FEMA, 1999
ECB & TC
APRIL 2013
By Shri A.K. Salvi
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ECB POLICY
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India’s external debt includes external assistance,
NRI deposits, short-term credits and rupee debt.
ECBs are key components of external debt.
The important aspect of ECB policy is to provide
flexibility in borrowings by Indian corporates, at the
same time maintaining prudent limits for total
ECBs. Government decides the limit.
The guiding principles for ECB policy are to keep
maturities long, cost low and encourage
infrastructure (9 areas) and export sector
financing.
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ECB POLICY CONTD..
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ECB is an administered facility and has implications for the
external sector of the country. As an administered policy
certain amount of rationing of annual limit is necessitated for
channelising the resources to prospective capital expenditure
and asset built up.
ECB is one of the major instruments of capital controls for
regulating capital inflows.
As per the current policy, overseas lenders are required to
assume directly the project risk without credit support from
domestic banks. Allowing banks to extend credit support for
ECBs have implications for domestic financial stability.
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ECBS..
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ECBs & TCs are governed by :
- Sec. 6 (3) (d) of FEMA;
[ i.e. any borrowing or lending in foreign
exchange in whatever form or by whatever
name called ].
- Policy framed by Govt.;
- Notf. No. FEMA. 3/2000 issued u/s 6 (3)(d);
- Amendment to Notf. From time to time;
- A. P. ( Dir Series) Cirs. Issued by RBI.
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ACCESSION OF FUNDS FROM ABROAD..
ECBs : commercial loans in the form of bank
loans/buyer’s credit/supplier’s
credit/securitised instruments (FRN/FRB) with
minimum average maturity of three years;
 FCCBs: FCCB&OS (Through Depository Receipt
Mechanism) 1993;
 Preferance shares: NC/OC/PC ( funds received
on or after 1-5-2007 );
 FCEBs: FCEB Scheme 2008.
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FRN : Floating Rate Note
FRB : Floating Rate Bond
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ECB INCLUDES…..
Commercial loans;
 Syndicated loans;
 Floating/Fixed rate notes/bonds;
 LoCs from foreign banks/financial institutions;
 Import loans;
 Loans from export credit agencies;
 Commercial loans from IFCI/ADB/CDC etc.
 TCs : BC/SC [ more than 3 yrs ].
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METHOD OF RAISING FUNDS..
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Two Routes:- Automatic Route, and
- Approval Route.
For investment in real sector-industrial sector,
infrastructure sector and service sectors
( Hotel/Hospital/Software) under Automatic Route.
Individuals, Trusts and Non-profit making
Organisations are not eligible to raise ECBs.
In case of doubt about Automatic or Approval Route,
the applicant may take recourse to Approval Route.
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ECBS – NORMS RELATE TO…
Eligible borrowers;
 Recognised lenders;
 Amount & maturity;
 All-in-cost ceilings;
 End-use;
 End-use not permitted;
 Guarantees;
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Security;
 Parking of ECB
proceeds;
 Prepayment;
 Debt servicing;
 Refinancing of an
existing ECB;
 Procedure.
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INFRASTRUCTURE SECTOR DEFINED AS..
Power
 Telecommunication;
 Railways;
 Roads including bridges;
 Sea port & Air port;
 Industrial parks;
 Urban infrastructure
( water supply, sanitation
& sewage projects);
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Mining, exploration and
refining;
Cold storage or cold
room facility, including
for farm level precooling, for preservation
or storage of agricultural
and allied produce,
marine products and
meat.
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NORMS CONTD..
End use not permitted :
- On lending ;
- Investment in capital market;
- Acquisition of a company ( full/part );
- Investment in Money Market Mutual
Funds;
- Real estate sector;
- General corporate purpose;
- Repayment of Rupee loan; and
- Working capital requiremnet.
