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Foreign Exchange Management Act RESERVE BANK OF INDIA RBI/2005-06/87 August 1, 2005 To All banks authorised to deal in foreign exchange Madam/Sirs, External Commercial Borrowings (ECB)Attention of Authorised Dealers is invited to the A.P. (DIR Series) Circular No.40 dated April 25, 2005 and A.P. (DIR Series) Circular No.60 dated January 31, 2004 in connection with External Commercial Borrowings (ECB). A review of the ECB guidelines has been undertaken keeping in view the current macroeconomic situation, the experience gained so far by the Reserve Bank in administering the ECB policy and requests received from certain sectors. 2. Accordingly, it has been decided to liberalise/modify the ECB policy as indicated below:
3. The amended ECB policy will come into force with immediate effect and is subject to review. 4. Comprehensive and revised ECB guidelines are set out in the Annex to this circular. 5. Necessary amendments to the Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000 dated May 3, 2000 are being issued separately. 6. Authorised Dealer banks may bring the contents of this circular to the notice of their constituents and customers. 7. The direction contained in this circular has been issued under sections 10(4) and 11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999) and is without prejudice to permissions / approvals, if any, required under any other law. Yours faithfully, (Vinay Baijal) Annex to A.P. (DIR Series) Circular No. 5 dated August 1, 2005 External Commercial Borrowings (ECB)1. ECB refer to commercial loans [in the form of bank loans, buyers’ credit, suppliers’ credit, securitised instruments (e.g. floating rate notes and fixed rate bonds)] availed from non-resident lenders with minimum average maturity of 3 years. ECB can be accessed under two routes, viz., (i) Automatic Route outlined in paragraph 1(A) and (ii) Approval Route indicated in paragraph 1(B). (A) AUTOMATIC ROUTE Under the extant policy, ECB for investment in real
sector -industrial sector, especially infrastructure sector-in India,
are under Automatic Route, i.e. do not require RBI/Government approval.
In case of doubt as regards eligibility to access Automatic Route,
applicants may take recourse to the Approval Route. (a) Corporates registered under the Companies Act except financial intermediaries (such as banks, financial institutions (FIs), housing finance companies and NBFCs) are eligible. Individuals, Trusts and Non-Profit making Organisations are not eligible to raise ECB. (b) Non-Government Organisations (NGOs) engaged in micro finance activities are eligible to avail ECB. Such NGO (i) should have a satisfactory borrowing relationship for at least 3 years with a scheduled commercial bank authorised to deal in foreign exchange and (ii) would require a certificate of due diligence on `fit and proper’ status of the board/committee of management of the borrowing entity from the designated Authorised Dealer (AD). ii. Recognised Lenders (a) Borrowers can raise ECB from internationally recognised sources such as (i) international banks, (ii) international capital markets, (iii) multilateral financial institutions (such as IFC, ADB, CDC etc.,), (iv) export credit agencies, (v) suppliers of equipment, (vi) foreign collaborators and (vii) foreign equity holders. Furthermore, overseas organisations and individuals complying with following safeguards may provide ECB to NGOs engaged in micro finance activities. (b) Overseas organisations planning to extend ECB would have to furnish a certificate of due diligence from an overseas bank which in turn is subject to regulation of host-country regulator and adheres to Financial Action Task Force (FATF) guidelines to the designated AD. The certificate of due diligence should comprise the following (i) that the lender maintains an account with the bank for at least a period of two years, (ii) that the lending entity is organised as per the local law and held in good esteem by the business/local community and (iii) that there is no criminal action pending against it. (c) Individual Lender has to obtain a certificate of due diligence from an overseas bank indicating that the lender maintains an account with the bank for at least a period of two years. Other evidence /documents such as audited statement of account and income tax return which the overseas lender may furnish need to be certified and forwarded by the overseas bank. Individual lenders from countries wherein banks are not required to adhere to Know Your Customer (KYC) guidelines are not permitted to extend ECB. (d) The key operative part in the credential of the overseas lender is that ECB should be availed from an internationally recognised source and one of the recognized categories is "foreign equity holder" as indicated above. It is clarified that for a "foreign equity holder" to be eligible as "recognized lender" under the automatic route would require minimum holding of equity in the borrower’s company as under: (d. i) ECB up to USD 5 million – minimum equity of 25 per cent held directly by the lender, (d. ii) ECB more than USD 5 million – minimum equity of 25 per cent held directly by the lender and debt-equity ratio not exceeding 4:1(i.e. the proposed ECB not exceeding four times the direct foreign equity holding). iii. Amount and Maturity
iv. All-in-cost ceilings All-in-cost includes rate of interest, other fees and expenses in foreign currency except commitment fee, pre-payment fee, and fees payable in Indian Rupees. Moreover, the payment of withholding tax in Indian Rupees is excluded for calculating the all-in-cost. The all-in-cost ceilings for ECB are indicated from time to time. The following ceilings are valid till reviewed.
