External Commercial Borrowings (ECBs) Policy

1. ECB POLICY - AN OVERVIEW www.enterslice.com Enterslice is Award Winning Legal Technology Company that helps entrepreneurs start and mange business in India. Whether you are starting a new business or already an established firm, Enterslice has out of the box tailor-made solutions for you. Enterslice Advisory is your partner to grow your venture to the next level. We help you define and execute key growth hacking strategies, deliver a great product/service launch experience, bring new products and services to the market, and secure VC funding. From strategy review of a Business and development to hands-on implementation, we help Entrepreneur achieve long-term growth.

2. As a part of the development policy, India has always promoted capital inflows. In other words to make domestically investment foreign capital is obtained from foreign countries. There are some reasons which compelled our government to go after foreign capital such as Lack of domestic capital and deficit in the current account. There are different types of foreign capital and the major category is foreign investment including FDI (Foreign Direct Investment) and FPI (Foreign Portfolio Investment). There are following types of foreign capital such as trade credit, NRI deposits and ECBs (External Commercial Borrowings).

3. ECB Policy- An Overview External Commercial Borrowings (ECB) is a commercial loan availed from nonresident lenders by an Indian entity with a minimum average maturity of 3 years. These types of loans are provided by foreign commercial banks and other institutions. ECBs are defined as money borrowed from foreign resources in the form of • Commercial bank loans; • Buyers’ credit/ suppliers’ credit; • Securitized instruments such as floating rate notes and fixed rate bonds; • Credit from official export credit agencies and commercial borrowings from Multilateral Financial Institutions. ECBs have emerged a major form of foreign capital like FDI and FII in the post reform period. In Country from several years contribution of ECBs was between 20 to 35 percent of the total capital flows. In large number Indian corporate and PSUs have used the ECBs as sources of investment. Private sector corporates have obtained bulk of the overseas loans or ECBs. ECB is easy to obtain fund for the corporates and it also helps them to make business/investment expansion. For expansion of existing capacity as well as for fresh investment, ECBs are being permitted by the Government as a source of finance for Indian Corporates.

4. Objectives • For expanding the existing capacity as well as for fresh investments government permits the ECBs as an additional source of financing. • ECB policy seeks to emphasize the priority of investing in the infrastructure and core sectors such as Power, telecom, Railways, Roads, Urban infrastructure etc. and also emphasis on the need of capital for Small and Medium scale enterprises. Benefits to Borrowers • ECB funding helps corporates in paying to suppliers in other countries that may not be available in India. • In comparison to domestic funds, cost of funds borrowed from external sources is cheaper. • Borrower can diversify the investor base. • It provides international market to borrowers. In ECB there are internationally recognised sources such as banks, export credit agencies, suppliers of Equipment, foreign collaborators, foreign equity holders, international capital markets etc.

5. Advantages • With the help of ECBs it provide an opportunity to borrow large volume of funds; • Funds are relatively available for long term; • In comparison to domestic funds interest rate are also lower; • Since ECBs are in the form of foreign currencies, they enable the corporate to have foreign currency to meet the import of machineries etc. • ECBs can be raised by corporates from internationally recognized sources such as banks, export credit agencies, international capital markets etc. India has a vibrant corporate sector unlike many other emerging market economies and many of them have overseas operations as well. In India, to the corporates, domestic financial market is not often able to provide big sized loans at competitive rate of interests. For domestic companies ECBs have emerged as a valuable source of investable resource of funds. Under ECB Policy government put restrictions on amount of loan that can be obtained by a company, end user restrictions, interest rate ceiling for ECBs, maturity period etc. Government put ceiling for the total amount of ECBs that can be obtained through the ECB route during a year by all Indian firms.

