External Commercial Borrowings
Key updates and issues
The Chamber of Tax Consultants FEMA Study Circle
5 August 2015, Mumbai
CA Gaurav Tanna
Contents
• Statutory Framework
• Meaning of ECB
• Key concepts
• Recent / Key Updates
• Some Issues
• Q&A
1
Statutory Framework
•
Section 6(2) of the Foreign Exchange Management Act, 1999
•
RBI FEMA Notifications
Statutory
Framework
− Permissible Capital Account Transaction Regulations 2000 [FEMA 1]
− Borrowing and Lending in Foreign Exchange Regulations 2000 [FEMA 3]
− Transfer or Issue of Foreign Security Regulations 2000 [FEMA 120] [FCCB & FCEB]
− Notifications issued by RBI from time to time amending above
•
Circulars issued by RBI
− A.P. Dir Series Circulars: issued by RBI from time to time
− Master Circular: Issued once in a year by RBI – 1 July: now updated periodically (only
for reference)
•
No RBI FAQs on ECB but Monthly Data on ECBs available on RBI website
•
Thumb Rule
− ECB is a Capital Account Transaction – permissible only as stipulated
− In case of doubt, always avail the Approval Route
3
Meaning of ECB?
 Borrowings / deemed borrowings from Non Resident Lenders
Ambit and
Coverage of
ECB
 Forms of ECB include:
− Commercial Loans (Banks / Others Recognized Lenders)
− Securitized Instruments issued to Non-Residents - Floating Rate Notes and Fixed Rate
Bonds,
− Non-Convertible, Optionally Convertible or Partly Convertible Preference Shares (w.e.f.
1 May 2007)
− Trade Credits for imports - Supplier’s / Buyers Credit
− Foreign Currency Convertible Bonds (FCCB) and Foreign Currency Exchangeable
Bonds (FCEB) issued to Non-Residents
 ECB in Indian Rupees
− Earlier, only permitted for ECB from foreign equity holders (since 23 September 2011)
− From 3 September 2014, permissible from all Recognized Lenders subject to INR swap
undertaken through AD Bank in India
5
Key Concepts
Key
Concepts
•
Automatic v. Approval Route
•
Eligible Borrowers
•
Recognized Lenders
•
End-use restrictions
•
End-uses not permitted
•
Amount and Maturity
•
All-in-cost ceiling
•
Guarantees and Security
•
Parking of ECB proceeds – overseas and in India
•
Other aspects - Prior Registration, changes to terms of ECB, pre-payment, etc.
Note: All the above conditions are cumulative and not standalone
4
Recent / Key updates
Recent / Key updates
-- Eligible Borrowers
•
Eligible
Borrowers
•
Infrastructure definition expanded
−
Earlier definition had a very limited scope
−
New definition more specific and comprehensive
Scope of Service Sector expanded to include Miscellaneous Service Sector. Miscellaneous
Services mean companies engaged in
−
Training activities (but not educational institutes),
−
R&D activities
−
Companies supporting infrastructure sector
• Trading business, Logistic Services, Financial Services and Consultancy services
specifically excluded from Miscellaneous Service Sector
•
NBFC (AFC) permitted to avail ECB for financing the import of infrastructure equipment for
leasing to infrastructure projects
•
SIDBI can avail ECB for on-lending to MSME sector
•
Civil Aviation Sector for specific purpose of working capital under approval route up to 31
March 2016 (Sector cap is USD 1 bn and for individual airline company USD 300 mn)
•
Developers / Builders / HFC for specific purpose of Low Cost Affordable Housing
6
Recent / Key updates
-- End Use
•
Companies in Manufacturing, Infrastructure, hotels, hospitals and software sector brought under
automatic route from their direct foreign equity holder company with a minimum average
maturity of 7 years subject to:
− Minimum paid up equity of 25 percent should be directly held by the lender
General
Corporate
Purpose
(including
Working Capital)
− End use of the ECB should be as per ECB guidelines
− Repayment of principal shall commence only after completion of minimum average maturity
of 7 years.
