Significant developments under the new ECB framework – An analysis

In the recent past, there has been a push by the Indian Government to improve India’s ranking in the ease of doing business. An important factor is the ability and ease of obtaining funding from overseas. In line with the same, the Reserve Bank of India (‘RBI’) had recently notified the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 via Notification no. FEMA 3(R)/2018-RB dated December 17, 2018, superseding the existing regulations viz. Notification No. FEMA 3/2000-RB; Notification No. FEMA 4/2000-RB; and Regulation 21 of Notification FEMA 120/RB-2004.

On 16 January 2019, in line with the revised regulation and to further rationalise the existing framework for ECB and INR denominated bonds, RBI issued a circular on ‘ECB Policy – new ECB framework’ [No. RBI/2018-19/109, AP (DIR Series) Circular No. 17].

This article discusses significant developments in the new ECB framework vis-à-vis the erstwhile one, the extent of rationalisation / liberalisation in the framework and the related aspects thereon.

ECB framework – rationalisation

Under the erstwhile framework, ECB were classified in three tracks with a separate regulation for INR denominated bonds (commonly called ‘Masala Bonds’). Under the new ECB framework, the tracks are consolidated into two tracks solely based on the currency, as under;

It must be noted that proposals for Masala bonds under the erstwhile framework were subject to examination by the RBI. Since they are now included under ‘INR denominated ECB’, no such separate examination is prescribed under the new framework.

Eligible Borrowers – liberalisation

The erstwhile framework provided an exhaustive list of entities (with a sector-wise classification) which were eligible to borrow under each Track. The RBI has liberalised the framework, as now all entities who are eligible to receive Foreign Direct Investment (‘FDI’) are regarded as eligible borrowers (for both FC as well as INR denominated ECB).

Some of the key changes as a result of the above are discussed hereunder:

• Limited Liability Partnership (‘LLP’)

Under the new framework, the definition of an Indian entity specifically includes LLP registered under LLP Act, 2008. The erstwhile framework defined ‘Indian entity’ as a company or a body corporate or a firm in India. However, the erstwhile framework specified an exhaustive list of eligible borrowers, which did not include an LLP to be an eligible borrower. Under the new framework, as there is no exhaustive list and all entities who are eligible to receive FDI are regarded as eligible borrowers, an LLP can now borrow ECB, if it is eligible to receive FDI.

If one were to look at the intent, it is pertinent to note that under the erstwhile FDI policy 2015, there was a specific restriction on LLP availing ECB. This restriction was deleted vide press note 12 of 2015 with a corresponding amendment being brought into FEMA 20 (relating to Transfer and Issue of Security by a person resident outside India) in 2017. This clearly showed the intention of the Government to allow LLP to raise ECB. However, as LLP were not included in the list of eligible borrowers under the erstwhile ECB framework, this intention of the Government remained unfulfilled.

This intention to allow LLP to raise ECB is now fulfilled by the new ECB framework.

• Eligible to receive FDI vis-à-vis actual FDI

Under the new framework, the condition to be an eligible borrower is that the entity must be eligible to receive FDI. Thus, it follows that whether an entity actually has received FDI is not relevant as long as it is eligible to receive FDI under Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2017 [Notification no. FEMA 20(R)/2017-RB dated 7 November 2017] [‘FEMA 20(R)’].

• Service Sector entities

Under the erstwhile ECB framework, only companies engaged in specified services (research and development, training, companies supporting infrastructure, software development etc.) were allowed to borrow ECB. Under the new ECB framework, all service sector entities who are eligible to receive FDI can raise ECB.

• Other Sector entities

Hitherto, the entities in sectors like e-commerce, single brand retail, multi-brand retail, etc. were not eligible borrowers, it seems that such sectors are now covered within the eligible borrower criterion, as long as they are in compliant with the conditions mentioned in FEMA 20(R), though a specific clarification on this aspect would obviate any doubt. 

• FDI under approval route

It needs to be seen whether entities in sectors like print media, broadcasting content services, air transport services, etc. where FDI is permissible under the approval route, are eligible to raise ECB under automatic route or whether any specific approvals need to be obtained for ECB as well. A specific clarification in this regard would be helpful.

Recognised Lenders – liberalisation

Under the erstwhile framework, there was a specific list of recognised lenders prescribed for different Tracks of ECB. In order to strengthen the Anti Money Laundering/ Countering Financing of Terrorism framework, the new ECB framework has replaced the specific list to now allow any lender who is a resident of Financial Action Task Force (‘FATF’) or International Organisation of Securities Commission (‘IOSCO’) compliant countries.

