External Commercial Borrowings Insight | Exercises Law

EXTERNAL COMMERCIAL BORROWING SHUBHAM MALPANI

I. Introduction: Genesis and Current Scenario

The recourse to commercial borrowings by the Indian Corporates, though began in the 1970s, remained

modest due to the dominance of concessional, non-market based finance in the form of external

assistance from bilateral sources and multilateral agencies. Towards the end of the 1970s, the

concessionality in the aid flows dwindled. Thus, with the rising external financing requirements beginning

with the 1980s and the recognition that reliance on external assistance was not favorable, commercial

borrowings from international capital markets were preferred.

During the late 1980s, large inflows were

also contributed by the development financial institutions which were encouraged to borrow overseas well

in advance of their requirements. The rising reliance on commercial borrowings was manifested in the fact

that the commercial borrowings constituted 27 per cent of net capital flows to India in the 1980s, more

than double from 12 per cent in the 1970s.

External Commercial Borrowing (ECB) is one of the important methods used in India by Indian companies

to access foreign funds. It can be refer as borrowing by an eligible resident entity from outside India in

accordance with framework decided by the Reserve Bank in consultation with the Government of India

ECBs can be in the form of Loans, Issue of non-convertible, optionally convertible or partially convertible

preference shares/debentures, Buyers' credit, Suppliers' credit, Foreign Currency Convertible Bonds

(FCCBs) or Foreign Currency Exchangeable Bonds (FCEBs) and should confirm to parameters specified

in ECB guidelines such as minimum maturity period, permitted end-use of funds, maximum all-in-cost

ceilings etc.

The transactions of lending and borrowing between residents of India and Non-Resident Indians are

regulated by Reserve Bank of India. Borrowing and Lending in Foreign Exchange is governed by clause

(d) of Section 6(3) of FEMA read with Foreign Exchange Management (Borrowing or Lending in Foreign

Exchange) Regulations, 2000 and Master Direction No. 5/2015-16. Transactions of borrowing and lending

in Rupees are governed by clause (e) of Section 6(3) of FEMA read with Foreign Exchange Management

(Borrowing and Lending in Rupees) Regulations, and Master Direction No. 6/2015-16. These regulations

were amended regularly which causes burden on the individual in relation to various compliances and

any contravention of the applicable provisions of ECB guidelines will invite penal action under the FEMA.

Thus with the ongoing efforts at rationalizing multiple regulations framed over a period of time under

FEMA, 1999, it is proposed to consolidate the regulations governing all types of borrowing and lending

transactions between a person resident in India and a person resident outside India in both foreign

currency and INR, in consultation with the Government. The proposed regulations, viz., Foreign

Exchange Management (Borrowing or Lending) Regulations, 2018 had subsume the existing notifications

and rationalize the extant framework for external commercial borrowings and Rupee denominated bonds

with a view to improving the ease of doing business.

This article looks into the revised framework of External Commercial Borrowing (“ECB”) in light of newly

framed Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 in comparison with

erstwhile Regulations and also analyze the key changes. Lastly, it points towards the need of formulation

of new regulation and impact assessment in relation to borrowing and lending mechanism.

Singh Bhupal, ‘Corporate Choice for Overseas Borrowings: The Indian Evidence’, Available at:

https://rbi.org.in/scripts/BS_VIEWContent.aspx?ID=1916 (last accessed on 14th January 2019).

Ibid.

Foreign Exchange Management (Borrowing and Lending) Regulations, 2018, Regulation 2(iv).

RBI Bulletin, ‘Fifth Bi-monthly Monetary Policy Statement, 2018-19, Available at

https://m.rbi.org.in/Scripts/BS_ViewBulletin.aspx?Id=17937 ((last accessed on 15th January 2019).

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EXTERNAL COMMERCIAL BORROWING

