ECB Compliance Advisory

External Commercial Borrowings, also known as ECB, in short, are loans which are borrowed from foreign banks and institutions. ECB compliance is required for all institutions that borrow these forms of loans. As the name indicates, External Commercial Borrowings are borrowings that are made from foreign institutions and banks.ECB can only used for a specific purpose. Companies and public Sector undertakings (PSUs) prefer using ECBs as there is a low rate of interest payable on ECBs.

Package inclusions:
  • Advisory services related to the use of External Commercial Borrowings.
  • Advice on your borrowing related to ECB Compliance.
  • Compliance and monitoring services regarding the use of ECB.
  • Liasoning with the RBI for ECB compliance.

ECB Compliance- An Overview

External Commercial Borrowings is also known as ECB. External Commercial Borrowings are commercial loans which are provided by foreign institutional investors. These loans carry a lower rate of interest in comparison to the interest rates which are offered by commercial banks in India. Therefore companies and Public Sector Undertakings (PSU) prefer opting for ECB. For corporates to utilize these loans they have to follow the rules related to ECB Compliance.

As ECBs can be used only for specific commercial purpose, the borrower has to utilise the funds provided by foreign investors carefully. Therefore it is essential to consider the business needs and long term goals of the organisation before opting for ECBs. Non-Compliance with the provisions of ECB will attract a penalty.

As these borrowings can be used only for a specific commercial purpose, there is an End-use requirement. This means that the ECB borrowed can be used only for the purpose mentioned in the End-use. Hence the user must follow the rules related to ECB compliance.

Benefits of ECB Compliance

Borrowers have to keep in mind the following before utilizing ECB. There are different benefits of ECB compliance. Hence borrowers prefer utilsing this form of loans for carrying out different purposes:

  • Compliance with the Rules

    ECB compliance is required for all forms of borrowers that carry out activities. Such activities which would be carried out by borrowers should be according to ECB compliance requirements.

  • Borrowers can utilize this

    Borrowers can utilize these forms of ECB loans to carry out work related specified commercial activities.

  • Low Interest Rates

    When compared to other commercial banks, taking loans in accordance with the requirements of ECB compliance would be beneficial to the borrower. Different rules related to ECB compliance would be applicable to the borrower. Low interest rates have to be paid by the borrower when following the requirements related to ECB compliance. Interest rates which are offered by foreign institutions are less when compared to other public sector undertakings.

  • End- Use Requirements

    Another benefit of utilizing the ECB is to fulfill the end use requirement of the borrower. Hence the borrower would only be allowed to utilize ECB for carrying out the work which is stated in the particular proposal.

Routes For External Commercial Borrowings (ECB Compliance)

A company planning to borrow from foreign institutions in the form of ECB have to follow the requirements of ECB compliance. Currently there are two routes for ECB in the country:

    • Automatic Route- 100% oreign investment can be carried out through the automatic route. Under this route, no prior approval is required from the government of India. If the investment for external commercial borrowings falls under this route, then ECB compliance has to be met in order to satisfy the criteria.
    • Government Route- The government route requires prior approval from the government. Hence in a transaction involving ECB both the lender and borrower have to comply with the requirements of ECB compliance.
      ECB can be done through the Automatic Route and Approval / Government Route. However, under the Automatic route, there are certain ECB limits prescribed. The following are ECB Limits for particular sectors:

      • Infrastructure sector, real –industrial sector up to USD 750 million.

      • Software development sector, hotels, hospitals –up to USD 200 million.

      • Microfinance activities – up to USD 100 million.

      • A company or other remaining entities (other than a financial intermediary, registered under the Companies Act, can raise to USD 500 million in a financial year.

      If the ECB value goes above the limit, then the approval/government route has to be taken. Here the prior approval of the concerned government authority would be considered. Generally, companies can borrow under the automatic route. Approval needs to be taken under the following cases:

      • When a service sector company which is not in the business of hotels, hospitals or software services example R&D and Training institutions.