* for the respective currency of borrowing or applicable benchmark. v. End-use
vi. Guarantees Issuance of guarantee, standby letter of credit, letter of undertaking or letter of comfort by banks, financial institutions and NBFCs relating to ECB is not permitted. vii. Security The choice of security to be provided to the lender/supplier is left to the borrower. However, creation of charge over immovable assets and financial securities, such as shares, in favour of overseas lender is subject to Regulation 8 of Notification No. FEMA 21/RB-2000 dated May 3, 2000 and Regulation 3 of Notification No. FEMA 20/RB-2000, dated May 3, 2000, as amended from time to time, respectively. viii. Parking of ECB proceeds overseas ECB proceeds should be parked overseas until actual requirement in India. It is clarified that ECB proceeds parked overseas can be invested in the following liquid assets (a) deposits or Certificate of Deposit or other products offered by banks rated not less than AA(-) by Standard and Poor/Fitch IBCA or Aa3 by Moody’s; (b) deposits with overseas branch of an authorised dealer in India; and (c) Treasury bills and other monetary instruments of one year maturity having minimum rating as indicated above. The funds should be invested in such a way that the investments can be liquidated as and when funds are required by the borrower in India. ix. Prepayment Prepayment of ECB up to USD 200 million may be allowed by ADs without prior approval of RBI subject to compliance with the stipulated minimum average maturity period as applicable to the loan. x. Refinance of existing ECB Refinancing of existing ECB by raising fresh ECB at lower cost is permitted subject to the condition that the outstanding maturity of the original loan is maintained. xi. Debt Servicing The designated Authorised Dealer (AD) has the general permission to make remittances of instalments of principal, interest and other charges in conformity with ECB guidelines issued by Government / RBI from time to time. xii. Procedure
(B) APPROVAL ROUTE The following types of proposals for ECB are covered under the Approval Route. i. Eligible borrowers
ii. Recognised Lenders (a) Borrowers can raise ECB from internationally recognised sources such as (i) international banks, (ii) international capital markets, (iii) multilateral financial institutions (such as IFC, ADB, CDC etc.,), (iv) export credit agencies, (v) suppliers of equipment, (vi) foreign collaborators and (vii) foreign equity holders. (b) From 'foreign equity holder', where the minimum equity held directly by the foreign equity lender is 25 per cent but debt-equity ratio exceeds 4:1(i.e. the proposed ECB exceeds four times the direct foreign equity holding). iii. All-in-cost ceilings All-in-cost includes rate of interest, other fees and expenses in foreign currency except commitment fee, pre-payment fee, and fees payable in Indian Rupees. Moreover, the payment of withholding tax in Indian Rupees is excluded for calculating the all-in-cost. The all-in-cost ceilings for ECB are indicated from time to time. The following ceilings are valid till reviewed.
* for the respective currency of borrowing or applicable benchmark. iv. End-use
v. Guarantees Issuance of guarantee, standby letter of credit, letter of undertaking or letter of comfort by banks, financial institutions and NBFCs relating to ECB is not normally permitted. Applications for providing guarantee/standby letter of credit or letter of comfort by banks, financial institutions relating to ECB in the case of SME will be considered on merit subject to prudential norms. vi. Security The choice of security to be provided to the lender/supplier is left to the borrower. However, creation of charge over immovable assets and financial securities, such as shares, in favour of overseas lender is subject to Regulation 8 of Notification No. FEMA 21/RB-2000 dated May 3, 2000 and Regulation 3 of Notification No. FEMA 20/RB-2000, dated May 3, 2000, as amended from time to time, respectively. vii. Parking of ECB proceeds overseas ECB proceeds should be parked overseas until actual requirement in India. It is clarified that ECB proceeds parked overseas can be invested in the following liquid assets (a) deposits or Certificate of Deposit or other products offered by banks rated not less than AA(-) by Standard and Poor/Fitch IBCA or Aa3 by Moody’s; (b) deposits with overseas branch of an authorised dealer in India; and (c) Treasury bills and other monetary instruments of one year maturity having minimum rating as indicated above. The funds should be invested in such a way that the investments can be liquidated as and when funds are required by the borrower in India. viii. Prepayment (a) Prepayment of ECB up to USD 200 million may be allowed by ADs without prior approval of RBI subject to compliance with the stipulated minimum average maturity period as applicable to the loan. (b) Pre-payment of ECB for amounts exceeding USD 200 million would be considered by the Reserve Bank under the Approval Route. ix. Refinance of existing ECB Refinancing of outstanding ECB by raising fresh ECB at lower cost is permitted subject to the condition that the outstanding maturity of the original loan is maintained. x. Debt Servicing The designated AD has the general permission to make remittances of instalments of principal, interest and other charges in conformity with ECB guidelines issued by Government / RBI from time to time. xi. Procedure Applicants are required to submit an application in form ECB through designated AD to the Chief General Manager, Foreign Exchange Department, Reserve Bank of India, Central Office, External Commercial Borrowings Division, Mumbai – 400 001 along with necessary documents. xii. Empowered Committee
C. REPORTING ARRANGEMENTS AND DISSEMINATION OF INFORMATION i. Reporting Arrangements
ii. Dissemination of Information
2. Foreign Currency Convertible Bonds (FCCB)
3. Structured Obligations
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