6. Routes to access ECB External Commercial Borrowings – Commercial Loans, buyer / suppliers credit, securitized instruments (Bonds, Preference shares etc.) with a minimum average maturity of 3 years. External Commercial Borrowing (ECB) Automatic Route Approval Route USD 750 M-Maximum USD 200 M- Hotel, Hospital, S/W and Miscellaneous Service; USD 10 M- NGO in MF –MFI; Specified NBFC and SIDBI as per conditions Approval route applicable - Not covered in Automatic route Minimum average maturity 3 or 5 years depending on the quantum of ECB Short term debt not encouraged 6 6

7. Automatic Route Eligible Borrowers: • Corporates including those in the hotel, hospital, software sectors • Non-Government Organizations (NGOs) engaged in micro finance activities are eligible to avail of ECB. • Units in Special Economic Zones (SEZ) Units (except financial intermediaries, individuals, Trusts) • NBFC-IFC, NBFC-AFC • Companies in Miscellaneous Services i.e. Training Activities, R&D; and Infra Support; (except Educational Inst., Trading business, Logistic Services, Financial Services, and Consultancy Services) only from its Direct/Indirect Equity Holder/Group Cos • Small Industries Development Bank of India (SIDBI) can avail of ECB for on lending to MSME Sector) • Other specified

8. Recognized Lenders: International Banks International Capital Markets Multilateral Financial Institutions such as IFC, ADB, CDC etc. Export credit agencies Suppliers of equipment Foreign collaborators Foreign Equity Holders (min. 25%) For ECB beyond USD 5M – ECB Liability- Equity Ratio 4:1 Indirect Equity Holder- Only if indirect Holding in IC is 51% Group Co.- ECB from a group company is permitted provided both the borrower and the foreign lender are subsidiaries of the same parent

9. Maturity: The maximum amount of ECB which can be raised by a corporate is USD 750 million or its equivalent during a financial year other than hotel, hospital and software sectors, and corporate in miscellaneous services sector. USD 200 M- Hotel, Hospital, S/W and Miscellaneous Service; U$ 10 M- NGO in MF –MFI; Specified NBFC and SIDBI as per conditions Minimum average maturity 3 or 5 years depending on the quantum of ECB Minimum avg. maturity period USD 20 M – 3 years Beyond USD 20 up to 750 M – 5 years All in Cost Ceiling 3-5 years – LIBOR + 350 bps Beyond 5 years – LIBOR + 500 bps (Fixed rate loans: swap cost +margin)

10. End Use: Real/ Industrial sector (SME)– • Import of capital goods, • New Projects, Expansion/ modernization of existing units • Overseas Direct Investment in Joint Ventures (JV)/ Wholly Owned Subsidiaries (WOS) Payment of Interest During Construction (IDC) First stage acquisition of shares in the disinvestment process and also in the mandatory second stage offer under GOIs disinvestment program Payment for obtaining License/ permit for 3G spectrum. For lending to self-help groups or for micro credit by NGO’s Repayment of rupee loans by companies in infrastructure sector manufacturing and hotel sector (with project cost of NR 250 or more) General corporate purpose from foreign direct equity holder

11. End Use (Not Permitted): On lending, Investment in capital market or acquiring a company in India Real Estate Sector General corporate purposes Repayment of existing INR Loan

12. Other permitted end uses Import of capital goods; New projects; Modernization/expansion of existing projects in real sector (industrial sector including SME and infrastructure sector); Hotel Sector (fixed capital investment of ≥ Rs. 200 Crore) Convention Centers (fixed capital investment of ≥ Rs. 300 Crore) Common infrastructure for Industrial Parks, SEZ, Tourism Facilities; Capital investment for fertilizers; Post harvest infrastructure for agricultural and horticultural produce including cold storage; Soil testing laboratories; Cold chain for farm level pre-cooling, preservation, storage or agricultural and allied produce, marine produce and meat; ODI in JV/WOS abroad; Acquisition of shares in disinvestment process of PSU shares; IDC for Indian Infrastructure sector; Capital expenditure in maintenance and operations of toll system; Refinancing of Bridge finance availed for import of capital goods in infrastructure sector; Import of services, technical know-how, payment of license fee etc.; General corporate purposes from FDEH in manufacturing, infrastructure, hotels, hospitals and IT sector (minimum average maturity 7 years); Payment of spectrum allocation;

13. Guarantee: • Issuance of guarantee, standby letter of credit, letter of undertaking or letter of comfort by banks, Financial Institutions and Non-Banking Financial Companies (NBFCs) from India relating to ECB is not permitted. • Pledge of shares by promoters, domestic associate companies of the borrower • Corporate Guarantee, Personal Guarantee , • Creation of Charge over immoveable assets and financial securities is Possible only after obtaining no objection from AD bank. • Incase of enforcement of charge – property will be transferred only to person resident in India • ECB Policy • Authorized Dealer can permit: • Change in Name; Change in Lender; Change in End Use, Change in All-in-Cost • Transfer of ECB, Currency Reschedulement, Reduction in amount of ECB • Cancellation of LRN