The reading of the new ECB framework suggests that any foreign group company (even without being a shareholder) can lend money to the borrower if such foreign company is a resident of FATF or IOSCO compliant country. It seems that group financing companies of MNCs, not having a direct or indirect equity stake in an Indian entity, are now allowed to lend money to the Indian eligible borrower except for restricted end use, which hitherto was not feasible.

Foreign equity holders are defined to mean a minimum 25% direct equity holding or a minimum 51% indirect equity holding or a group company with a common overseas parent.  Considering ‘Equity holding’ is not specifically defined, in context of an LLP, one would want to read equity holding, as capital contribution in LLP. A specific clarification in this regard would be helpful and this would also be relevant for computing the ECB liability equity ratio in case of LLP, wherein equity has been defined to include paid-up capital and free reserves.

Negative List / End use restrictions

While a description-based end use restriction prevailed earlier, this was already changed to a negative list of end use under the erstwhile framework vide circular dated 27 April 2018. While the negative list broadly remains the same under the new ECB framework, few key differentiating points are discussed in hereunder:

• Acquisition of land

Under the erstwhile framework, purchase of land was not allowed even for setting up of manufacturing unit, etc. The negative list under the new ECB framework replaces this with the term ‘Real estate activities’ and it seems that purchase of land is now a permitted end use for ECB, as long as such purchase of land is not for real estate activity involving buying, selling and renting and is effectively used for the purpose of carrying on business activity.

• Working capital, general corporate purpose and repayment of INR loan

Under the erstwhile ECB framework, an eligible borrower was allowed to avail ECB in FC under track II for a minimum maturity period of 10 years even from a recognised lender other than Foreign equity holder for the end use of working capital, general corporate purpose or repayment of INR loan.

Now under the new ECB framework, an eligible borrower can borrow ECB only from a Foreign equity holder for the said purposes with minimum maturity period of 3 years.

As it is restrictive to that extent, the impact of the change will be felt in infrastructure sector where companies generally refinance expensive long-term domestic INR debt, with relatively cheaper, longer-dated FC debt under the ECB route, once projects become operational.

Other noteworthy changes

• Delegated powers to Authorised dealer (AD) bank – The new ECB framework provides guidance for delegated powers to AD banks only in respect of change in AD banks, cancellation of LRN, refinancing of ECB, conversion of ECB into equity and security for raising ECB. Guidance for other delegated powers present under the erstwhile ECB framework are missing in the new framework for areas such as change in name of borrower, change in in drawdown / repayment schedule, change in currency of borrowing,  transfer of ECB, etc. In the absence of any specific guidelines on the above areas, there may be difference of opinion with AD banks taking different approaches in different cases.
• Limit on borrowing - There were sectoral limits on borrowing under the erstwhile framework whereas the new ECB framework allows all eligible borrowers to borrow upto USD 750 million per financial year without any specific sectoral limits.
• Minimum Average Maturity (‘MAM’) Period - Under the erstwhile framework, there were different MAM period ranging from 3 years to 10 years for different amounts of ECB. Under the new ECB framework, irrespective of the amount raised, the MAM Period is fixed at 3 years for all sectors and further reduced to 1 years for manufacturing sector companies with debt upto USD 50 million in a financial year.
• Late submission fees (‘LSF’) – Under the erstwhile regime, any contravention of the ECB framework invited penal action under the Foreign Exchange Management Act, 1999 (‘FEMA’). It has now been provided that delay in filing prescribed forms (Form ECB, ECB 2, etc.) can be regularised by payment of a LSF. Non-filing of such forms or non-payment of LSF will be treated as a contravention of reporting provision and be subject to compounding or adjudication as provided in FEMA.
• Standard Operating Procedures for untraceable entities – RBI has issued specific procedure to be followed by the AD banks in case of untraceable entities which are found to be in contravention of reporting provisions for ECB.
• It is specifically provided that any borrowing under the erstwhile regulations can be continued up to the date of repayment.

Conclusion

The rationalisation and liberalisation of the ECB framework is a positive step in the right direction, though there is scope for clarification on certain aspects. One would need to closely follow the next move of the Government / RBI on these fronts and seek clarification wherever there is ambiguity.