      • SEZ developers (wanting to provide infrastructure facilities in the SEZs) Co-operative societies, financial institutions or banks.

    ECB Compliace- Where ECB cannot be used for?

    The borrower has to comply with the rules related to ECB compliance. Hence there are specific guidelines which have to be followed by the borrower for ECB compliance. In the following sectors ECB cannot be utilised:

    • Real estate activities
    • Investment in capital market
    • Equity investment.
    • Working capital purposes except from foreign equity holder.
    • General corporate purposes except from foreign equity holder.
    • Repayment of Rupee loans except from foreign equity holder
    • On-lending to entities for the above activities.

    Who Regulates External Commercial Borrowings?

    The Reserve Bank of India and FEMA is the Regulatory Body and law related to External Commercial Borrowings. Apart from this, the Foreign Exchange Management (Borrowing and Lending in Foreign Exchange) Regulations 2000, Foreign Exchange Management (Borrowing and Lending in Rupees) Regulations 2000 regulate ECBs.

    In 2018 a notification was passed by the Reserve Bank of India – the Foreign Exchange Management (Borrowing and Lending) Regulations 2018 provides the scope for RBI in consultation with the government of India to make certain changes.

    Eligibility criteria for External Commercial Borrowings (ECB Compliance)

    The following criteria has to be sufficed to fulfill the requirements related to ECB Compliance:

    • Manufacturrers- Which would include all forms of industries involved in manufacturing products.
    • SIDBI- Small Industries Development Bank of India;
    • Units in Special Economic Zones (SEZs);
    • Shipping and airlines companies;
    • Export-Import Bank of India (Exim Bank) (only under the approval route)
    • Non-Banking Financial Companies (NBFCs);
    • Companies in the infrastructure sector;
    • Holding companies;
    • Core Investment Companies (CICs);
    • Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (INVITs) coming under the regulatory framework of the Securities and Exchange Board of India (SEBI);
    • NBFCs-Micro Finance Institutions (NBFCs-MFIs), Not for Profit companies registered under the Companies Act, 1956/2013, Societies, trusts and co-operatives (registered under the Societies Registration Act, 1860, Indian Trust Act, 1882 and State-level Co-operative Acts/Multi-level Co-operative Act/State-level mutually aided Co-operative Acts respectively), Non-Government Organisations (NGOs) which are engaged in microfinance activities;
    • Companies engaged in miscellaneous services viz. research and development (R&D), training (other than educational institutes), companies supporting infrastructure, companies providing logistics services;
    • Developers of Special Economic Zones (SEZs) or National Manufacturing and Investment Zones (NMIZs);

    Eligibility Criteria for ECB Compliance for Lenders

    The lenders below have to follow rules related to ECB Compliance:

    • International banks;
    • International capital markets;
    • Multilateral financial institutions (such as IFC, ADB, CDC, etc.);
    • Export credit agencies;
    • Suppliers’ of equipment;
    • Foreign collaborators and
    • Foreign equity holders (other than erstwhile OCBs).

    Procedure for External Commercial Borrowings (ECB Compliance)

    External Commercial Borrowings can be done through the Automatic Route or the Approval/ Government Route.

    Automatic Route

    1. The applicant who requires external commercial borrowings should approach the concerned/ designated authorised dealer. An authorised dealer can be a bank, fully-fledged money changer or any other person. The application should be sent to the following address:

    Principal Chief General Manager,
    Foreign Exchange Department, Reserve Bank of India,
    Central Office, External Commercial Borrowings Division,
    Mumbai – 400 001.

    2. The borrower must get the LRN (Loan Registration Number) from the Reserve Bank of India before taking the external commercial borrowings. This would be in accordance to ECB compliance.

