External Commercial Borrowings (ECB) in India: An Overview

External Commercial Borrowings are commercial loans provided by foreign institutional investors. It is an instrument that helps organizations and Indian firms raise funds outside India in foreign currencies. These commercial loans carry a lower interest rate than the interest rate offered by commercial banks in India. So, PSUs and companies prefer opting for ECBs. External Commercial Borrowings are used only for a particular commercial purpose; the borrower has to utilize the funds provided by foreign investors. It is crucial to consider the business needs and long term goals of an organization before choosing External Commercial Borrowings. Non-compliance with the provisions of External Commercial Borrowing will attract a penalty. As these borrowings are used only for commercial purposes, there is an End-use requirement, which means that the borrowed can be used only for the purpose specified in the End-use. Scroll down to check more information regarding External Commercial Borrowings in India.

What are the benefits of ECB in India?

Following are some of the essential benefits of raising funds using External Commercial Borrowings: 

• The funds value usually is lower when borrowed from external sources. For example, some economies have a lower interest rate, and Indian firms and organizations can borrow the money at lower interest rates from the United States of America (USA) and the Eurozone as the rates are moderately low.
• The borrower can expand the base of the investor.
• Companies can become increasingly profitable through External Commercial Borrowing.
• ECB offers access to the international market so that the borrowers have greater exposure to universal opportunities.
• ECB is just a way to take a loan, and it is not necessary to be of equity nature, and therefore the company's stakes will not be diluted. Essentially borrowers can raise funds without relinquishing control as debtors will not have any voting rights in the company.
• ECB offers many benefits to the economy also. With the Indian Government's help, inflows can be directed into the sector, thus increasing its potential for growth. For example, a large percentage of funding through ECB is allowed by India's Government for the SMEs (Small and medium-sized Enterprises) and infrastructure industry.
• Since the markets are greater when raising funds through ECB, companies can meet higher global players' requirements than domestic players.

What are the eligibility criteria for External Commercial Borrowings?

Eligible Borrowers - Following is the list of entities that can raise money through ECBs: 

• Development and Manufacturing Sector.
• Small Industries Development Bank of India.
• Units in SEZs (Special Economic Zones).
• Airlines companies and shipping companies.
• Export-Import Bank of India (only for the approval route).
• NBFCs or Non-Banking Financial Companies.
• Companies in the infrastructure sector.
• Holding companies.
• CICs or Core Investment Companies.
• Infrastructure and Real Estate Investment Trusts come under the Securities and Exchange Board of India's regulatory framework.
• Non-Banking Financial Companies-Micro Finance Institutions (NBFCs-MFIs) not for profit companies registered under the Companies Act, 2013. Trusts, Societies, and co-operative registered under the Indian Trust Act, 1882, Societies Registration Act, 1860, and State-Level Cooperative Act/State-Level mutually aided Co-operative Acts respectively, NGOs which are involved in microfinance activities.
• Companies indulged in various services such as R&D (Research and Development), training, companies supporting infrastructure, companies providing logistics services.
• National Manufacturing and Investment Zones (NMIZs) or Developers of Special Economic Zones.

 Eligible Lenders- Following is the list of entities who provide External Commercial Borrowings or ECBs: 

• International Banks.
• Export Credit Agencies.
• Multilateral Financial Institutions (MFIs) such as ADB, IFC, CDC, etc.
• Foreign Collaborators.
• Foreign Equity Holders.
• International Capital Markets.
• Suppliers of equipment.

What are the essential documents required for External Commercial Borrowings in India?

Following is the list of all the essential documents required for External Commercial Borrowings (ECBs): 

• Registration number of loan.
• Loan Agreement (It compulsory for the borrowers to enter into a loan agreement with the Authorized Dealer).
• Before securing the External Commercial Borrowings, the registration number of the loan must be received from RBI or Reserve Bank of India.
• It is necessary to submit the form to the RBI by the authorized dealer to obtain the Loan Registration Number.
• Form-ECB.
• ECB-2 Return.
• For getting the LRN, the authorized dealer must submit Form 83 in duplicate, which is verified by a CA (Chartered Accountant) or CS (Company Secretary).

What is the Procedure for External Commercial Borrowings?

ECBs can be done through the Automatic Route or Approval Route, and you can check the same below: 

• Any corporate that needs ECB must approach the designated authorized dealer. An authorized dealer can be a fully-fledged money changer, bank, or any other person. Send the application to the following address:

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

• The borrower must obtain the LRN or Loan Registration Number from the Reserve Bank of India before taking the ECBs.
• For getting the Loan Registration Number, the applicant must submit the Form 83 duplicate and all the documents.
• Form 83 must be certified by a CA (Chartered Accountant) or CS (Company Secretary).
• Then the Form has to be forwarded to the concerned or designated bank.
• Submit a copy to the designated bank address, which is mentioned below:

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

• The borrower can get the loan only after getting the Loan Registration Number from the DSIM (Department of Statistics and Information Management), RBI (Reserve Bank of India), within 7 working days from the month end to which it relates.
• The borrower must submit the Form ECB to the Reserve Bank of India.
• After verification of the application, RBI will grant permission.

 Approval Route: In this route, permission is required by the Reserve Bank of India, and the authorized dealer can do it.

Conclusion

ECBs are very important as a source of corporate funds. It is maintained within the judicious limit for total external borrowings and provides flexibility to corporate in external borrowings, and it is reflected in its guidelines. Though, the primary purpose of External Commercial Borrowings is to inspire borrowings, which provides the basis for the most robust economy.