SHUBHAM MALPANI

I. Introduction: Genesis and Current Scenario The recourse to commercial borrowings by the Indian Corporates, though began in the 1970s, remained modest due to the dominance of concessional, non-market based finance in the form of external assistance from bilateral sources and multilateral agencies. Towards the end of the 1970s, the concessionality in the aid flows dwindled. Thus, with the rising external financing requirements beginning with the 1980s and the recognition that reliance on external assistance was not favorable, commercial borrowings from international capital markets were preferred.^1 During the late 1980s, large inflows were also contributed by the development financial institutions which were encouraged to borrow overseas well in advance of their requirements. The rising reliance on commercial borrowings was manifested in the fact that the commercial borrowings constituted 27 per cent of net capital flows to India in the 1980s, more than double from 12 per cent in the 1970s.^2 External Commercial Borrowing ( ECB ) is one of the important methods used in India by Indian companies to access foreign funds. It can be refer as borrowing by an eligible resident entity from outside India in accordance with framework decided by the Reserve Bank in consultation with the Government of India^3. ECBs can be in the form of Loans, Issue of non-convertible, optionally convertible or partially convertible preference shares/debentures, Buyers' credit, Suppliers' credit, Foreign Currency Convertible Bonds (FCCBs) or Foreign Currency Exchangeable Bonds (FCEBs) and should confirm to parameters specified in ECB guidelines such as minimum maturity period, permitted end-use of funds, maximum all-in-cost ceilings etc. The transactions of lending and borrowing between residents of India and Non-Resident Indians are regulated by Reserve Bank of India. Borrowing and Lending in Foreign Exchange is governed by clause (d) of Section 6(3) of FEMA read with Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000 and Master Direction No. 5/2015-16. Transactions of borrowing and lending in Rupees are governed by clause (e) of Section 6(3) of FEMA read with Foreign Exchange Management (Borrowing and Lending in Rupees) Regulations, and Master Direction No. 6/2015-16. These regulations were amended regularly which causes burden on the individual in relation to various compliances and any contravention of the applicable provisions of ECB guidelines will invite penal action under the FEMA. Thus with the ongoing efforts at rationalizing multiple regulations framed over a period of time under FEMA, 1999, it is proposed to consolidate the regulations governing all types of borrowing and lending transactions between a person resident in India and a person resident outside India in both foreign currency and INR, in consultation with the Government. The proposed regulations, viz., Foreign Exchange Management (Borrowing or Lending) Regulations, 2018 had subsume the existing notifications and rationalize the extant framework for external commercial borrowings and Rupee denominated bonds with a view to improving the ease of doing business.^4 This article looks into the revised framework of External Commercial Borrowing (“ECB”) in light of newly framed Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 in comparison with erstwhile Regulations and also analyze the key changes. Lastly, it points towards the need of formulation of new regulation and impact assessment in relation to borrowing and lending mechanism. (^1) Singh Bhupal, ‘Corporate Choice for Overseas Borrowings: The Indian Evidence’, Available at : https://rbi.org.in/scripts/BS_VIEWContent.aspx?ID=1916 (last accessed on 14th^ January 2019). (^2) Ibid. (^3) Foreign Exchange Management (Borrowing and Lending) Regulations, 2018, Regulation 2(iv). (^4) RBI Bulletin, ‘Fifth Bi-monthly Monetary Policy Statement, 2018 - 19, Available at https://m.rbi.org.in/Scripts/BS_ViewBulletin.aspx?Id=17937 ((last accessed on 15th^ January 2019).

II. Framework of External Commercial Borrowings under Foreign Exchange Management (Borrowing or Lending) Regulations, 2018 The framework of External Commercial Borrowings (ECB) from overseas lenders in foreign exchange and in rupees received a modification with the introduction of fewer restriction end-uses also to encourage investment in start-ups; RBI has also permitted start-ups to raise up to USD 3 millions in a financial year for three year tenure. Brief overview of the regulation can be viewed as:- 2.1 Prior Permission of the RBI No person resident in India shall borrow or lend in foreign exchange from or to a person resident in or outside India and no person resident in India shall borrow in rupees from, or lend in rupees to, a person resident outside India: The Reserve Bank may, for sufficient reasons, permit a person resident in India for same. 2.2 Mechanism for Borrowing The borrowing may be in foreign exchange or in Indian Rupees. Borrowing from outside India in Foreign Exchange by a Person Resident in India can be in the form of:-

Borrowing by an Authorized Dealer or its branch outside India;
Borrowing by Persons other than Authorized Dealers. Borrowing in Indian Rupees by a Person Resident in India can be in the form of:-
Borrowing by an Authorized Dealer;
Borrowing by persons other than Authorized Dealer. Note : use of Credit Card in India by a person resident outside India; or outside India by a person resident in India shall not be deemed as borrowing or lending in Indian Rupee/foreign exchange^5. This was not there in erstwhile regulation. 2.3 Raising of External Commercial Borrowing An Authorized Dealer and eligible resident entities may raise ECB in foreign exchange and rupee denominated ECB from outside India. Such borrowings which are in the nature of ECBs shall be subject to provisions contained in the regulations and in Schedule I and III in the light of:-
Forms of Borrowings
Eligibility of borrowers
Maturity
Who can be Lender
All-in-cost (‘All-in-Cost’ includes rate of interest, other fees, expenses, charges, guarantee fees whether paid in foreign currency or Indian Rupees (INR) but will not include commitment fees, pre-payment fees / charges, withholding tax payable in INR).
End-uses of ECB
Security provided by Borrower
Parking of loan amount abroad
Drawal of Loan raised by Borrower
Reporting Compliances (^5) Foreign Exchange Management (Borrowing and Lending) Regulations, 2018. Regulation 3.