14. Conversion of ECB into Equity • Conditions: • Activities to be under Automatic Route / FIPB approval obtained • Sectoral Cap not breached • Pricing: Listed as per SEBI; Unlisted: At a Fair Value arrived by CA/MB based on IAP on ALP on the date of conversion • Conversion Rate: Maximum at exchange rate prevailing on the date of the agreement between the parties. • Reporting structure • Full conversion of outstanding ECB into equity – Form FC-GPR to AD & Form ECB-2 to DSIM within 7 working days from the close of the month • Partial conversion of outstanding ECB into equity – Form FC-GPR for converted portion & Form ECB-2 to DSIM mentioning converted and unconverted portion

15. Procedure Execution of Loan Agreement(filing is not compulsory) Filing of Form 83 duly certified by CA/CS to AD AD to process the request and send to RBI for LRN Drawn should take place post allotment of LRN Filing of Monthly Return in ECB 2 by 7th of next month

16. Compounding of Contraventions of Cont Compounding of contraventions means settle an offence committed by the contravener through imposition of a monetary penalty without going in for litigation after the contravener acknowledges having committed the contravention. Objective: • To provide comfort by minimizing transaction costs, while taking severe view of willful, malafide and fraudulent transactions but it is not equal to withdrawal of a charge or a complaint but an agreement not to pursue the legal battle and spare the accused from further consequences.

17. Filling Application • Application Form • Nature of the contravention • Provisions of FEMA under which the transaction would be handled • While undertaking the transaction which of the FEMA provisions were contravened • Transaction:- Parties involved, Date of the transaction and Amount involved • DD – in favor of “RESERVE BANK OF INDIA” Payable at RO/MUMBAI • RBI Office Jurisdiction • Regional Offices Central Offices • - Delay in AR,FC-GPR • Non Allotment/Refund in 180 days • Violation of Pricing Guidelines • Issue of Ineligible Instruments • Issue of securities without RBI/FIPB approval • Delay in Filing of FC-TRS-NR/R-R/NR • Recording of Transfer by Company without FC-TRS • New Delhi • Acquisition of IMP in/outside India • LO, BO and PO • Deposits • Mumbai • ECB • ODI • Export, Import and Others

18. Features of Compounding • Voluntary • No suo-motto investigation • Time Bound completion (Within 180 days) • No further proceedings for contravention so compounded • Payment of sum of contravention (within 15 days) • Once the order is passed, no contravener seek to withdraw the order or to hold it as void or request a review of the order • No appeal against the Order • Non payment shall be deemed as no application is made • No compounding before expiry of 3 years of previous order for similar contravention • No Compounding of cases where approval of any statutory authority/Govt. etc. was required unless such approvals has been sought

19. Ascertainment of Nature of Contravention by RBI Depends on whether the contravention is… • Technical/ Minor in nature and needs only Cautionary Advice. • Serious in nature and warrant Compounding; • Prima facie, involves Money-Laundering, National and Security concerns involving serious infringement of the regulatory framework; • However, RBI reserves the right to classify the contraventions and no body else has any right to classify any contravention as technical suomoto. • Decision of Sum of contravention by RBI depends on … • Amount of Gain of unfair advantage made from contravention; • Amount of Loss to any agency/authority/exchequer from contravention; • Economic benefits accruing to the contravener from delayed compliance or compliance avoided; • Repetitive nature of the contravention, Track Record, History of non-compliance of the Contravener; • Contravener’s conduct in undertaking the transaction, Disclosure of full facts in the application and submissions made during the personal hearing; • Any other factor considered relevant and appropriate

20. Contraventions & Penalties • Application for Condonation • Application for compounding • Adjudication proceedings • Penalty/ Confiscation in case of quantifiable offence – Up to 3 times, in case of non -quantifiable offence – Up to Rs. 200,000, in case of continuing penalty - Rs. 5000 per day • Imprisonment if penalty not paid within prescribed time