    3. For getting the LRN- the applicant has to submit in duplicate Form 83 with all the documents.

    4. Form 83 has to be certified by a Chartered Accountant or Company Secretary.

    5. The form has to be forwarded to the designated bank.

    6. One copy has to be submitted to the designated bank following address :

    Director, Balance of Payments Statistics Division,
    Department of Statistics and Information Management (DSIM),
    Reserve Bank of India,
    Bandra-Kurla Complex,
    Mumbai – 400 051.

    7. The borrower can draw-down the loan only after obtaining the LRN from DSIM, Reserve Bank.

    8. Borrowers are required to submit ECB-2 Return certified by the designated AD bank monthly to reach Department of Statistics and Information Management (DSIM), Reserve Bank within seven working days from the close of month to which it relates.

    9. The borrower has to submit form ECB to the RBI.

    10. After scrutinising the application, RBI will grant permission.

    Approval Route

    1. For the approval route, the applicant has to satisfy the requirements related to form ECB Compliance.

    The form ECB must be submitted to the following address:

    Principal Chief General Manager,
    Foreign Exchange Department,
    Central Office, ECB Division,
    Reserve Bank of India,
    Mumbai 400 001.

    2. Along with the above form all the information along with the documents have to be submitted to the above address.

    Documents required for ECB Compliance

    • Loan Agreement ( Borrowers need to enter into a loan agreement with the Authorised Dealer)
    • Loan Registration Number
    • Loan Registration Number has to be received from the Reserve Bank before securing the ECB.
    • The authorised dealer has to submit the form to the RBI to get the Loan Registration Number.
    • For getting the LRN, the Authorised Dealer has to submit form 83 in duplicate which has been verified by a CA or CS.
    • ECB -2 Return- Reporting of Monthly Transactions related to ECB complance
    • Form- ECB
    • Copy of the respective offer letter furnishing the respective details of the offer
    • Copy of the import Contract/ performa invoice or bill of lading
    • Undertaking that the ECB has to utilised only for permitted purposes

Frequently Asked Questions

What is the difference between ECB and FDI?

Foreign Direct Investment is a form of an equity investment which is put in a business or venture or an organisation. Whereas ECBs are a type of commercial loan that is provided by a foreign company or a lender. The rate of interest related to ECB is less.

What is ECB compliance?

ECB compliance is related to the requirements taken by the foreign company and the borrower to ensure that the funds are utilsied for a particular purpose. As long as the borrower satisfies the requirements related to End Use, the parties would be compliant with the principles related to ECB.

Whose responsibility is it to ensure compliance is maintained as per the ECB guidelines?

It is the responsibility of the borrower to maintain ECB compliance requirements. Any form of structure which evades the normal routes for ECB would attract penalties.

Can ECB be used for making some form of contribution in an LLP?

No ECB cannot be used for making any form of contribution in an LLP.

What is the currency of raising ECBs?

ECB can be raised in Indian Rupees (INR) or any other convertible currency. As long as the purpose of the ECB is for commercial use, then the ECB is valid.

What is the meaning of commercial purpose?

Commercial purpose means for general business purpose. For example- in a recent amendment ECB can be used for general corporate and working capital purposes.

What are the various types of ECB?

ECB includes Loans, Securitised instruments, Buyers’ and supplier’s credit, Foreign Currency Convertible Bonds (FCCBs). Financial Lease and Foreign Currency Exchangeable Bonds (FCEBs).

Who are eligible lenders under ECB framework?

The lender for ECB purposes should be:

A member country of the Financial Action task Force which has financial institutions can lend under ECB framework. The following institutions can lend ECB.

  • International banks;
  • International capital markets;
  • Multilateral financial institutions (such as IFC, ADB, CDC, etc.);
  • Export credit agencies;
  • Suppliers’ of equipment;
  • Foreign collaborators and
  • Foreign equity holders (other than erstwhile OCBs).

Can any form of reimbursement from the past be utilized as end use purpose?

No this form of reimbursement from the past cannot be utilized in the form of an end use.

Can ECB be utilized for buying good will ?

No ECB cannot be utilized for the purpose of purchasing good will.