Reserve Bank of India has issued Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 (‘New Regulations’) on 17th December, 2018 in supersession of Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000 and Foreign Exchange Management (Borrowing and Lending in Rupees) Regulations, 2000 (collectively, ‘Erstwhile Regulations’) with an objective to rationalize the framework of borrowing and lending in foreign exchange/ rupees and foster the ease of doing business. However, the recently issued regulations required clarifications with respect to certain provisions mentioned therein.
Thus, in furtherance thereof, RBI has promulgated External Commercial Borrowings (ECB) Policy – New ECB Framework (‘New ECB Policy’) on 16th January, 2019 supplementing the New Regulations.
The key features of the New ECB Policy are cited hereinbelow:
ELIGIBLE BORROWERS
Under the New Regulations, RBI has expanded the domain of eligible borrowers and allowed all the entities who are eligible to receive FDI, to raise ECB. In addition to this, RBI has further included the following entities as eligible borrowers-
- Port trusts
- Units in SEZ
- SIDBI
- EXIM bank
- Registered entities engaged in micro-finance activities namely registered NPO, societies/ trusts/ co-operatives and registered not for profit companies
ELIGIBLE LENDERS
Instead of providing detailed list of eligible lenders under different tracks as recognized under the Erstwhile Regulations, the New ECB policy has enlisted a simpler yet broader criterion to determine the lenders who are eligible to lend ECB.
MINIMUM AVERAGE MATURITY PERIOD (MAMP)
RBI streamlined the provisions with respect to MAMP and has provided that the MAMP shall be 3 years for all ECBs under the New Regulations. However, through the New ECB Policy, it has been clarified that the ECBs may be raised by the manufacturing sector companies with MAMP of 1 year. Further, it has also been provided that the ECB may also be raised by an eligible borrower from its foreign equity holders with MAMP of 5 years, after complying with prescribed conditions.
FORMS OF ECB
| ECB denominated in Foreign Currency | ECB denominated in INR |
| Loans including bank loans, floating fixed rate notes/ bonds/ debentures (other than fully and compulsorily convertible) | Loans including bank loans, floating fixed rate notes/ bonds/ debentures/ preference shares (other than fully and compulsorily convertible) |
| Trade credits beyond 3 years | Trade credits beyond 3 years |
| FCCBs and FCEBs | Financial Lease |
| Financial Lease | Plain vanilla Rupee denominated bonds issued overseas (RDBs) |
HEDGING
Through the New ECB Policy, RBI has modified hedging provisions with respect to ECBs denominated in foreign currency, though operational aspects remain the same.
The Erstwhile Regulations allowed specified borrowers to hedge 100% of their ECB exposure in case the average maturity is less than 5 years. However, in the New ECB Policy, only infrastructure space companies are obligated to hedge 70% of its proceeds if ECBs are raised with an MAMP of less than 5 years. Further, all entities raising ECB are required to follow the guidelines for hedging issued by the concerned sectoral or prudential regulator.
REPORTING REQUIREMENTS
Pursuant to the amended ECB policy along with the New Regulations, RBI has revamped the reporting requirements of ECBs.
| S. N. | Form | Purpose | Reporting |
|
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Form ECB | To obtain Loan Registration Number (LRN) and to report terms and conditions of the ECB for all categories and any amount of ECBs. Further, withdrawal of ECB proceeds should happen only after obtaining LRN |
Though the ECB policy has not clarified the time period for reporting of Form ECB, however the AD Bank are required to submit the same within 7 days from the date of signing of loan agreement. Thus, considering the responsibility of timely reporting, it is advisable that the entities shall ensure to submit the said Form within requisite time to the AD Bank to comply with the aforesaid provisions. |
| To report changes in ECB parameters | Within 7 days from the effective date of changes | ||
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ECB-2 Return | To report actual ECB transactions | Within 7 working days from the closure of month to which it relates |
LATE SUBMISSION FEE (LSF)
RBI has specified the provisions with respect to regularization of delay in reporting by payment of late submissions fees as detailed below:
| S. N. | Type of Return/ Form | Period of Delay | Applicable LSF |
| 1. | Form ECB 2 | Up to 30 days from the due date of submission | INR 5,000 |
| 2. | Form ECB 2/ Form ECB | Up to 3 years from the due date of submission/ date of drawdown of ECB proceeds | INR 50,000 per year |
| 3. | Form ECB 2/ Form ECB | Beyond 3 years from the due date of submission/ date of drawdown of ECB proceeds | INR 1,00,000 per year |
Further, non-payment of LSF will be treated as a contravention of reporting provisions and shall be subject to compounding or adjudication as per FEMA, 1999.
Standard Operating Procedure (SOP) for Untraceable Entities
RBI has empowered the designated AD Category- I banks to initiate SOP and undertake specified actions against the untraceable entities who are in contravention of reporting provisions for ECBs.
SPECIAL DISPENSATIONS
| S. N. | Facility for | Relevant Provisions |
| 1. | Public Sector Oil Marketing Companies | Minimum Average Maturity Period: 3 years Amount: USD 10 million End uses: Working capital purposes |
| 2. | Startups | Minimum Average Maturity Period: 3 years Amount: USD 3 million Forms of ECB: Loans or preference shares (non-convertible/ optionally convertible/ partially convertible) End uses: General and working capital purposes |