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DETAILS OF BORROWINGS and how it is to be done in respect to present borrowing scheme in India.
Typology: Exercises
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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:-
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 :
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:-