FEMA FOCUS

Sr. No.

Name of regulation

Relevant Notification No.

Scope of regulation

1

Foreign
Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations,
2000 ( ‘Old ECB Regulations’)

FEMA 3 /2000-RB dated
3^rd May, 2000

i) Borrowing in foreign currency by
persons other than AD

ii) Borrowing in foreign currency by AD

iii) Borrowing in Indian currency by
Company

iv) Trade credits

2

Foreign
Exchange Management (Borrowing and Lending in Rupees) Regulations, 2000 (‘INR
Borrowing Regulations’)

FEMA 4 /2000-RB dated
3^rd May, 2000

i)
Borrowing in Indian currency by Indian Company through issuance of NCDs;

ii)
Borrowing in Indian currency by persons other than company

3

Para
21 of Foreign Exchange Management (Transfer or Issue of Any Foreign Security)
(Amendment) Regulations, 2004 (‘ODI Regulations’)

FEMA 120/ RB-2004 dated
7^th July, 2004

i)
Lending in foreign currency by Indian company to its overseas subsidiary/ JV

Old ECB Regulation read with Master Direction on
ECB updated as on 22^nd November, 2018

New ECB regulation read with Circular No. 17
dated 16 ^thJan 2019

Comments

The list of entities eligible to raise ECB were
classified under the three tracks is set out in the following table.

All entities eligible to receive FDI are eligible borrowers and
there is no more Track 1, Track 2 and Track 3. Further, following entities
are also eligible to raise ECB:

a) Port Trusts;

b) Units in SEZ;

c) SIDBI;

d) EXIM Bank; and

e) Registered entities engaged in micro-finance activities,
viz., registered Not for Profit companies, registered
societies/trusts/cooperatives and Non-Government Organisations (permitted
only to raise INR ECB).

Under new ECB regulations, all entities, including companies and
LLP would be eligible to receive FDI under FEMA 20 can raise ECB irrespective
of the sector in which they operate. New regulations now paves way for
service sector enterprise, companies engaged in ITES activities etc to raise
finance via ECB route. Further ECB route is open even for sectors which are
subject to sectorial cap or FDI is permitted subject to performance linked
conditions.

  Track :1

i. Companies in mfg & software development sectors.

ii. Shipping and airlines companies.

iii. SIDBI.

iv. Units in SEZs

v. Exim Bank (only under the approval route).

vi. Companies in infra sector, NBFC-IFCs, NBFC-AFCs, Holding
Companies and CICs. Also, Housing Finance Companies, regulated by the
National Housing Bank, Port Trusts constituted under the Major Port Trusts
Act, 1963 or Indian Ports Act, 1908.

  Track :2

i. . All entities listed under Track I. 

ii. REITs & INVITs (governed by SEBI)

    Track
:3

i. All entities listed under Track II.

ii. NBFCs coming under the regulatory purview of RBI.

iii. NBFCs-MFIs, Not for Profit companies registered under the
Companies Act, 1956/2013, Societies, trusts and cooperatives (registered
under the Societies Registration Act, 1860, Indian Trust Act, 1882 and
State-level Cooperative Acts/Multi-level Cooperative Act/State-level mutually
aided Cooperative Acts respectively), NGOs which are engaged in micro finance
activities.

iv. Companies engaged in miscellaneous services viz.
R&D, training (other than educational institutes), companies supporting
infrastructure, companies providing logistics services. Also, companies
engaged in maintenance, repair and overhaul and freight forwarding.

v. Developers of SEZs/ National Manufacturing and Investment
Zones (NMIZs).

Old ECB Regulation read with Master Direction on
ECB updated as on 22^nd November, 2018

New ECB regulation read with Circular No. 17
dated 16 ^thJan 2019

Comments

No specific exemption / relaxation for companies
in IBC

An entity which is under restructuring scheme/
corporate insolvency resolution process can raise ECB only if specifically
permitted under the resolution plan.

Likely to boast restructuring of companies under
IBC. Resolution plan can now substitute high interest debt with low interest
bearing ECB

The list of recognised lenders/investors for the
three tracks will be as follows:

The lender should be resident of FATF or IOSCO compliant
country, including on transfer of ECBs. However,

a) Multilateral and Regional Financial Institutions where India
is a member country will also be considered as recognised lenders;

b) Individuals as lenders can only be permitted if they are
foreign equity holders or for subscription to bonds/debentures listed abroad;
and

c) Foreign branches/subsidiaries of Indian banks are permitted
as recognised lenders only for FCY ECB (except FCCBs and FCEBs).

