Concept of External Commercial Borrowings under the FEMA Act, 1999.

• The Basis of External Commercial Borrowings (ECB)
• The Concept of External Commercial Borrowings (ECB)
• Framework of External Commercial Borrowings (ECB)
• Leverage and Limitation
• Raising the ECB Procedure
• Reporting by the ECB
• Endnote

• Loans inclusive of Bank loans 
• Other than completely and compulsorily convertible instruments, floating/fixed rate notes/bonds/debentures;
• Trade credits that are more than three years old;
• FCCBs (Foreign Currency Convertible Bonds);
• FCEBs (Foreign Currency Exchangeable Bonds); and
• Lease on Financial Terms

• Loans inclusive of Bank loans 
• Other than completely and compulsorily convertible instruments, floating/fixed rate notes/bonds/debentures/preference shares;
• Trade credits that are more than three years old;
• Lease Financial; and
• Bonds denominated in Indian rupees issued in other countries

• All entities eligible for FDI (Indian Co., LLP, NBFC, VCF)
• Trusts for Ports
• SEZ SIDBI units; and
• India’s Exim Bank

• All companies that are qualified to issue FCY ECB; and
• Registered entities engaging in microfinance activities, such as registered not-for-profit companies, registered societies/trusts/cooperatives, and registered Non-Governmental Organizations.

• Multilateral Financial Institutions (such as the IMF and the World Bank) and Regional Financial Institutions (such as the Asian Development Bank and the European Investment Bank) of which India is a member shall also be treated as recognised lenders.
• b) Individuals as lenders are only authorised if they are foreign equity investors or subscribe to bonds/debentures listed in another country; and
• Foreign branches/subsidiaries of Indian banks are only authorised as FCY ECB recognised lenders (except FCCBs and FCEBs). Subject to relevant prudential standards, foreign branches/subsidiaries of Indian banks can act as arrangers/underwriters/market-makers/traders for Rupee Denominated Bonds issued overseas.

Underwriting by overseas branches/subsidiaries of Indian banks for issuances by Indian banks, on the other hand, will be prohibited.

• The ECB’s MAMP will be three years.
• Call and put options, if any, shall be ineligible for exercise prior to the fulfilment of the minimum average maturity.
• However, for the specific categories listed below, the MAMP shall be as follows:

for the categories listed in (b) to (e) above –

1. ECB cannot be issued by overseas branches or subsidiaries of Indian banks.
2. (ii) The required MAMP must be scrupulously followed in all situations.

Prepayment charges/penal interest, if applicable, for default or breach of covenants shall not exceed 2% over the negotiated rate of interest on the outstanding principal amount and will fall outside of the all-in-cost cap.

• Real estate transactions
• Capital market investment
• Capital investment
• Working capital reasons, with the exception of the ECB indicated in 5(b) and 5(c) above.
• General company objectives, with the exception of the ECB stated in 5(b) and 5(c) above.
• Repayment of Rupee loans, with the exception of the ECB stated in 5(d) and 5(e) above.
• On-lending to entities for the aforementioned activities, with the exception of ECB raised by NBFCs as described in 5(c), 5(d), and 5(e) above.

FCY ECB into INR ECB can be at the exchange rate existing on the day of the agreement for such change between the parties involved, or at a rate less than the rate prevailing on the date of the agreement, if the ECB lender agrees.

The exchange rate applicable on the day of settlement shall be the rate in effect at the time of settlement.

• They must have a risk management policy that has been approved by the Board.
• Furthermore, such corporations are required to hedge 70% of their ECB exposure if the average maturity of the ECB is less than 5 years.
• The designated AD Category-I bank must ensure that the 70% hedging requirement is met during the ECB’s currency and report the situation to the RBI using Form ECB 2.

The following operational components of hedging must be ensured:

• Coverage: The ECB borrower will be expected to use financial hedges to cover both the principal and the coupon. The financial hedging for all ECB exposures should begin at the moment of each such exposure (i.e. the day the liability is created in the books of the borrower).

• Tenor and rollover: A minimum tenor of one year would be necessary for the financial hedge, with periodic rollover, ensuring that the exposure on account of the ECB is not unhedged at any moment during the currency of the ECB.

• Natural Hedge: Natural hedging shall be accepted in place of financial hedge solely to the extent of balancing planned cash flows / revenues in matching currency, net of any other projected outflows. An ECB may be regarded naturally hedged for this purpose if the offsetting exposure matures/cash flows during the same accounting year.

• Overseas investors can hedge their Rupee risk using approved derivative instruments with AD Category I banks in India.
• Investors can also gain access to the domestic market through branches / subsidiaries of Indian banks overseas or branches of foreign banks with a back-to-back presence in India.