A Revised Structure of External Commercial Borrowing

By | June 5, 2020
Revised Structure of External Commercial Borrowing (ECB)

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A Revised Structure of External Commercial Borrowing | Overview


As the name suggests, External Commercial Borrowing (ECB) is borrowing when an Indian entity borrows funds in the form of loans from entity/institutions established outside India for commercial purposes. External Commercial Borrowing transactions are governed by clause (d) of sub-section 3 of section 6 of the Foreign Exchange Management Act, 1999 (FEMA).

Powers to regulate such capital account transactions are vested with Reserve Bank of India (RBI) as it can prohibit/regulate the issuance of foreign security, borrowing in foreign exchange, export/import of foreign currency, etc. Various provisions such as of Foreign Exchange Management (Borrowing and Lending) Regulation, 2018, and Foreign Exchange Management (Guarantees) Regulations, 2000 often play an important role in the framework of ECB.[1]

One of the key reasons for borrowing loans from an entity outside India is the lesser rate of interest. Countries with a strong economy lend money at lower interest rates, such as the United States or Eurozone. Joint ventures are also one of the reasons as it gets easier for the Indian entity to borrow loan from the country where they plan to establish their Joint Venture.

Routes for ECB

There are two routes through which ECB transactions can take place. Under an automatic route, borrower interacts with the Authorized Dealer Category (AD-Category 1) permitted by RBI under section 10 of FEMA such as Commercial Banks, Nationalized Banks, Foreign Commercial Banks, etc. and their role consists in providing the guidelines and to meet the requirement for that respective transaction.

Whereas, under the approval route, borrowers are supposed to send a request in format (Form ECB)[2] to RBI through their Authorized Dealer. ECB transactions are of two types:

  1. Foreign currency (FCY) denominated ECB – It must be freely convertible Foreign Currency which means any transferring of money between the foreign lender and domestic borrower must go through the conversion process by the RBI (including repayment along with interest on the maturity of the loan). Whatever the exchange rate is at the time of conversion, the loan is to be converted in domestic currency at that exchange rate. Currency risk under this route lies with the borrower.
  2. Indian Rupee (INR) denominated ECB – Process of conversion here also falls under a liability of the RBI but the transaction is in Rupee denominated ECB. Currency risk under this transaction lies with the lender regardless of whatever the exchange rate at the time of repayment.

Forms of ECB

ECB under FCY denominated route may be of several forms which include loans from a bank, floating/fixed-rate notes/debentures (other than fully & compulsory convertible instruments), trade credit beyond 3 years, Foreign Currency Convertible Bonds (FCCBs), Foreign Currency Exchangeable Bonds (FCEBs) and Financial Lease.

ECB under INR denominated route are of same forms as an above-mentioned route but it also includes preference shares, plain vanilla Rupee denominated bonds where vanilla denotes plain simple bonds with fixed interest rate and maturity period issued overseas, which can either be placed privately or listed on the exchange (Anon., 2019).

Minimum Average Maturity Period (MAMP)

A minimum loan must be of 3 years. A conditional loan can be raised for 1 year by manufacturing companies where the amount must not exceed US$ 50 million. Loan raised for general corporate purposes or capital purposes from foreign equity holders must be of 5 years and on lending by NBFCs can extend up to 10 years.

Eligible Borrowers and Lenders

All entities which are permitted to invest under the list of FDI are eligible borrowers with addition to new entities such are Port Trusts, Units in  Special Economic Zones (SEZ), Export-Import (EXIM) Banks, Small Industrial Bank of India (SIDBI) and Registered entities engaged in Micro-Finance activities.

The lender must belong to a country that is a member of the Financial Action Task Force (FATF) or International Organization of Securities Commission (IOSCO). Individuals can also be considered as a lender if they are the holder of foreign equity shares in their own country. Indian banks or subsidiaries which have branches outside India are also eligible to grant loans.[3]

End-Uses (Activities)

Amount raised from the loan can be used at all sectors & activities where FDI is allowed except the following : (Anon., 2019)

  1. Activities related to real estate
  2. Investments in capital market
  3. Working capital (allowed only from foreign equity holder)
  4. General corporate purposes (allowed only from foreign equity holder)
  5. Allowed in the form of foreign equity

Limit and Leverage

Under the automatic route, borrowing amount cannot exceed the single limit of US$ 750 million per year and it can only be raised by eligible borrowers as stated above, whereas, under the approval route, approval from RBI is required in case if it exceeds the above cap.

Furthermore, no guarantee will be provided to any person/entity planning to raise such loan either by Indian Banks or NBFCs or All India Financial Institutions and no such banks shall invest in FCEBs/FCCBs. This is in direct connection to the case of Nirav Modi where he used to provide bank guarantees from the Punjab National Bank (PNB) which subsequently created liability on PNB for any of his defaults.

Parking of ECB

Parking of ECB can be done either in India or even outside India. When talking outside India, ECB money can be parked in Bank deposits/certificates of deposit/Treasury Bills but those Banks must be accredited by the minimum rating of S&P (AA-), Fitch (IBCA), Moody’s (Aa3). If parking domestically then repatriation of money should be done through AD Category-1 banks and deposits held in banks cannot exceed 12 months.


