In Part I of this Article, we had dealt with provisions relating to raising of External Commercial Borrowings (ECBs) the automatic route of Reserve Bank of India (RBI). In this part, we shall deal with provisions relating to raising of ECBs under the approval route as well as various other provisions relating to raising of ECBs.

1. Approval Route for External Commercial Borrowings

2. Pre-payment of ECB loans

Pre-payment of ECB for amounts exceeding US$ 200 million would be considered by the RBI under the Approval Route.

3. ECB by Units in Special Economic Zones (SEZs)

Units in SEZs have been permitted to raise ECB subject to the following conditions:—

1. ECB is raised for their own requirement, and

2. They shall not transfer or on-lend any borrowed funds to their sister concern or any other unit in Domestic Tariff Area (DTA).

Units in SEZs can raise ECBs on "stand alone basis". As there is a special policy, the important paragraph from the policy is being reproduced below.

"By "stand alone" it is meant that units in the SEZs would be completely isolated from financial contacts with their subsidiaries or their parent in the mainland or within the SEZs as far as repayment of ECB interest/principal is concerned. Therefore, in effect only those units, which are either subsidiary/branch of a company registered outside India or where a company is registered independently for operating in one or more zones in the country, would qualify for stand alone criteria. Borrowers in the SEZs are to be allowed to raise ECB under the special window as announced in the EXIM Policy. They would service the loan (principal + interest + any other fee, charge etc.) out of proceeds generated by the SEZ units."

4. Borrowings under erstwhile US$ 5 million scheme

Designated Authorised Dealers (ADs) have been permitted to approve of elongation of repayment period for loans raised under the erstwhile US$ 5 million scheme, provided there is a consent letter from the overseas lender for such re-scheduling without any additional cost.

5. Crystallisation of ECB liability

ADs desiring to crystallise their foreign exchange liability arising out of guarantees provided for ECB raised by corporate in India into Rupees, may make an application to the Chief General Manager, Foreign Exchange Department, External Commercial Borrowings Division, Reserve Bank of India, Central Office, Mumbai, giving full details viz., name of the borrower, amount raised, maturity, circumstances leading to invocation of guarantee/letter of comfort, date of default, its impact on liabilities of the overseas branch of the Authorised Dealer concerned and other relevant factors. [Master Circular No. 12/2005-06, dated July 1, 2005 on ECB and Trade Credits.]

6. Conversion of ECB loan into equity

Government of India vide Press Release dated September 29, 2004 has permitted conversion of ECB loans into equity under automatic route. RBI vide its Circular No. 15 dated October 1, 2004 has subsequently granted General Permission for conversion of ECB into equity subject to the following conditions:

1. The activity of the company is covered under the Automatic Route for FDI or it had obtained Government approval for foreign equity in the company,
    

2. The foreign equity after such conversion of debt into equity is within the Sectoral Cap, if any,
    

3. Pricing of shares is as per SEBI and erstwhile CCI guidelines/regulations in the case of listed/unlisted companies, as the case may be.
    

4. Compliance with the requirements prescribed under any other statute and regulation in force.

The conversion facility is available for all ECBs availed either with the general or specific permission of Reserve Bank. This would also be applicable to ECBs, irrespective of whether due for repayment or not, as well as secured/unsecured loans availed from non-resident collaborators. However, import payables, deemed as ECBs, would not be eligible for conversion into equity/preference shares.

6.1 Reporting requirements —

Details of issue of shares against conversion of ECB have to be reported to the concerned Regional Office of the Reserve Bank, as indicated below:

1. In case of full conversion of ECB into equity, the company shall report the conversion in Form FC-GPR to the concerned Regional Office of the Reserve Bank as well as in form ECB-2 submitted to the Department of Statistical Analysis and Computer Services (DESACS), Reserve Bank of India, Bandra-Kurla Complex, Mumbai-400 051, within seven working days from the close of month to which it relates. The words "ECB wholly converted to equity" shall be superscribed on top of the ECB-2 form. Once reported, filing of ECB-2 in the subsequent months is not necessary.
    

2. In case of partial conversion of ECB, the company shall report the converted portion in Form FC-GPR to the concerned Regional Office as well as in Form ECB-2 clearly differentiating the converted portion from the unconverted portion. The words "ECB partially converted to equity" shall be indicated on top of Form ECB-2. In the subsequent months, the outstanding portion of ECB shall be reported in Form ECB-2 to DESACS RBI as per the instructions contained in AP (DIR Series) Circular No. 60 dated January 31, 2004.