3.5 Borrowing from relatives In the erstwhile Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000, as per regulation 4(iv) individual can borrow up to US$ 2,50,000 or its equivalent in foreign exchange by an individual resident in India from his close relatives resident outside India, subject to the conditions that^10 :

the loan is free of interest;
the minimum maturity period of the loan is seven years;
The amount of loan is received by inward remittance in free foreign exchange through normal banking channels or by debit to the NRE/FCNR account of the non-resident lender;
The amount of loan is received by inward remittance in free foreign exchange through normal banking channels or by debit to the NRE/FCNR account of the non-resident lender; But in the new regulation these conditions were been excluded from raising borrowing through relatives and also word close relatives is been substituted by the word relatives. 3.6 Borrowing in INR by person resident in India, being a company incorporated in India In the erstwhile regulation company incorporated in India may borrow in rupees on repatriation or non- repatriation basis, from a nonresident Indian or a person of Indian origin resident outside India or an overseas corporate body (OCB), by way of investment in Non-convertible Debentures (NCDs)^11 subject to the conditions mentioned in the regulations. In the new Regulation of 2018, the public offer of NCDs as a mandatory requirement of is no longer provided in Regulations, 2018. However, the master directions are pending to be amended. 3.7 Borrowing of funds for start-up Now in the Regulation of 2018, individual can borrow for Startups the amount would be limited to USD 3 million or equivalent per financial year. However, Reserve Bank, in consultation with Government of India may prescribe higher limits for ECBs raised by entities in certain sectors or for certain end uses.^12 There was no provision in the erstwhile regulations. 3.8 Continuation of Foreign exchange loan in the event of change in the residential status of the borrower In the Regulation of 2018, government had specifically inserted the provision in relation to the effect of borrowing in case residential status of borrower changes during the subsistence of borrowing (as mentioned under regulation 8 )^13. But there was no such provision in the erstwhile regulations. (^10) Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000, Regulation 4(iv). (^11) Supra Note 6. (^12) Foreign Exchange Management (Borrowing and Lending in Foreign Exchange) Regulations, 2018, Schedule 1. (^13) Foreign Exchange Management (Borrowing and Lending in Foreign Exchange) Regulations, 2018, Regulation 8.

IV. Conclusion As sufficient time has passed since the extant ECB framework was operationalised, a need was felt to undertake a review of existing framework and come up with the streamline single regulation though new regulation had to read with the master direction of 2015-16 on ECB. With the faming of new ECB regulation government had achieved various objective:-

A more liberal approach, with fewer restrictions on end uses, higher all-in-cost ceiling, etc. for long term foreign currency borrowings as the extended term makes repayments more sustainable and also minimizes roll-over risks for the borrower;
Insertion of new definition with view of achieving ease of reference.
Curbing of multiplicity regulations and its various amendments in relation to the raising of ECB in foreign exchange and rupee and coming up with single streamline regulation.
Now in order to meet the funding requirement of various newly formed startups individual can borrow up to USD 3 million in a financial year. Though amount raised through ECB is limited but government had broadened the scope of ECB with the increasing need. Thus with the in increasing need for ECB in various ways like, paying to suppliers in other countries etc that may not be available in India, cost of funds borrowed from external sources at times works out to be cheaper as compared to the cost of raising fund internally, also help in diversifying the investor base, international market is a better option in case of large fund requirements as compare to the fund available in the domestic market etc.^14 there was a need to come up with the new regulation. Though ECB is the viable option but funds raised through ECBs is in foreign currency and the interest & redemption proceeds are also payable in the foreign currency, the issuing company has to hedge its foreign exchange exposure, which involves expenditure. In case the company opts to keep its foreign exchange exposure un-hedged, it carries a huge risk due to fluctuation in foreign exchange rates. Analyzing the ECB borrowing across various sectors from year 2007 to 2012. The idea was to see if there was a preference for ECB within some sectors or was it dependent on market conditions. The analysis reveals an interesting point that sectors which are performing well generally have lower ECB. For example, Auto and Pharma which were laggards in the 2007 bull market had ECB/Total Liabilities of 14% and 15% respectively. However, as the performance of these sectors relative to the market improved in 2012, their ECB/Total Liabilities reduced to 5% and 1% respectively. Infrastructure and Power are an exception to this trend.^15 This trend can be because of the reason that sectors which are not performing well have to avail domestic credit at unfavorable stringent terms and so they prefer ECBs which are available at comparatively favorable terms. Therefore need for raising fund through External Commercial Borrowing has increased with the change in market condition thus new regulation will help in fulfilling the ECB requirement in simplifying way but one need to be cautious about the exchange rate risk. (^14) ‘Critical Analysis of External Commercial Borrowings in India’, Available at : http://ideasmakemarket.com/2013/04/critical-analysis- of-external-commercial-borrowings-by-companies-in-india.html (Last accessed on 15th January 2019). (^15) Ibid.

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EXTERNAL COMMERCIAL BORROWING

SHUBHAM MALPANI