− No prepayment will be allowed before the maturity
•
•
Apart from above, eligible borrowers can avail ECB for general corporate purposes (including
working capital) under the Approval route
Companies in Infrastructure sector can import capital goods by availing short term credit
(including buyers / suppliers credit) in the nature of bridge finance under Approval route subject
to:
−
The bridge finance shall be replaced with a long term ECB
−
The long term ECB shall comply with ECB norms
−
Prior approval of RBI shall be sought for replacing the bridge finance with a long term ECB
Bridge
Finance
7
Recent / Key updates
-- End Use
•
Repayment of
Rupee Loans
Indian companies in Infrastructure sector are permitted under Approval route to utilize 25%
(40% for power sector) of the fresh ECB towards refinancing of the Rupee loans availed by
them from the domestic banking system subject to:
− At least 75% (60% for power sector) of the fresh ECB shall be utilized for capital
expenditure towards a ‘new infrastructure project’.
− Balance shall only be utilized for repayment of rupee loan availed of for capital
expenditure of earlier completed infrastructure projects
− ECB shall not be raised from overseas branched / subsidiaries of Indian banks
•
Indian Companies in manufacturing, infrastructure sector and hotel sector can avail ECB
under Approval route for repayment of Rupee loans taken from domestic banks for capital
expenditure or for fresh rupee capital expenditure
•
Indian companies in these sectors making investment in JV / WOS / assets abroad
•
ECB can be availed to repay all term loans availed from domestic banks for overseas
investment in addition to capital expenditure subject to foreign exchange earning capacity
and repayment of ECB of therefrom
•
Foreign exchange earning track record for three years, various other ceilings and conditions
stipulated
USD 10 Bn
scheme
8
Recent / Key updates
-- End Use
• Developers / Builders / HFC / NHB are permitted to avail ECB for low cost affordable housing
projects / Slum Rehabilitation under Approval route
Low Cost
Affordable
Housing
•
•
Developers / builders are subject to conditions like minimum 3 years of experience, good track
record in terms of quality and delivery etc.
•
HFCs / NHB eligible to avail ECB for financing prospective owners of low cost affordable
housing units subject to prescribed conditions.
•
The ECB should be swapped into Rupees for the entire maturity on fully hedged basis.
•
Developers / builders / HFCs /NHB shall not be permitted to raise FCCBs under this scheme.
•
The scheme was available up to 31 March 2016 - An aggregate limit of USD 1 bn each for FYs
2013-14, 2014-15 and 2015-16
Import of services, technical know-how and payment of license fees included as part of import of
capital goods subject to conditions:
− Duly signed agreement between the service provider and the borrower company
− Original invoice raised by the service provider should be duly certified by the borrower;
Import of
services,
know-how
etc.
− Declaration that the expenditure forms part of import of project cost and will be capitalized
9
Recent / Key updates
-- Procedural
•
Delegation
of powers to
AD
•
Rescheduling / restructuring of ECBs subject to conditions that revised average maturity
period and / or all-in-cost are in conformity of current guidelines :
•
Changes / modification (irrespective of the number of occasions) in the draw-down and
repayment schedules - with / without change in the average maturity / all-in-cost.
•
Reduction in the amount of ECB
•
Increase in all-in-cost of ECB
Approve refinancing of ECB where the AMP of the fresh ECB is exceeding the residual
maturity of the existing ECB under the Automatic route subject to conditions
•
Subject to FDI guidelines with respect to Automatic route / Approval route, sectoral caps, share
pricing etc.
•
Conversion Rate – Exchange Rate on date of agreement or lower as per mutual
agreement
•
Filing obligations post conversion
Conversion
of ECB into
equity
10
Recent / Key updates
-- Others
Routing of
Funds raised
abroad
•
Indian companies or AD-Banks are not allowed to issue any direct or indirect guarantee or
create any contingent liability or offer any security in any form for any borrowing by
overseas holding / associate / subsidiary / group companies except for permitted
purposes.
•
Funds raised abroad by overseas holding / associate / subsidiary / group company of
Indian companies with support of the Indian company or AD-Bank cannot be used in India
unless they confirm to the general / special permission granted under relevant regulations
•
Any such structures construed as contravention of the FEMA regulations
Recent / Key updates
-- Others
•
Parking of
ECB,
Creation of
Security etc.
