External Business Loans (ECB) Under Automatic Route Policy and Procedures in India

For large projects in India, financial assistance from a foreign country can be obtained through foreign business loans, providing an opportunity for foreign investors to invest in India. IT is a commercial loan with a minimum average maturity period of 3 years. Foreign commercial loans are the key components of India’s overall foreign assistance, which includes foreign aid, buyers’ credit, non-resident Indian deposits, short-term credit, and rupee debt. External Commercial Loans are accessed on either the Automatic route or the Approval route. In the automatic route, the approval of the RBI or the Government is not needed, but in the approval route, the prior approval of the RBI and the Government of India is necessary.

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

The Eligible Borrowers to avail themselves of External Commercial Advances under the automatic route are detailed below;

1. Corporations registered under the Companies Act, including those in the hotel, hospital, software sector, etc.
2. Infrastructure finance companies that are not financial intermediaries such as banks, housing finance companies, financial institutions, and non-bank finance companies
3. Units in Special Economic Zones can borrow for their own requirements. They must not transfer or lend such funds to sister concerns or units in the National Rate Area.
4. To take advantage of External Commercial Loans, Non-Governmental Organizations engaged in microfinance activities. need to meet certain conditions such as; must have a satisfactory lending relationship with a commercial bank licensed to deal in foreign exchange in India for at least 3 years and a due diligence certificate from the designated AD category bank on “fit and proper” status from the Board or Management Committee of the lending institution.

Individuals, non-profit organizations and trusts are not eligible to obtain External Business Loans under the automatic route;

meInternational banks, Export Credit Agencies, Foreign Collaborators, Equipment Suppliers, foreign shareholders, multilateral financial institutions or regional financial institutions are the recognized lenders for External Commercial Loans under the Automatic Route.

‘foreign capital holder’ to be eligible as a ‘recognized lender’ under the automatic route would require a minimum holding of paid-up capital in the borrowing company as set out below;

1. For ECB up to USD 5 million, a minimum paid-up capital of 25 percent held directly by the lender
2. For ECBs over USD 5 million, a minimum paid-up capital of 25 percent held directly by the lender and a debt-to-equity ratio of no more than 4:1
3. Foreign organizations and individuals may provide ECBs to NGOs engaged in microfinance activities, but must submit a due diligence certificate from a foreign bank in the prescribed format.

Maximum limit to upload ECB during an exercise:

1. Companies other than those of the hotel, hospital and software sector-USD 500 million or its equivalent.
2. Corporate in the service sector viz. hotels, hospitals and software sector: USD 100 million or its equivalent to cover capital expenditures in foreign currency and/or rupees for permitted end uses.
3. Non-Governmental Organizations dedicated to microfinance activities – ECB up to USD 5 million or its equivalent.

Ripening period:

1. ECB up to USD 20 million or its equivalent in a fiscal year with a 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. ECBs up to USD 20 million or equivalent can have call/put options as long as the minimum average maturity is three years

The following are the permitted end use of external business loan proceeds:

1. Investment in real sector and industrial sector including specific service sectors like hotels, hospitals and software, small and medium enterprises, infrastructure sector in India.
2. Acquisition of first-stage shares in the divestment process and in the second-stage mandatory public offering under the Government’s PSU share divestment program.
3. Spectrum assignment payments.

End uses not permitted for investment in the capital market or acquisition of a company, general corporate purpose, working capital, repayment of existing loans and real estate sector

Procedure for obtaining External Commercial Loans:

1. Borrowers may enter into a loan agreement that complies with the ECB guidelines with a recognized lender to obtain the ECB under the automatic route without prior approval from the Reserve Bank. The borrower must obtain a Loan Registration Number from the Reserve Bank of India before withdrawing the ECB.
2. For the assignment of the Loan Registration Number, borrowers must submit Form 83, in duplicate, certified by the Company Secretary or Public Accountant to the designated AD bank. The designated AD bank must send a copy to the Director, Balance of Payments Statistics Division, Department of Statistics and Information Systems, Reserve Bank of India.
3. The borrower can withdraw the loan only after obtaining the Loan Registration Number from the Department of Statistics and Information Systems, Reserve Bank of India.
4. Borrowers must submit monthly the ECB-2 statement certified by the designated AD bank to reach the Department of Statistics and Information Systems, Banco de Reserva within seven business days after the close of the month to which it refers.

In conclusion; The primary responsibility for ensuring that the ECB raised/used complies with the ECB guidelines and Reserve Bank regulations/instructions rests with the borrower concerned and any breach of the ECB guidelines will be taken seriously and invite criminal action under FEMA 1999.