Foreign branches/subsidiaries of Indian banks, subject to
applicable prudential norms, can participate as arrangers/
underwriters/market-makers/traders for Rupee denominated Bonds issued
overseas. However, underwriting by foreign branches/subsidiaries of Indian
banks for issuances by Indian banks will not be allowed.

Under the new ECB regulations, any person can be eligible lender
provided they are resident of FATF or IOSCO compliant country. However,
individuals as lenders can only be permitted if they are foreign equity
holders or for subscription to bonds/ debentures listed abroad. Further,
Financial institutions located in International Financial Services Centres in
India are not specifically included in definition of recognised lender which
were included in the old ECB regulations.

Track :1

i. International banks.

ii. International capital markets.

iii. Multilateral financial institutions (such as, IFC, ADB,
etc.) /regional financial institutions and Government owned (either wholly or
partially) financial institutions.

iv. Export credit agencies.

v. Suppliers of equipment.

vi. Foreign equity holders.

vii. Overseas long term investors such as:

a. Prudentially regulated financial entities;

b. Pension funds;

c. Insurance companies;

d. Sovereign Wealth Funds;

e. Financial institutions located in International Financial
Services Centres in India

viii. Overseas branches/ subsidiaries of Indian banks

Track :2

All entities listed under Track I (excluding
overseas branches /subsidiaries of Indian banks)

Track :3

All entities listed under Track I (excluding overseas branches/
subsidiaries of Indian banks.

In case of NBFCs-MFIs, other eligible MFIs, not for profit
companies and NGOs, ECB can also be availed from overseas organisations and
individuals.

The minimum average maturities for the three
tracks are set out as under:

Minimum average maturity period (MAMP) will be 3 years. However,
manufacturing sector companies may raise ECBs with MAMP of 1 year for ECB up
to USD 50 million or its equivalent per financial year. Further, if the ECB
is raised from foreign equity holder and utilised for working capital
purposes, general corporate purposes or repayment of Rupee loans, MAMP will
be 5 years. The call and put option, if any, shall not be exercisable prior
to completion of minimum average maturity.

For ECB exceeding USD 50 million, no MAMP is specified and
hence, could be considered as 3 years

Old ECB Regulation read with Master Direction on
ECB updated as on 22^nd November, 2018

New ECB regulation read with Circular No. 17
dated 16 ^thJan 2019

Comments

Track:1

i. For ECB up to USD 50 million or its equivalent for Cos in Mfg
sector only – 1 year;

ii. For ECB upto USD 50 million or its equivalent – 3 years;

iii. For ECB beyond USD 50 million or its equivalent – 5 years

iv. 5 years for ECB taken from equity holder for working capital
purposes

v. 5 years for FCCBs/ FCEBs irrespective of the amount of
borrowing. The call and put option, if any, for FCCBs shall not be exercisable
prior to 5 years.

Track :2

10 years irrespective of the amount.

Track:  3

Same as under Track I.

The all-in-cost requirements for the three tracks
will be as under:

i) No change in all in cost ceilings

No change

 Track :1

i. The all-in-cost ceiling is prescribed through a spread over
the benchmark, i.e., 450 basis points per annum over 6 month LIBOR or
applicable benchmark for the respective currency.

ii. Penal interest, if any, for default or breach of covenants
should not be more than 2 per cent over and above the contracted rate of
interest.

Track :2

i All-in-cost ceiling – Same as Track I

ii Penal interest – same as Track I

Track :3

i. All-in-cost ceiling – 450 basis points per annum over the
prevailing yield of the Government of India securities of same maturity.

ii. Penal interest – Same as Track I

Old ECB Regulation read with Master Direction on
ECB updated as on 22^nd November, 2018

New ECB regulation read with Circular No. 17
dated 16 ^thJan 2019

Comments

The end-use prescriptions for ECB raised under the three tracks
are as under:

The negative list for all Tracks would include the following:

a. Investment in real estate or purchase of land except when
used for affordable housing as defined in Harmonised Master List of
Infrastructure Sub-sectors notified by Government of India, construction and
development of SEZ and industrial parks/integrated townships.

b. Investment in capital market.

c. Equity investment.

Additionally, for Tracks I and III, the following negative end
uses will also apply except when raised from Direct and Indirect equity
holders or from a Group company, and provided the loan is for a minimum
average maturity of five years:

d. Working capital purposes.

e. General corporate purposes.

f. Repayment of Rupee loans.

