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

For large projects in India, financial assistance from a foreign country can be obtained through external business loans, thus providing an opportunity for foreign investors to invest in India. IT is a commercial loan with a minimum average maturity period of 3 years. External business loans are the key components of India’s overall external assistance, which includes external assistance, buyer credit, non-resident Indian deposits, short-term credit, and rupee debt. Outside Business Loans are accessed either on the Automatic route or on the Approval route. In the auto route, no RBI or Government approval is needed, but in the approval route, prior approval from the RBI and the Government of India is required.

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

Below are the Eligible Borrowers to benefit from the External Commercial Advances under the automatic route;

1. Corporations registered under the Companies Law, including those in the hotel, hospital, software, etc. sectors.
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 may borrow for their own requirements. They must not transfer or loan such funds to sister concerns or units in the National Rate Area.
4. To take advantage of External Commercial Loans, Non-Governmental Organizations that are engaged in microfinance activities. need to meet certain conditions such as; they 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 certificate of due diligence from the designated AD grade bank on “fit” status from the Management Board or Committee of the borrowing entity.

Individuals, nonprofit organizations, and trusts are not eligible to obtain Outside Business Loans under the automatic route;

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

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

1. For ECBs 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 raise ECB during an exercise:

1. Companies other than those in 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 one 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. ECB up to USD 20 million or equivalent may 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 allocation 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 can enter into a loan agreement that meets ECB guidelines with a recognized lender to obtain 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 Secretary of the Company or Public Accountant to the designated AD bank. The designated AD bank should 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 the ECB-2 declaration certified by the designated AD bank on a monthly basis to reach the Department of Statistics and Information Systems, Banco de la Reserva within seven business days after the end of the month to which it refers.

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