ECB Policy- An overview

New DelhiNovember 07, 2015

External Commercial Borrowing (ECB)

Automatic Route Approval Route

U$ 750 M-Maximum U$ 200 M- Hotel, Hospital, S/W and Miscellaneous Service; U$ 10 M- NGO in MF –MFI;Specified NBFC and SIDBI as per conditions

Approval route applicable - when not covered in Automatic route

2Short term debt not encouraged

Minimum average maturity 3 or 5 years depending on the quantum of ECB

2

ECB Policy- An Overview

External Commercial Borrowings – Commercial Loans, buyer / suppliers credit, securitized instruments (Bonds, Preference shares etc.) with a minimum average maturity of 3 years.

ECB Policy- At a glance

Eligible Lender

• International Banks• International Capital Markets• Multilateral Financial Institutions• Export credit agencies• Suppliers of equipment• Foreign collaborators • Foreign Equity Holders (min.

25%) • For ECB > USD 5M – ECB

Liability- Equity 4:1• Indirect Equity Holder- Only if

indirect Holding in IC is 51%• Group Co.- Only if Lender &

Borrower are Subs of same Parent

Eligible Borrowers

• Corporates• NGOs in Micro Finance• SEZ Units (except financial

intermediaries, individuals, Trusts)

• NBFC-IFC, NBFC-AFC• MFI, NGO• Companies in Miscellaneous

Services i.e. Training Activities, R&D; and Infra Support; (except Edu Inst., Trading business, Logistic Services, Financial Services, and Consultancy Services) only from its Direct/Indirect Equity Holder/Group Cos

• SIDBI (for on lending to MSME Sector)

• Other specified

End Use

• Real/ Industrial sector (SME)– • Import of capital goods, • New Projects, Expansion/

modernization of existing units • ODI in JV/ WoS abroad

• Payment of Interest During Construction (IDC)

• First stage acquisition of shares in the disinvestment process and also in the mandatory second stage offer under GOIs disinvestment program

• Payment for obtaining License/ permit for 3G spectrum.

• For lending to self help groups or for micro credit by NGO’s

• Repayment of rupee loans by companies in infrastructure sector manufacturing and hotel sector (with project cost of NR 250 or more)

• General corporate purpose from foreign direct equity holder

Maturity & interest

Prohibition Minimum avg. maturity

period

USD 20 M – 3 years

>USD 20 upto 750 M – 5

years All in Cost Ceiling

3-5 years - LIBOR + 350 b.p.

>5 years - LIBOR + 500 b.p.

On lending, Investment in capital market or acquiring a company in India Real EstateGeneral corporate purposesRepayment of existing INR Loan

Other permitted end uses…

• Import of capital goods; New projects;• Modernization/expansion of existing projects in real sector (industrial sector including SME

and infrastructure sector);• Hotel Sector (fixed capital investment of ≥ Rs. 200 Crore)• Convention Centers (fixed capital investment of ≥ Rs. 300 Crore)• Common infrastructure for Industrial Parks, SEZ, Tourism Facilities;• Capital investment for fertilizers;• Post harvest infrastructure for agricultural and horticultural produce including cold storage;• Soil testing laboratories; Cold chain for farm level pre-cooling, preservation, storage or

agricultural and allied produce, marine produce and meat;• ODI in JV/WOS abroad;• Acquisition of shares in disinvestment process of PSU shares;• IDC for Indian Infrastructure sector;• Capital expenditure in maintenance and operations of toll system;• Refinancing of Bridge finance availed for import of capital goods in infrastructure sector;• Import of services, technical know-how, payment of license fee etc.;• General corporate purposes from FDEH in manufacturing, infrastructure, hotels, hospitals

and IT sector (minimum average maturity 7 years);• Payment of spectrum allocation;

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Guarantee

• Issuance of guarantee, standby letter of credit, letter of undertaking or letter of comfort by banks, Financial Institutions and Non-Banking Financial Companies (NBFCs) from India relating to ECB is not permitted.

• Pledge of shares by promoters, domestic associate companies of the borrower

• Corporate Guarantee, Personal Guarantee ,

• Creation of Charge over immoveable assets and financial securities is

Possible only after obtaining no objection from AD bank.

Incase of enforcement of charge – property will be transferred only to person resident in India

ECB Policy-

Now Authorised Dealer can permit:

• Change in Name; Change in Lender; Change in End Use, Change in All-in-Cost • Transfer of ECB, Currency Reschedulement, Reduction in amount of ECB• Cancellation of LRN

Conversion of ECB into Equity

Conditions:

• Activities to be under Automatic Route / FIPB approval obtained

• Sectoral Cap not breached

• Pricing: Listed as per SEBI; Unlisted: At a Fair Value arrived by CA/MB based on IAP on ALP

on the date of conversion

• Conversion Rate: Maximum at exchange rate prevailing on the date of the agreement

between the parties.