Finally, for all Tracks, the following negative end use will
also apply:

g. On-lending to entities for the above activities from (a) to
(f)

The negative list for which ECB proceeds cannot
be utilised is largely similar as erstwhile ECB regulations. However, earlier
negative list used the phrase investment in real estate or purchase of land.
In the new ECB regulations, above phrase has been replaced by real estate
activities which has been defined above. Further, proceeds of ECB cannot be
used for payment of interest / charges for ECB.

Real estate activity specifically excludes
purchase / long term leasing of industrial land as part of new project /
modernisation or expansion of existing unit. Hence, going forward ECB can be
utilised towards purchase of industrial land for expansion of existing unit
or setting up of new unit.

Designated AD Category I banks may allow changes
in the currency of borrowing of the ECB to any other freely convertible currency
or to INR subject to compliance with other prescribed parameters. Change of
currency of INR denominated ECB is not permitted.

No change

NA

Individual limits of borrowing

Old ECB Regulation read with Master Direction on
ECB updated as on 22^nd November, 2018

New ECB regulation read with Circular No. 17
dated 16 ^thJan 2019

Comments

The individual limits of ECB that can be raised
by eligible entities under the automatic route per financial year for all the
three tracks are set out as under:

a. Up to USD 750 million or equivalent for the
companies in infrastructure and manufacturing sectors, Non-Banking Financial
Companies -Infrastructure Finance Companies (NBFC-IFCs), NBFCs-Asset Finance
Companies (NBFC-AFCs), Holding Companies and Core Investment Companies;

b. Up to USD 200 million or equivalent for
companies in software development sector;

c. Up to USD 100 million or equivalent for
entities engaged in micro finance activities;

d. Up to USD 500 million or equivalent for
remaining entities; and

e. Up to USD 3 million or equivalent for
startups;

ii. ECB proposals beyond aforesaid limits will
come under the approval route. For computation of individual limits under
Track III, exchange rate prevailing on the date of agreement should be taken
into account.

iii. In case the ECB is raised from direct equity
holder, aforesaid individual ECB limits will also subject to ECB liability:
equity ratio requirement. The ECB liability of the borrower (including all
outstanding ECBs and the proposed one) towards the foreign equity holder
should not be more than seven times of the equity contributed by the latter.
This ratio will not be applicable if total of all ECBs raised by an entity is
up to USD 5 million or equivalent.

All eligible borrowers (excluding startups) can
now raise ECB up to USD 750 million or equivalent per financial year under
auto route. Rest of the conditions, including ECB equity ratio in case of
borrowings from foreign equity holder would remain the same.

Expansion of individual limits

ECB proceeds are permitted to be parked abroad as
well as domestically in the manner given below:

Parking of ECB proceeds abroad: ECB proceeds meant only for
foreign currency expenditure can be parked abroad pending utilisation. Till
utilisation, these funds 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)
Treasury bills and other monetary instruments of one year maturity having
minimum rating as indicated above and (c) deposits with overseas branches/
subsidiaries of Indian banks abroad.

Parking of ECB proceeds domestically: ECB proceeds meant for
Rupee expenditure should be repatriated immediately for credit to their Rupee
accounts with AD Category I banks in India. ECB borrowers are also allowed to
park ECB proceeds in term deposits with AD Category I banks in India for a maximum
period of 12 months. These term deposits should be kept in unencumbered
position.

No change

NA

Loan Registration Number (LRN): Any draw-down in respect
of an ECB as well as payment of any fees / charges for raising an ECB should
happen only after obtaining the LRN from RBI. To obtain the LRN, borrowers
are required to submit duly certified Form 83, which also contains terms and
conditions of the ECB, in duplicate to the designated AD Category I bank. In
turn, the AD Category I bank will forward one copy to the Director, Balance
of Payments Statistics Division, Department of Statistics and Information
Management (DSIM), Reserve Bank of India, Bandra-Kurla Complex, Mumbai – 400
051, Contact numbers 022-26572513 and 022-26573612. Copies of loan agreement
for raising ECB are not required to be submitted to the Reserve Bank.

Changes in terms and conditions of ECB: Permitted changes in ECB
parameters should be reported to the DSIM through revised Form 83 at the
earliest, in any case not later than 7 days from the changes effected. While
submitting revised Form 83 the changes should be specifically mentioned in
the communication.

