. Raising of fresh ECB to part refinan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the equity shares to be issued shall be worked out with reference to the date of conversion only. 7.5. Security for raising ECB: AD Category I banks are permitted to allow creation/cancellation of charge on immovable assets, movable assets, financial securities and issue of corporate and/or personal guarantees in favour of overseas lender / security trustee, to secure the ECB to be raised/ raised by the borrower, subject to satisfying themselves that: the underlying ECB is in compliance with the extant ECB guidelines, there exists a security clause in the Loan Agreement requiring the ECB borrower to create/cancel charge, in favour of overseas lender/security trustee, on immovable assets/movable assets/financial securities/issuance of corporate and/or personal guarantee, and No objection certificate, as applicable, from the existing lenders in India has been obtained in case of creation of charge. Once the aforesaid stipulations are met, the AD Category I bank may permit creation of charge on immovable assets, movable assets, financial securities and issue of corporate and/or personal guarantees, during the currency of the ECB with security co-terminating with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iv. Issue of Corporate or Personal Guarantee: The arrangement shall be subject to the following: A copy of Board Resolution for the issue of corporate guarantee for the company issuing such guarantee, specifying name of the officials authorised to execute such guarantees on behalf of the company or in individual capacity should be obtained. Specific requests from individuals to issue personal guarantee indicating details of the ECB should be obtained. Such security shall be subject to provisions contained in the Foreign Exchange Management (Guarantees) Regulations, 2000, as amended from time to time. ECB can be credit enhanced / guaranteed / insured by overseas party/ parties only if it/ they fulfil/s the criteria of recognised lender under extant ECB guidelines. 7.6. Additional Requirements: While exercising the delegated powers, the AD Category I banks should ensure that: The changes permitted are in conformity with the applicable ceilings / guidelines and the ECB continues to be in compliance with applicable guidelines. It should also be ensured that if the ECB borrower has availed of credit facilities from the Indian banking system, including fore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er Startup will be limited to USD 3 million or equivalent per financial year either in INR or any convertible foreign currency or a combination of both. All-in-cost: Shall be mutually agreed between the borrower and the lender. End uses: For any expenditure in connection with the business of the borrower. Conversion into equity: Conversion into equity is freely permitted subject to Regulations applicable for foreign investment in Startups. Security: The choice of security to be provided to the lender is left to the borrowing entity. Security can be in the nature of movable, immovable, intangible assets (including patents, intellectual property rights), financial securities, etc. and shall comply with foreign direct investment / foreign portfolio investment / or any other norms applicable for foreign lenders / entities holding such securities. Further, issuance of corporate or personal guarantee is allowed. Guarantee issued by a non-resident(s) is allowed only if such parties qualify as lender under ECB for Startups. However, issuance of guarantee, standby letter of credit, letter of undertaking or letter of comfort by Indian banks, all India Financial Institutio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring scheme/ corporate insolvency resolution process can raise ECB only if specifically permitted under the resolution plan. 10.2. 14 Eligible corporate borrowers who have availed Rupee loans domestically for capital expenditure in manufacturing and infrastructure sector and which have been classified as SMA-2 or NPA can avail ECB for repayment of these loans under any one time settlement with lenders. Lender banks are also permitted to sell, through assignment, such loans to eligible ECB lenders, provided, the resultant external commercial borrowing complies with all-in-cost, minimum average maturity period and other relevant norms of the ECB framework. Foreign branches/ overseas subsidiaries of Indian banks are not eligible to lend for the above purposes. The applicable MAMP will have to be strictly complied with under all circumstances. 10.3. Eligible borrowers under the ECB framework, who are participating in the Corporate Insolvency Resolution Process under Insolvency and Bankruptcy Code, 2016 as resolution applicants, can raise ECB from all recognised lenders, except foreign branches/subsidiaries of Indian banks, for repayment of Rupee term loans of the target company. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cated outside India and financial institutions in IFSCs located in India. Note: Participation of Indian banks and non-banking financial companies (operating from IFSCs) as lenders will be subject to the prudential guidelines issued by the concerned regulatory departments of the Reserve Bank. Further, foreign branches/subsidiaries of Indian banks are permitted as recognised lenders only for FCY TC. v Period of TC The period of TC, reckoned from the date of shipment, shall be up to three years for import of capital goods. For non-capital goods, this period shall be up to one year or the operating cycle whichever is less. For shipyards / shipbuilders, the period of TC for import of non-capital goods can be up to three years. vi All-in-cost ceiling per annum 15 Benchmark Rate plus 350 bps spread: For existing TCs linked to LIBOR whose benchmarks are changed to ARR. Benchmark rate plus 300 bps spread: For new TCs. Benchmark rate plus 250 bps spread. vii Exchange rate Change of currency of FC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the ADs, on behalf of the importer, in favour of overseas lender of TC not exceeding the amount of TC. Period of such guarantee cannot be beyond the maximum permissible period for TC. TC may also be secured by overseas guarantee issued by foreign banks/overseas branches of Indian banks. Issuance of such guarantees i.e. guarantees by Indian banks and their branches/subsidiaries located outside India will be subject to compliance with the provisions contained in Department of Banking Regulation Master Circular No.DBR.No.Dir.BC.11/13.03.00/2015-16 dated July 1, 2015 on Guarantees and Co-acceptances , as amended from time to time. 16.2. For the purpose of raising TC, the importer may also offer security of movable assets (including financial assets) / immovable assets (excluding land in SEZs) / corporate or personal guarantee for raising trade credit. ADs may permit creation of charge on security offered / accept corporate or personal guarantee, duly ensuring that: there exists a security clause in the loan agreement requiring the importer to create charge, in favour of overseas lender / security trustee on immovable assets / movable assets / financial securities / issuan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7.2. Quarterly reporting 16 : AD Category I banks are also required to furnish data on issuance of bank guarantees for TCs by all its branches, in a consolidated statement, at quarterly intervals on the CIMS platform (URL: https://sankalan.rbi.org.in/ ). For clarification required, if any, AD banks may write to fedcoecbd@rbi.org.in of the Reserve Bank and/ or may be communicated at Telephone No. 022-22601000 (extension- 2715). Format of this statement is also available at Annex V of Part V of Master Directions Reporting under Foreign Exchange Management Act dated January 1, 2016, as amended from time to time. 18. Role of ADs: While the primarily responsibility of ensuring adherence to the TC policy lies with the importer, the ADs are also expected to ensure compliance with applicable parameters of the trade credit policy / provisions of Foreign Exchange Management Act, 1999 by their constituents. As the Reserve Bank has not prescribed any format or manner in which TC arrangements / loan agreements are to be documented, ADs may consider any document to satisfy themselves with the underlying TC arrangement. ADs should ensure that there is no double financing on account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e invoked guarantee. 17 20. Facility of Credit Enhancement: The facility of credit enhancement by eligible non-resident entities (viz. Multilateral financial institutions (such as, IFC, ADB, etc.) / regional financial institutions and Government owned (either wholly or partially) financial institutions, direct/ indirect equity holder) to domestic debt raised through issue of capital market instruments, such as Rupee denominated bonds and debentures, is available to all borrowers eligible to raise ECB under automatic route subject to the following conditions: The underlying debt instrument should have a minimum average maturity of three years; Prepayment and call/ put options are not permissible for such capital market instruments up to an average maturity period of 3 years; 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... April 07, 2021 20 11 A.P.(DIR Series) Circular No. 19 December 08, 2021 21 12 A.P.(DIR Series) Circular No. 05 June 09, 2022 22 13 A.P. (DIR Series) Circular No. 11 August 01, 2022 23 14 A.P. (DIR Series) Circular No. 16 September 30, 2022 24 15 A.P. (DIR Series) Circular No. 10 December 22, 2023 1 Inserted vide A.P.(DIR Series) Circular No. 19 dated December 08, 2021. 2 Deleted vide A.P.(DIR Series) Circular No. 19 dated December 08, 2021. Deleted portion read as EURIBOR: Euro Interbank Offered Rate 3 Substituted vide A.P.(DIR Series) Circular No. 19 dated December 08, 2021. Prior to substitution it read as 6-months LIBOR rate of different currencies or any other 6-month interbank interest rate applicable to the currency of borrowing, for eg., EURIBOR 4 Inserted vide A.P.(DIR Series) Circular No. 04 dated July 30, 2019. 5 Substituted vide A.P.(DIR Series) C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 2021. Prior to substitution it read as Benchmark rate plus 250 bps spread. 16 Amended in terms of A.P. (DIR Series) Circular No. 10 dated December 22, 2023. Prior to amendment it read as AD Category I banks are also required to furnish data on issuance of bank guarantees for TCs by all its branches, in a consolidated statement, at quarterly intervals on the XBRL platform. For the above purpose AD banks may login to the site https://secweb.rbi.org.in/orfsxbrl/ using their User name, Password and Bank code. For downloading the relevant form, AD banks may follow the link Download Returns Package and download the form. After following the successive steps, AD banks may upload the file. For User name and Password, AD banks may write at fedcoecbd@rbi.org.in along with contact details. Clarification required, if any, may also be sent to the aforesaid email of the Reserve Bank and/ or may be communicated at Telephone No. 022-22601000 (extension- 2715). Guide for using XBRL website is also available under the Help option on the same page. Format of this statement is also available at Annex V of Part V of Master Directions Reporting under Foreign Exchange Management Act dated Ja ..... X X X X Extracts X X X X X X X X Extracts X X X X
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