Eligibility for External Commercial Borrowings (ECB) Under RBI

The Reserve Bank of India (RBI) permits eligible borrowers to raise External Commercial Borrowings (ECB) from recognised lenders, subject to compliance with the Foreign Exchange Management Act (FEMA), 1999, and the Master Direction on ECB. Eligibility is determined by the borrower's legal status, the purpose of borrowing, and the minimum average maturity period.

Under the current framework, the following entities are eligible to raise ECB:

• Corporates: Companies registered under the Companies Act, 2013, including those in the manufacturing, infrastructure, and service sectors.
• Non-Banking Financial Companies (NBFCs): Registered with RBI, including those classified as Infrastructure Finance Companies (IFCs), Asset Finance Companies (AFCs), and others.
• Housing Finance Companies (HFCs): Registered with the National Housing Bank (NHB).
• Port Trusts, Units in Special Economic Zones (SEZs), and Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs).
• Micro, Small, and Medium Enterprises (MSMEs): Eligible for ECB up to USD 3 million per financial year under the automatic route.

Borrowers must not be under any investigation by law enforcement agencies or have defaulted on any loan repayment in the past. The borrowing must be for permitted end-uses, such as import of capital goods, new projects, modernisation, or repayment of existing Rupee loans (subject to conditions).

RBI classifies ECB into three tracks based on the borrower, lender, and end-use. Each track has distinct eligibility and compliance requirements.

• Track I: For all eligible borrowers, including corporates, NBFCs, and HFCs. Borrowing can be in any freely convertible foreign currency or Indian Rupees (via offshore Rupee-denominated bonds). Minimum average maturity is 3 years for loans up to USD 50 million equivalent, and 5 years for loans above that. Permitted end-uses include capital expenditure, working capital (for NBFCs), and on-lending (for NBFCs/HFCs).
• Track II: For borrowers raising ECB for specific purposes like low-cost affordable housing, smart city projects, or renewable energy. Minimum average maturity is 5 years. Lenders can be multilateral financial institutions, export credit agencies, or foreign banks.
• Track III: For borrowers raising ECB in Indian Rupees from foreign lenders through Rupee-denominated bonds (masala bonds) or loans. Minimum average maturity is 3 years. This track is open to all eligible borrowers.

Borrowers must ensure that the ECB is not raised from certain restricted lenders (e.g., individuals, entities from countries sharing land border with India without prior approval). The automatic route is available for most Track I and Track III borrowings, while Track II and certain cases require prior RBI approval.

RBI specifies clear end-use restrictions to ensure ECB funds are used for productive purposes and not for speculative activities. The following are generally permitted:

• Capital expenditure: For new projects, expansion, modernisation, or acquisition of capital goods.
• Working capital: Allowed for NBFCs and HFCs, subject to conditions.
• On-lending: NBFCs and HFCs can on-lend ECB funds to their customers for permitted end-uses.
• Repayment of Rupee loans: Allowed for infrastructure companies and NBFCs, subject to minimum average maturity and other conditions.
• Import of capital goods: Directly from the lender or through third-party suppliers.

Prohibited end-uses include:

• Investment in capital markets (equity, derivatives, mutual funds).
• Real estate activities (except affordable housing projects).
• Purchase of land.
• On-lending to entities engaged in prohibited activities.
• Repayment of Rupee loans for non-infrastructure companies (except under specific schemes).

Borrowers must submit a certificate from a Chartered Accountant confirming end-use compliance within 30 days of utilisation.

Raising ECB involves several procedural steps, including registration, documentation, and ongoing reporting to RBI.

1. Loan Agreement: A legally binding agreement between the borrower and lender, specifying terms like amount, interest rate, repayment schedule, and covenants.
2. Form ECB: The borrower must file Form ECB with RBI through the authorised dealer (bank) within 7 days of signing the agreement. This is done online via the RBI's ECB portal.
3. LRN (Loan Registration Number): RBI issues a unique LRN after verifying the Form ECB. This number must be quoted in all future correspondence.
4. Drawdown: Funds can be drawn down only after obtaining the LRN. The authorised dealer must ensure compliance with end-use and maturity conditions.
5. Reporting: Borrowers must submit:
   • Form ECB-2: Quarterly return on actual transactions, including drawdowns, interest payments, and repayments, within 7 days of the end of each quarter.
   • Annual Certificate: From a Chartered Accountant confirming end-use compliance.
6. Repayment: Principal and interest must be repaid as per the loan agreement. Prepayment is allowed without RBI approval if the loan is under the automatic route and the prepayment is from internal accruals.

Non-compliance with reporting requirements can lead to penalties under FEMA.

While ECB offers access to cheaper foreign currency funds, it carries significant risks that borrowers must manage.

• Currency Risk: Borrowing in foreign currency exposes the borrower to exchange rate fluctuations. If the Indian Rupee depreciates, the Rupee cost of repayment increases. Borrowers should consider hedging through forward contracts or options.
• Interest Rate Risk: Floating-rate ECBs can lead to higher costs if global interest rates rise. Fixed-rate loans or interest rate swaps can mitigate this.
• Regulatory Changes: RBI may amend ECB guidelines, affecting eligibility, end-use, or reporting. Borrowers must stay updated through RBI circulars.
• Withholding Tax: Interest payments to foreign lenders are subject to withholding tax under the Income Tax Act, 1961. The rate may be reduced under Double Taxation Avoidance Agreements (DTAAs).
• Transfer Pricing: If the lender is a related party (e.g., parent company), the interest rate must be at arm's length to avoid transfer pricing adjustments.
• Default Risk: Defaulting on ECB can lead to cross-border litigation and impact the borrower's credit rating.

Borrowers should conduct thorough due diligence on the lender, negotiate favourable terms, and maintain robust compliance systems.

If you are considering raising ECB, first assess your eligibility under the current RBI framework and identify the appropriate track. Consult a qualified chartered accountant or legal professional with FEMA expertise to draft the loan agreement, file Form ECB, and ensure ongoing compliance. For complex structures or restricted end-uses, seek prior approval from RBI.

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This page provides preliminary information. It is not legal advice. For your matter, consult a qualified professional.