External commercial borrowing (ECB) is a loan incurred by an eligible entity in India for strictly commercial purposes from external sources, i.e. any recognized entity outside India. These borrowings are expected to adhere to the RBI’s rules and regulations.
The ECB guidelines and policies are monitored and regulated by the DEA (Department of Economic Affairs), Ministry of Finance, Government of India, and the Reserve Bank of India. Foreign commercial banks and other entities provide the majority of these loans.
In compliance with the regulations, eligible entities may raise External Commercial Borrowings (ECB) from outside India. The ECB can be issued in any freely convertible foreign currency, as well as Indian rupees or any other currency determined by the Reserve Bank of India in collaboration with the Indian government. ECB from indirect equity holders is permissible if the lender owns at least 51 percent of the indirect stock in the Indian company.
Corporates registered under the Companies Act except financial intermediaries, such as banks, financial institutions (FIs), housing finance companies and NBFCs, are eligible to raise ECB. Individuals, trusts and non-profit making organizations are not eligible to raise ECB.
Different types of ECB’s
Bank loans, for example. Non-convertible, partially convertible, or optionally convertible preference shares/debentures are examples of securitized instruments. Trade Credits are available for a period of more than three years.
Benchmark rate plus 450 basis points spread is the maximum amount of interest that can be paid. There is no minimum amount of interest that must be paid. As a result, because of the parent-subsidiary relationship, ECB in the form of a loan might be interest-free. However, the host country’s regulations must be assessed and followed.
Borrowing in foreign currency can help with investment and economic development if it gives the country more inexpensive finance and allows the borrowed cash to go to productive industries.
Working capital and general corporate purposes External Commercial Borrowing with a minimum average maturity duration of 10 years. Borrowing for the aforementioned maturity by NBFCs is also permissible for on-lending for the above purposes.