Under automatic route (Form ECB)[4] as mentioned above which contains the terms and conditions of the ECB to be submitted through AD Category-1 Bank to RBI and under the approval route, an empowered committee will be established including external and internal members to examine the proposal of the ECB.

It is necessary to obtain Loan Registration Number (LRN) from RBI through the same AD Category-1 Bank under both the routes. Also, the borrowers are supposed to report the ECB transactions through  Form ECB 2[5] Return form through their AD Category-1 Bank.

Conversion of ECB into Equity

Conversion of ECB into equity can be implemented and can often be proven advantageous to some borrowers at the time of repaying the loan. In case, if the borrower is unable to repay the loaned amount to the lender, the borrower always has the option of converting that amount into equity. Conversion of existing ECB/matured and unpaid ECB into equity is allowed under the following conditions :

  • An Entity using ECB should be allowed for FDI
  • Consent of the lender is to be obtained
  • Pricing of shares/conversion as per Pricing Regulations
  • Form ECB-2 and FC-GPR along with the annual return must be submitted to RBI
  • The Exchange rate should not be more than exchange conversion rate

ECB for Startups

The government of India has various legislation for start-ups, Companies Act has a range of exemptions for start-ups and many other benefits are given under taxation laws to them. The first eligibility criteria should be that the start-up must be recognised and approved by the Central Government of India.

Start-ups can acquire loans from foreign lenders under the automatic route for Minimum Average Maturity Period (MAMP) of 3 years but only up to US$3 Billion per financial year which could either be in Indian Rupee (INR) or Foreign Currency (FY). Such borrowing may be in the form of loans/non-convertible, optionally convertibly or partly convertible preferential shares and all-in-cost mutual understanding between borrower and lender shall be discussed.

Security can be of many natures such as of movable, immovable, intangible assets, financial securities etc and they must comply with the norms of Foreign Portfolio Investment (FPI) or Foreign Direct Investment (FDI). The lender country must be a member of FATF or IOSCO and the investment must be related to the business that the borrower is pursuing.

Hedging Provision

Hedging under ECB is close to being insured against the possibility of rupee depreciation. It is a relaxation provided to the borrower and lender by the RBI under ECB transactions where they can hedge ECB loans to protect themselves from future losses.

Under FCY ECB, hedging is compulsory for borrowers and must be pertinent to the Sectoral Regulator. The principal amount and interest amount must be hedged at the time of acquiring a loan. There is a form of hedging known as Natural Hedging which is used to offset the projected cash flow. It is used to offset the Foreign currency inflow with the other outflow of currency. Under INR ECB route hedging is optional and the risk lies on the lender.

Advantages of ECB

  • The cost of funds is cheaper if borrowed from the country with a strong economy whose rate of interest is lower in comparison to the Domestic entities.
  • Since the market size increases companies can explore several options to meet their larger requirement.
  • The borrower will help in diversifying the investor base.
  • Entities can raise funds without being afraid of dilution of control as the lenders won’t be having voting rights.
  • The funds borrowed are valid for a fairly long period.

Disadvantages of ECB

  • It may bring a lax attitude on the company’s side due to excessive borrowing to which they will be attracted to due to the lower rate of interest.
  • Companies having higher debt on their balance sheet will be affected when being rated by the rating agencies.
  • Since the borrowings are foreign currency denominated, there will be an exchange rate risk among the parties. Liability and costs of hedging will also be incurred by the entity on whom the currency risk lies.

Revised Changes 

  • Earlier there were 3 routes for ECBs namely Track 1 (medium-term foreign currency loans), Track 2 (long-term foreign currency loan) and Track 3 (INR denominated ECB) and Rupee Denominated Bonds (RDB or Masala Bonds) which now have been merged into two new routes which are Foreign Currency (FCY) Denominated route and Indian Rupee (INR) Denominated route.
  • Under the previous route, lenders were recognised per different tracks. As per revised ECB framework, lenders must be a member of FATF or IOSCO compliant country.
  • Minimum Average Maturity Period for all types of ECB will be of 3 years.
  • The limits for raising ECB have also been revised to US$ 750 Million from US$ 50 Million replacing the existing sector-wise list.
  • The list of borrowers and lenders has also been extended.

Author: Jayant,

Department of Law, University of Lucknow


  1. Anon., n.d. Ministry of law and justice. [online] available here
  2. Anon., 2016. Indianeconomy.net. [online] available here
  3. Anon., 2019. Businessline. [online] available here
  4. Anon., 2019. Reserve bank of India. [online] available here
  5. Anon., 2019. Reserve bank of India. [online] available here
  6. Anon., 2020. Efinancemanagement. [online] available here

[1] https://m.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=11510

[2] https://rbidocs.rbi.org.in/rdocs/content/pdfs/ECB26032019_F1.pdf

[3] https://www.rbi.org.in/scripts/FS_Notification.aspx?Id=11456&fn=5&Mode=0#ANN

[4] https://rbidocs.rbi.org.in/rdocs/content/pdfs/ECB26032019_F1.pdf

[5] https://rbidocs.rbi.org.in/rdocs/content/pdfs/ECB26032019_F2.pdf

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