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APPROVAL ROUTE COVERS…
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Proposals covered under the Approval Route:
- Cases not covered under Automatic Route;
- ECB beyond 50% of NoF by FI classified as IFCs
- Bks/Fis participated in the Textile or Steel sector restructuring;
- ECBs with AVM of 5 yrs. By NBFCs from multilateral FI/reputable
regional FIs/Export credit agencies/Intl. Banks to finance import of
infrastructure instruments for leasing;
- ECB by IFCs (NBFCs catagorised as IFCs) beyond 50% of NoF for on
lending to IF sector ( compliance with DNBS guidelines and hedging);
- FCCBs by HFCs ( 3 years NoF not less than Rs.500crs; listed on
BSE/NSE ; minimum ECB of $100 mn. And submission of purpose /
plan of utilisation)
- SPVs or any other entity notified by RBI to finance IFCs;
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APPRVAL ROUTE CONTD..
- Multi State Co-op. Soc. engaged in mfg.
(financially solvent & having up-to-date B/S);
- SEZs developers for providing infrastructure
facilities within SEZ;
- Corporates who have violated ECB policy and
under investigation by RBI/DoE;
- Service sector (Hosp/Hotel/Software) beyond $
200 mn. Per F. Y. & AVM exceeding 5 yrs
w.e.f. 26-09-2010;
- Development of Integrated Township( was
available up to 31-12-2010 ).
- National Manufacturing Investment Zones (NMIZ)
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PROCEDURE
Automatic Route :
- Loan agreement in compliance with ECB guidelines without prior approval of RBI;
- Submission of Form 83, certified by CS/CA,
through AD Bank to RBI [ DSIM ] for obtaining
LRN before drawing down of ECB;
- Drawing down of ECB only after LRN.
 Approval Route : Application in Form ECB to Co.
RB, through AD Bank, for approval. After
approval to follow automatic route procedure.
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REPORTING REQUIREMENT
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Form-83 [to obtain LRN ];
Form-83 [change/modifications in the
drawl/repayment schedule ]
ECB-2 [ reporting of drawls – monthly basis ];
FC-GPR [ conversion of ECB into equity ];
Compliance of ECB Guidelines is the primary
responsibility of the borrower;
Any contravention need to be got compounded by
applying to RBI;
Before forwarding the ECB-2 return to RBI the
Company Secretary/CA must scrutinise related
original documents and ensure that the return is
complete and is in order as per ECB Guidelines
issued by RBI / Govt.
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TRADE CREDIT (TC)
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TC refers to credit extended for imports directly by the
overseas supplier, bank, FI, for maturity of less than 3
yrs.
Depending on source, TC can be classified as:
> Suppliers credit (SC);
> Buyers credit (BC);
BCs / SCs for 3 yrs and above are ECBs;
All-in-cost: 6 months LIBOR + 350 bps and includes
arrangers fee, upfront fee, management fee, handling/
processing fees, out of pocket and legal expenses if any.
(w.e.f. 15.11.2011 until further review Cir 40/9-12-12).
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TC : REPORTING..
Each TC may be given UID No. By AD.
 Ads to submit a consolidated statements for all
their branches as under :
- Monthly in Form TC [ approval, drawl,
utilisation & repayment ] to DEAP. RBI;
- Quarterly [issuance of LCs/Guarantees/LoU/
LoC to FED. RBI.
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USUAL CONTRAVENTIONS...
Contraventions of the provisions of FEMA by
corporates & individuals are due to the acts of
omissions & commissions of the AD Banks. Such
contraventions dealt with by RB mainly relates to
FEMA Notification. No. 3/2000 ;
i) Draw down of ECB without LRN [ Reg. 3 & 6];
ii) Allowing drawn of ECB under automatic
route from unrecognised lender, to in eligible
borrower, for non permitted end uses, etc.
[Reg.3 & 6 ].
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ECB CAN BE BLESSING BUT --FEW CONCERNS...
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Big question remains hanging over the future of
interest rates;
Rupee volatility : Forex risk is sharp;
Cost effectiveness of ECB funds relative to domestic
borrowing;
Country rating [Baa3] : difficult to get finest rates;
CAD : Unlikely to improve because of widening trade
deficit, oil prices, affected earnings of software exports,
lower expatriates' remittances, etc;
Forward rates : Currently 6.5/7% [ cost 12/13%];
Corporates chose not to hedge [ e.g. FCCB redemption].
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Thanks!!!
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