ECB for Rupee expenditure can be placed on term deposits with AD for maximum period of
6 months pending utilization subject to certain conditions
− ECB in compliance with current ECB regulations
− No charge in any form should be created on such term deposits
− Term deposits should be exclusively in the name of the borrower
− Term deposits can be liquidated as and when required
•
Creation of security on movable assets
− Enforcement / invocation of charge restricted to outstanding claim against the ECB
− Encumbered movable assets can be taken out of country
23
Listed NCDs
Key Criteria
•
FPI registration with SEBI required for making investment in listed/ to be listed NCDs
•
FPI to invest in NCDs issued by Portfolio Company.
•
Under FEMA 20, possible to directly subscribe to NCDs of Issuer company provided:
− NCDs gets listed on stock exchange within 15 days of investment; else NCDs need to
be redeemed / bought back by the Issuer company
•
NCDs can be unlisted if Portfolio Company is in ‘Infrastructure’ Sector.
•
Not treated as FDI or ECB
•
No pricing/ sector restrictions
•
No interest rate restrictions
•
Security possible (RBI approval for invoking)
•
Ease in Exit / capital repatriation
Key Benefits
23
Some Issues
Some issues
-- Eligible Borrowers
Software
•
•
•
Software sector not defined under the ECB regulations
•
Software define under the Export regulations
•
Software sector includes Companies in ITeS or ITeS falls under Miscellaneous Services?
•
STPI registration a pre-requisite for being eligible?
•
STPI registration available even for ITeS
•
STPI registration required / available only in case of exports – can Company without
exports avail ECB?
Definition of a person resident in FEMA – foreign branch of an Indian company is
considered as a person resident in India
Purpose of Branch relevant
Overseas
Branch of
Indian
Company
Some issues
-- End use
Aquisition of
Land
•
Acquisition of land specifically restricted / prohibited as end-use for service sector and
Miscellaneous services sector
•
Acquisition of Land for real-industrial / infrastructure sector – whether permissible?
•
Recently the master circular puts by way of a note under the end-use – Automatic route –
Acquisition of Land not permitted
•
Similar Note not present in case of end-use under Approval Route
•
If there are trade advances received from say, parent company. Can the same be repaid by
utilizing ECB proceeds?
•
Whether ECB proceeds be utilized for repayment of Existing domestic working capital
loans / credit facilities?
Slump Sale
Aquisition
General
Corporate
Purpose
•
Whether acquisition of an undertaking by of slump sale is a permissible end use?
•
End uses not permitted - reference
Some issues
-- Others
• Drawdown of ECB only after LRN
Miscellaneous
• Regular filings of ECB-2
• What if shares allotted but FC-GPR not filed / not taken on record?
•
Definition of Indian entity under FEMA 3
•
Corporates referred to as Companies registered under Companies Act
•
SEZ Units
Foreign
Collaborator
• Whether equity participation necessary for Foreign Collaborator?
Whether ECB
eligible LLP /
Firm
Some issues
-- Others
Conversion
of ECB to
Equity
•
Whether conversion of interest accrued and outstanding on ECB into equity permissible?
•
Whether trade credits allowed for import of services?
•
Bridge Finance – upfront declaration / approval
•
Unpaid Trade credits / other current account dues crossing threshold of three years?
Other Open
Issues
Trade Credits
•
Whether CCPS / CCD form part of equity while calculating ECB:Equity ratio?
•
Can the shareholding go down after availing the ECB?
•
ECB can be from Indirect Foreign Equity Holders where Indirect equity holding by the
Lender is at least 51% - How many levels to go up for Indirect equity?
•
ECB can be from an Overseas Group Company where both borrower and lender are
subsidiaries of same Parent - whether refers to immediate Parent or Ultimate Parent?
&
Answers
Questions
© 2009 KPMG India Private Limited, an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
19 19
The views in this presentation are personal views of the Presenter. Further, the information contained is of a general nature and is not intended to address the circumstances of any particular individual or
entity. Although, the endeavor is to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in
the future. No one should act on such / this information without appropriate professional advice which is possible only after a thorough examination of facts / particular situation.
Thank You!