Reporting structure

• Full conversion of outstanding ECB into equity – Form FC-GPR to AD & Form ECB-2 to DSIM

within 7 working days from the close of the month

• Partial conversion of outstanding ECB into equity – Form FC-GPR for converted portion &

Form ECB-2 to DSIM mentioning converted and unconverted portion

ECB Policy- Procedures & Compliance

Execution of Loan Agreement(filing is not compulsory)

Filing of Form 83 duly certified by CA/CS to AD

AD to process the request and send to RBI for LRN

Drawn should take place post allotment of LRN

Filing of Monthly Return in ECB 2 by 7th of next month

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Practical Aspects

Practical Aspects

• Treatment of certain securities - Non convertible, optionally convertible or partially convertible preference shares.

• Concept of Deemed ECB.

• RBI has not granted the LRN even after 2 months – Can I drawdown the first tranche.

• Can I convert ECB into equity including Interest – what about interest on Interest.

• ECB for Trading sector.

• Does software sector include –IT/ITeS non STPI units.

• Can I use MIBOR for INR denominated ECBs?

• In case of confusion on whether a sector qualifies under automatic route, can I still follow automatic route.

Compounding of Contraventions

Compounding of Contravention

Means..

Objective..

Settle an offence committed by the contravener through imposition of a

monetary penalty without going in for litigation after the contravener

acknowledges having committed the contravention..

To provide comfort by minimizing transaction costs, while taking severe

view of willful, malafide and fraudulent transactions…….

But it is not equal to withdrawal of a charge or a complaint but an agreement not to pursue the legal battle and spare the accused from further consequences.

Compounding of Contraventions

Filling the Application

• Application Form• Nature of the contravention • Under which provisions of FEMA the transaction would be handled• How and which of the FEMA provisions were contravened while undertaking

the transaction • Transaction:- Parties involved, Date of the transaction and Amount involved• DD – in favour of “RESERVE BANK OF INDIA” Payable at RO/MUMBAI

Jurisdiction of RBI Offices

Regional Offices Central Offices

- Delay in AR,FC-GPR- Non Allotment/Refund in 180 days- Violation of Pricing Guidelines- Issue of Ineligible Instruments- Issue of securities without

RBI/FIPB approval- Delay in Filing of FC-TRS-NR/R-

R/NR- Recording of Transfer by Company

without FC-TRS

New Delhi- Acquisition of IMP in/outside India- LO, BO and PO- Deposits

Mumbai- ECB- ODI- Export, Import and Others

Compounding – Salient Features

• Voluntary• No suo-motto investigation • Time Bound completion (Within 180 days)• No further proceedings for contravention so compounded• Payment of sum of contravention (within 15 days)• Once the order is passed, no contravener seek to withdraw the order or to hold it

as void or request a review of the order• No appeal against the Order• Non payment shall be deemed as no application is made • No compounding before expiry of 3 years of previous order for similar

contravention• No Compounding of cases where approval of any statutory authority/Govt. etc.

was required unless such approvals has been sought

Ascertainment of Nature of Contravention by RBI

Depends on whether the contravention is…

• Technical/ Minor in nature and needs only Cautionary Advice. • Serious in nature and warrant Compounding;• Prima facie, involves Money-Laundering, National and Security concerns involving serious

infringement of the regulatory framework;

However, RBI reserves the right to classify the contraventions and no body else has any right to classify any contravention as technical suo moto.

Decision of Sum of contravention by RBI depends on …• Amount of Gain of unfair advantage made from contravention;• Amount of Loss to any agency/authority/exchequer from contravention; • Economic benefits accruing to the contravener from delayed compliance or compliance

avoided; • Repetitive nature of the contravention, Track Record, History of non-compliance of the

Contravener; • Contravener’s conduct in undertaking the transaction, Disclosure of full facts in the

application and submissions made during the personal hearing;• Any other factor considered relevant and appropriate

Contravention

Application for Condonation

Application for compounding

Adjudication proceedings

Penalty/ ConfiscationQuantifiable offence - Upto 3 times

Non quantifiable offence - Upto Rs. 200,000Continuing penalty - Rs. 5000 per day

Imprisonment if penalty not paid within prescribed time

Contraventions & Penalties at a glance

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Discussion

Atul Mittal,Director Deloitte Heskin & Sells LLP.9810065744