Presently, a ‘foreign equity holder’ to be eligible as a ‘recognised lender’ under the automatic route must hold minimum paid-up equity in the borrower company as follows:
(i) For ECB up to US $ 5 million — minimum paidup equity of 25% held directly by the lender.
(ii) For ECB more than US $ 5 million — minimum paid-up equity of 25% held directly by the lender and debt-equity ratio not exceeding 4:1 (i.e., the proposed ECB does not exceeds four times the direct foreign equity holding).
This Circular clarifies that:
(i) Now onwards the term ‘debt’ in the debtequity ratio will be replaced with ‘ECB liability’ and the ratio will be known as ‘ECB liability’ — equity ratio to make the term signify true position as other borrowings/debt are not to be considered in working out this ratio.
(ii) Presently, only the paid-up capital contributed by the foreign equity holder is taken into account for the purpose of calculation of equity for ECB of or beyond USD 5 million from direct foreign equity holders. Henceforth, besides the paid-up capital, free reserves (including the share premium received in foreign currency) as per the latest audited balance sheet will be considered for the purpose of calculating the equity of the foreign equity holder. However, where there are more than one foreign equity holders in the borrowing company, the portion of the share premium in foreign currency brought in by the lender(s) concerned will only be considered for calculating the ECB liability-equity ratio for reckoning quantum of permissible ECB.
(iii) For calculating the ECB liability, not only the proposed borrowing but also the outstanding ECB from the same foreign equity holder lender should be considered.
Henceforth, ECB proposals from foreign equity holders (direct/indirect) and group companies will be considered under the Approval Route as under:
(i) Service sector units, in addition to those in hotels, hospitals and software, will also be considered as eligible borrowers if the loan is obtained from foreign equity holders. This would facilitate borrowing by training institutions, R & D, miscellaneous service companies, etc.
(ii) ECB from indirect equity holders may be considered, provided the indirect equity holding by the lender in the Indian company is at least 51%.
(iii) ECB from a group company may be permitted, provided both the borrower and the foreign lender are subsidiaries of the same parent.
However, it must be ensured that total outstanding stock of ECB (including the proposed ECB) from a foreign equity lender does not exceed 7 times the equity holding, either directly or indirectly of the lender (in case of lending by a group company, equity holdings by the common parent will be reckoned).