7. External Commercial Borrowings by Non-Government Organisations (NGOs) engaged in micro-finance activities under automatic route

Earlier, Non-Government Organisations engaged in micro-finance institutions were not permitted to raise ECB in foreign exchange without prior approval of RBI. Pursuant to the announcement made by the Finance Minister in Union Budget 2005-06, where it was proposed to allow qualified NGOs engaged in micro-finance activities to raise ECBs, RBI has issued Circular No. 40 dated April 25, 2005 whereby NGOs engaged in Micro Finance Activities have been permitted to raise ECBs under the Automatic route subject to the following guidelines:

1. Eligible borrower

NGOs engaged in micro finance activities would be eligible to avail ECB. Such NGO (i) should have a satisfactory borrowing relationship for at least 3 years with a scheduled commercial bank authorised to deal in foreign exchange and (ii) would require a certificate of due diligence on ‘fit and proper’ status of the board/committee of management of the borrowing entity from designated Authorised Dealer (AD).

2. Permitted end-use

The designated AD must ensure that the ECB proceeds are utilised for lending to self-help groups or for micro-credit or for bona fide micro-finance activity including capacity building.

3. Recognised lender

ECB funds should be routed through normal banking channel. ECB from following internationally recognised sources; i.e., (i) international banks, (ii) multilateral financial institutions, (iii) export credit agencies may be availed. Furthermore, overseas organisations and individuals complying with following safeguards may provide ECB, to NGOs engaged in micro-finance activities.

1. Overseas organisations planning to extend ECB would have to furnish a certificate of due diligence from an overseas bank which in turn is subject to regulation of host-country regulator and adheres to Financial Action Task Force (FATF) guidelines to the designated AD. The certificate of due diligence should comprise the following (i) that the lender maintains an account with the bank for at least a period of two years, (ii) that the lending entity is organised as per the local law and held in good esteem by the business/local community and (iii) that there is no criminal action pending against it.
    

2. Individual lender has to obtain a certificate of due diligence from an overseas bank indicating that the lender maintains an account with the bank for at least a period of two years. Other evidence/documents such as audited statement of account and income tax return which the overseas lender may furnish need to be certified and forwarded by the overseas bank. Individual lenders from countries wherein banks are not required to adhere to Know Your Customer (KYC) guidelines are not permitted to extend ECB.

4. Amount of ECB

With a view to ensuring minimization of systemic risk, the maximum amount of foreign currency borrowings of an NGO borrower is capped at US$ 5 million during a financial year.

5. Other ECB parameters

All other ECB parameters such as minimum average maturity, all-in-cost ceilings, restrictions on issuance of guarantee, choice of security, parking of ECB proceeds, prepayment and refinancing of ECB under Automatic Route should be complied . The designated AD has to ensure at the time of draw-down that the forex exposure of the NGO borrower is hedged. Hedging of foreign exposure is not compulsory in case of borrowers other than NGOs.

6. Reporting requirements

Borrowers are required to comply with the reporting requirements of ECBs such as submission of Form 83 through designated AD to the RBI for allotment of loan registration number prior to draw-down of loan and filing of monthly ECB-2 Return.

8. Foreign Currency Convertible Bonds (FCCBs)

The policy for ECB is also applicable to FCCBs in all respects. In the recent past, the Indian corporates have borrowed through FCCBs route rather than ECB route. Due to the hardening of LIBOR, the ECB route has become a costlier mode of borrowing as compared to FCCBs route. Generally, the FCCBs are convertible at a substantial premium to the existing issue price. The FCCBs are issued at a coupon of either 0% or a very nominal percentage. Due to booming stock market, generally the stocks are being traded at a price above the pre-determined conversion price. This prompts the lenders to convert their bonds into shares at the conversion price. This results into saving of interest on FCCBs.

9. Conclusion

Provisions relating to ECBs have undergone substantial changes in the recent past. More and more restrictions are placed for end use of borrowed money in order to channelise borrowed funds in real sector or infrastructure projects. Minimum average maturity period of three years would prevent hot money to enter the Indian economy on one hand, and on the other hand, it would help matching purpose and period of borrowing, meaning, long term borrowings would fund long term projects. Requirement of maintaining a debt-equity ratio of 4:1 (applicable in case of borrowings from foreign equity holders) and minimum capital participation would help prevent "Thin Capitalisation" of Indian companies. Thus, foreign exchange policies are used to achieve several economic objectives through the medium of ECBs.