Understanding External Commercial Borrowings (ECB) and Trade Credits (TC): A Comprehensive Guide

External Commercial Borrowings (ECB) and Trade Credits (TC) constitute vital components of the global financial landscape, serving as crucial mechanisms for cross-border transactions and financing diverse purposes. In this comprehensive guide, we aim to provide an in-depth exploration of the fundamental aspects of ECB, addressing common queries and offering insights into eligibility, currency considerations, recognized lenders, leverage criteria, and more.

Part I: External Commercial Borrowings (ECB)

A. Basic Queries

1. Where to Obtain Framework Details?
   • For a comprehensive understanding of the current framework on ECB and TC, one can refer to Master Direction No. 5 on ‘External Commercial Borrowings, Trade Credits, and Structured Obligations’ dated March 26, 2019. This directive serves as a guide, ensuring compliance with guidelines applicable at the time of availing ECBs and TCs.
2. FCNR (B) Loans and ECB Framework
   • No, foreign currency loans provided domestically by AD Category I banks from the proceeds of FCNR (B) deposits do not fall under the ECB framework.
3. Precautions Before Raising Loan from Non-Residents
   • Borrowings from overseas must align with the applicable ECB guidelines and provisions outlined in the Foreign Exchange Management (Borrowing and Lending in Foreign Exchange) Regulations, 2018. Any structures or transactions that circumvent ECB guidelines may lead to penal action under FEMA.
4. Responsibility for Compliance with ECB Guidelines
   • The primary responsibility for ensuring compliance with ECB guidelines rests with the borrower. Any attempt to bypass guidelines or contravene Foreign Exchange Management (Borrowing and Lending in Foreign Exchange) Regulations, 2018 could result in penal action under FEMA.

B. Eligibility for Raising ECB

5. LLPs’ Eligibility for ECBs
   • Limited Liability Partnerships (LLPs), being ineligible to receive Foreign Direct Investment (FDI), are not eligible to raise ECBs.

C. Currency of ECB

6. Conversion of INR Denominated ECB
   • Entities raising INR denominated ECB are not allowed to convert the liability into a foreign currency or assume foreign currency risk through derivative contracts or other means.

D. Recognized Lenders/Investors

7. Minimum Equity Holding Requirement
   • Foreign equity holders, as defined in Master Direction No. 5, are eligible lenders for specific end-uses. For other purposes, recognized lenders are detailed in the Master Direction.
8. Disposal of Foreign Equity Holding
   • No, all ECB guidelines, including minimum equity holding requirements, must be maintained throughout the entire tenure of the ECB.
9. Participation of Indian Banks in Rupee Denominated Bonds Overseas
   • While Indian banks cannot subscribe to Rupee denominated bonds in the primary market, they can act as arrangers, underwriters, market makers, or traders, subject to prudential norms.
10. Subscription to Bonds by Persons Resident in India

• Residents in India, except foreign branches/subsidiaries of Indian banks or other permitted entities, should not have exposure to borrowings by eligible entities under this framework. Establishing structures that contravene guidelines may lead to penal action under FEMA.

E. Average Maturity Period

11. Calculation of Average Maturity Period
    • The average maturity period is a crucial metric in the ECB framework. Detailed calculations can be referred to in the provided RBI illustration.
12. Use of Door-to-Door Maturity
    • Door-to-door maturity cannot be used in lieu of average maturity in the ECB framework.
13. Repayment of ECB Principal Before 5 Years
    • Yes, in the case of ECBs raised from foreign equity holders and utilized for general corporate purposes, working capital, or repayment of Rupee loans, the repayment of principal can start before the completion of 5 years. However, the ECB should have a minimum average maturity period of 5 years.

F. Leverage Criteria and Borrowing Limit

14. Inclusion of Proposed ECB in Outstanding ECBs
    • Yes, the proposed ECB should be added to all outstanding ECBs for the purpose of calculating the ECB liability to equity ratio.
15. Inclusion of Non-Convertible Preference Capital in ECB Liability to Equity Ratio
    • No, non-convertible preference capital is not included in the ECB liability to equity ratio.
16. Arriving at Individual Limit for Raising ECBs
    • The individual limit for raising ECB under the automatic route takes into account all ECBs raised in the financial year, including the proposed one. However, refinancing of ECB amount is not considered for arriving at the individual limit per financial year.
17. Treatment of Debit Balance in Profit and Loss Account
    • Yes, any debit balance in the profit and loss account incurred by the Eligible Borrower should be deducted from the equity for computing the ECB liability-equity ratio.
18. Simultaneous Raising of Foreign Currency and INR Denominated ECBs
    • Yes, eligible borrowers can simultaneously raise both Foreign Currency and INR denominated ECBs as long as they comply with the ECB guidelines for the respective currencies as per RBI guidelines. The individual limit includes all ECBs raised, whether in foreign currency or INR.
19. Enhancement of ECB Amount Under Delegated Powers
    • Yes, enhancement of ECB amount is permitted under delegated powers, provided the enhanced amount does not breach the applicable annual limit for the automatic route for the current financial year, and other parameters of the ECB are in compliance with existing guidelines.

