External Commercial Borrowings: Meaning
External commercial borrowings, or ECB, are loans obtained by Indian borrowers from international lenders in the form of buyer’s credit, supplier’s credit, or securitized securities. The European Central Bank (ECB) can potentially be turned into shares. The ECB prohibits banks and other financial institutions from issuing any sort of guarantee. The issuing of corporate and personal guarantees, however, is permitted.
ECB and Start-ups
The Reserve Bank of India (RBI) published External Commercial Borrowings (ECB) Policy – New ECB Framework in January 2019. ECB is available to any start-up that is eligible to receive FDI under this framework, regardless of whether it is registered and recognized or not. This is a fantastic initiative by the RBI, with the goal of attracting foreign money for startups to use to leverage their financial health and growth.
According to the new ECB Framework, AD Category-I banks are now allowed to allow Startups to raise ECB via the automatic route up to 3 million USD or equivalent per financial year in rupees, any convertible foreign currency, or a combination of both, for a minimum average maturity period of three years. The following are some of the framework’s main features:
|Eligibility||An entity must be designated as a startup on the date of ECB raising, according to the conditions outlined in the Notification dated February 17, 2016.|
|Maturity||The ECB raised by Startups must have a minimum average maturity duration of three years.|
|Recognised lender||Under the ECB framework for Statrups, a lender / investor (foreign entity) must be a resident of a nation that is either a member of the Financial Action Task Force (FATF) or a member of a FATF-Style Regional Bodies; and must not be from a country listed in the FATF’s public statement as: A jurisdiction with strategic Anti-Money Laundering or Counter-Terrorism Financing shortcomings that require countermeasures; orA jurisdiction that has not made sufficient progress in correcting the inadequacies or has not committed to an action plan developed with the Financial Action Task Force. Under this structure, however, foreign branches or subsidiaries of Indian banks, as well as abroad wholly owned subsidiaries or joint ventures of Indian companies, will not be deemed recognized lenders.|
|Forms of Borrowing||Borrowing can only take the form of loans or non-convertible, optionally convertible, or partially convertible preference shares, according to the framework.|
|Currency||The loan should be denominated in any freely convertible currency, Indian Rupees (INR), or a combination of both, according to the framework. If the non-resident lender has to borrow in INR, he or she should use swaps or an outright sell through an AD Category-I bank in India.|
|Borrowing limits||Each Startup’s borrowing will be limited to USD 3 million or equivalent per financial year, in either INR or any convertible foreign currency, or a combination of the two|
|All-in-cost requirements||The borrower and the lender must agree on all-in-cost requirements.|
|Conversion to equity||Conversion of ECB to equity is available without restriction, subject to the regulations governing foreign investment in startups.|
|Security||The borrower can provide any security in the form of movable, immovable, intangible assets (including patents, intellectual property rights), financial securities, and so on, as long as it complies with the foreign direct investment / foreign portfolio investment and/or any other norms applicable to foreign lenders / entities holding securities.|
|Corporate and personal guarantees:||The framework allows for the issuing of corporate and personal guarantees. Furthermore, any guarantee offered by non-residents is permitted only if such parties meet the criteria for recognition as a lender under the framework outlined above. The framework, however, prohibits Indian banks, all India financial institutions, and NBFCs from issuing guarantees, standby letters of credit, letters of undertaking, or letters of comfort in relation to ECB.|
|Hedging||Under the framework, an overseas lender can hedge its INR exposure through approved derivative products with AD Category – I banks in India if the ECB is denominated in INR. Furthermore, the lender is allowed to access the home market on a back-to-back basis through branches/ subsidiaries of Indian banks overseas or branches of foreign banks with an Indian presence.|
Prior to the RBI’s announcement of the stated circular allowing start-ups to raise money through ECB, only large Indian corporations were allowed to do so. As a result, the RBI’s decision to allow Start-ups to obtain capital through the ECB route is a critical one. Through numerous policies and schemes, the government is attempting to support the Start-up India campaign. The government has created several incentives to boost entrepreneurs, including an income tax holiday, capital gains tax deductions on investments in businesses, and simplified regulations for raising funding from the security market. Another progressive step is the ECB Framework for Start-ups, which will undoubtedly benefit a huge number of start-ups.