External Commercial Borrowing (ECB) Under Automatic Route Policy and Procedures in India

For large projects in India, financial assistance may be obtained from a foreign country through External Commercial Borrowings, which provides an opportunity for the foreign investors to invest in India. IT is a commercial loan with a minimum average maturity period of 3 years. External Commercial Borrowings are the key components of India’s overall external assistance which includes external assistance, buyer’s credit, Non Resident Indian deposits, short-term credit and rupee debt. External Commercial Borrowings is accessed either under Automatic route or Approval route. Under automatic route, the approval of RBI or the Government is not needed, but under approval route prior approval of the RBI and the Government of India is necessary.

This article explains the External Commercial Borrowing policy, procedure and practice under Automatic Route:

Following are the Eligible Borrowers to avail of External Commercial Borrowings under the automatic route;

1. Corporate registered under the Companies Act, including those in the hotel, hospital, software sectors etc
2. Infrastructure Finance Companies other than financial intermediaries such as banks, housing finance Company, financial institutions and Non Banking Financial Companies
3. Units in Special Economic Zones can borrow for their own requirement, They should not transfer or on-lend such funds to sister concerns or units in Domestic Tariff Area.
4. To avail External Commercial Borrowings, the Non-Government Organizations which are engaged in micro finance activities. need to fulfill certain conditions like; they should have a satisfactory borrowing relationship with a scheduled commercial bank authorized to deal in foreign exchange in India for at least 3 years and a certificate of due diligence from the designated AD category bank on ‘fit and proper’ status of the Board or Committee of management of the borrowing entity.

Individuals, Non-Profit making organisations and Trusts are not eligible to raise External Commercial Borrowings under automatic route;

International banks, Export Credit Agencies, Foreign Collaborators, Suppliers of equipments, foreign equity holders, multilateral financial institutions or regional financial institutions are the recognized lenders for External Commercial Borrowings under the Automatic Route.

‘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;

1. For ECB up to USD 5 million a minimum paid-up equity of 25 per cent held directly by the lender
2. For ECB more than USD 5 million a minimum paid-up equity of 25 per cent held directly by the lender and debt-equity ratio not exceeding 4:1
3. Overseas organizations and individuals may provide ECB to NGO engaged in micro finance activities but they need to furnish a certificate of due diligence from an overseas bank in the prescribed format.

Maximum limit to raise ECB during a financial year:

1. Corporate other than those in the hotel, hospital and software sectors-USD 500 million or its equivalent.
2. Corporate in the services sector viz. hotels, hospitals and software sector- USD 100 million or its equivalent for meeting foreign currency and/ or Rupee capital expenditure for permissible end-uses.
3. Non Government Organisations engaged in micro finance activities – ECB up to USD 5 million or its equivalent. 소액결제현금화

Maturity Period:

1. ECB up to USD 20 million or its equivalent in a financial year with minimum average maturity of three years.
2. ECB up to USD 20 million or its equivalent and up to USD 500 million or its equivalent with a minimum average maturity of five years.
3. ECB up to USD 20 million or equivalent can have call/put option provided the minimum average maturity of three years

Following are the Permitted End Use of External Commercial Borrowing proceeds:

1. Investment in real sector and industrial sector including specified service sectors like hotel, hospital and software, small and medium enterprises, infrastructure sector in India.
2. First stage acquisition of shares in the dis-investment process and in the mandatory second stage offer to the public under the Government’s dis-investment programme of PSU shares.
3. Spectrum Allocation payments.