G. All-in-Cost

20. Continuous Application of All-in-Cost Ceiling
    • All-in-cost should be within the applicable ceiling at all times, and deviations over different periods are not permitted.
21. Payment of Interest During Construction Stage
    • The restriction on the use of ECB proceeds for payment of interest/charges does not apply to ECBs raised for project finance and utilized for payment of guarantee fees (like ECA Premium) and interest during construction, provided these components are part of the project cost and capitalized by the borrower.

H. End-Uses

22. Reimbursement of Past Expenditure
    • The reimbursement of expenditure incurred in the past is not a permissible end-use under the ECB framework.
23. ECB for Equity Investment Domestically or Buying Goodwill
    • No, ECB cannot be availed for making equity investments, either directly or indirectly (through the purchase of goodwill).
24. ECB for Contribution in an LLP
    • No, it is not permitted.
25. ECB for On-lending in Affordable Housing Projects
    • Yes, housing finance companies can raise ECB for on-lending to individual borrowers exclusively for flats/units in affordable housing projects as defined in the Harmonized Master List of Infrastructure Sub-sectors notified by the Government of India.

I. Refinancing of ECB

26. Refinancing Under the New ECB Framework
    • Yes, ECB raised under the earlier ECB framework can be refinanced/partially refinanced through an ECB raised under the extant ECB framework, provided the borrower continues to be eligible, all-in-cost is lower, residual maturity is not reduced, and the new ECB complies with the extant ECB framework.
27. Refinancing Under Auto Route for ECBs Raised Under Approval Route
    • Yes, refinancing/partial refinancing can be undertaken under the auto route even for ECBs raised under the approval route, subject to compliance with guidelines.
28. Refinancing of ECBs Raised from Foreign Equity Holders
    • Yes, refinancing of ECBs raised from foreign equity holders and utilized for working capital/general corporate purpose/repayment of Rupee loans is permitted, provided the new ECB lenders are also foreign equity holders and comply with applicable refinancing guidelines.

J. Hedging Under ECB Framework

29. Assumption of Foreign Currency Risk for INR ECBs
    • Any entity raising INR ECB, including the issuance of Rupee denominated bonds overseas, is not permitted to convert the liability into a foreign currency liability or assume foreign currency risk through derivative contracts or otherwise.
30. Rollover of Existing Hedge(s) for ECBs
    • Yes, the existing hedge(s) for ECBs can be rolled over to the extent of 100 per cent of the outstanding ECB exposure.
31. Permitted Derivative Products for Hedging
    • Users may refer to the Master Direction on Risk Management and Inter-bank dealings dated July 5, 2016, as amended from time to time, for details on permitted derivative products for hedging of ECB.

Reporting

32. Precautions During Filing of Form ECB
    • Any draw-down in respect of an ECB should happen only after obtaining the Loan Registration Number (LRN) from RBI by filing duly certified Form ECB. It should be ensured that all terms and conditions of the ECB are reported correctly in Form ECB, and any failure to comply with reporting guidelines may invite penal action under FEMA.
33. Reporting Actual Transactions of an ECB to RBI
    • Borrowers are required to report actual ECB transactions through duly certified Form ECB 2 through the Authorised Dealer Category-I bank to DSIM as per the periodicity specified by the RBI. Any failure to comply with reporting guidelines may invite penal action under FEMA.
34. Need for Revised Form ECB Under New ECB Framework
    • No, in case no changes are made in terms and conditions of ECB, there is no need to file a revised Form ECB (erstwhile Form 83).
35. Applicability of LSF to Old ECB 2 Returns
    • The facility for opting for LSF shall be available up to three years from the due date of reporting/ submission.
36. LSF Applicability for Each Form ECB 2 and Nil Returns
    • Yes, LSF is applicable for non-submission of each Form ECB 2, including Nil returns.

K. Miscellaneous

37. Conversion of Interest Accrued on ECB into Equity
    • Yes, extant norms permit both ECB principal and interest to be converted into equity subject to applicable conditions.
38. Compliance of Remaining ECB Amount with All Applicable ECB Norms
    • Yes, the part conversion of ECB into equity will be freely permitted only when the part amount remaining as ECB complies with all the applicable ECB norms.
39. Renewal of Fixed Deposits Created Out of ECB Proceeds
    • No, fixed deposits created out of ECB proceeds, pending utilization, cannot be renewed after the completion of the maximum permitted period.

Part II: Trade Credits (TC)

40. Issuance of SBLC by AD Banks for Short Term Trade Finance
    • AD banks can issue SBLC on behalf of their customers for availing short-term trade credit from overseas lenders in foreign currency subject to compliance with relevant regulations.
41. Reporting Permissions for Settlement of Delayed Import Dues
    • AD banks are required to report all permissions granted by the AD banks/Regional offices of Reserve Bank for settlement of delayed import dues irrespective of the tenures of extension sought.

This comprehensive guide provides an extensive overview of External Commercial Borrowings, covering various aspects from eligibility to reporting requirements. In Part II, we will delve into Trade Credits, examining their role, regulations, and reporting procedures. Stay tuned for a deeper exploration of these essential financial instruments.