Reporting of actual transactions: The borrowers are required
to report actual ECB transactions through ECB 2 Return through the AD
Category I bank on monthly basis so as to reach DSIM within seven working
days from the close of month to which it relates. Changes, if any, in ECB
parameters should also be incorporated in ECB 2 Return. Format of ECB 2
Return is available at Annex III of Part V of Master Directions – Reporting
under Foreign Exchange Management Act.

Reporting on account of conversion of ECB into
equity: In case of partial or full
conversion of ECB into equity, the reporting to the RBI will be as under:

i. For partial conversion, the converted portion
is to be reported to the concerned Regional Office of the Foreign Exchange
Department of RBI in Form FC-GPR prescribed for reporting of FDI flows, while
monthly reporting to DSIM in ECB 2 Return will be with suitable remarks
“ECB partially converted to equity”. ii. For full conversion, the
entire portion is to be reported in Form FC-GPR, while reporting to DSIM in
ECB 2 Return should be done with remarks “ECB fully converted to equity”.
Subsequent filing of ECB 2 Return is not required.

iii. For conversion of ECB into equity in phases,
reporting through ECB 2 Return will also be in phases.

Name of form for obtaining LRN from RBI has
changed from old Form 83 to new Form ECB. Hence, wherever Form 83 was
required to be filed, going forward Form ECB would be required to be filed.
However, contents of the form are same. Further, ECB 2 filing continues to
remain as before. Additionally, in part D of Form ECB 2 details with respect
to proceeds of ECB parked domestically is also required to be stated.

Change in name of Form 83 to Form ECB and details
of ECB parked domestically to be provided in Form ECB 2

Old ECB Regulation read with Master Direction on
ECB updated as on 22^nd November, 2018

New ECB regulation read with Circular No. 17
dated 16 ^thJan 2019

Comments

No such provision existed earlier. Any late
filing of forms was subject to compounding proceedings

Late Submission Fee (LSF) for delay in reporting:

Any borrower, who is otherwise in compliance of ECB guidelines,
can regularise the delay in reporting of drawdown of ECB proceeds before
obtaining LRN or delay in submission of Form ECB 2 returns, by payment of
late submission fees as given in Annexure 1

Going forward, process of regularising ECB non compliances
relating to late filing of forms or drawdown of ECB before obtaining LRN
would be much simpler and would not be subject to compounding proceedings.
However, with respect to past non-compliances, compounding proceedings would
still need to be undertaken

The exchange rate for foreign currency – Rupee
conversion shall be the market rate on the date of settlement for the purpose
of transactions undertaken for issue and servicing of the bonds

No change

NA

Borrowers eligible shall have a board approved
risk management policy and shall keep their ECB exposure hedged 70 per cent
at all times in case the average maturity is less than 5 years. Further, the
designated AD Category-I bank shall verify that 70 per cent hedging
requirement is complied with during the currency of ECB and report the
position to RBI through ECB 2 returns. Also, the entities raising ECB under
the provisions of tracks I and II are required to follow the guidelines for
hedging issued, if any, by the concerned sectoral or prudential regulator in
respect of foreign currency exposure.

Operational aspects on hedging: Wherever hedging has been
mandated by the RBI, the following should be ensured:

i. Coverage: The ECB borrower will be
required to cover principal as well as coupon through financial hedges. The
financial hedge for all exposures on account of ECB should start from the
time of each such exposure (i.e. the day liability is created in the books of
the borrower).

ii. Tenor and rollover: A minimum tenor of
one year of financial hedge would be required with periodic rollover duly
ensuring that the exposure on account of ECB is not unhedged at any point
during the currency of ECB.

iii. Natural Hedge: Natural hedge, in lieu
of financial hedge, will be considered only to the extent of offsetting
projected cash flows / revenues in matching currency, net of all other
projected outflows. For this purpose, an ECB may be considered naturally
hedged if the offsetting exposure has the maturity/cash flow within the same
accounting year. Any other arrangements/ structures, where revenues are
indexed to foreign currency will not be considered as natural hedge.

No change

NA

Old ECB Regulation read with Master Direction on
ECB updated as on 22^nd November, 2018

New ECB regulation read with Circular No. 17
dated 16 ^thJan 2019

Comments

Under the ECB framework, ECBs can be raised
either under the automatic route or under the approval route. For the
automatic route, the cases are examined by the Authorised Dealer Category-I
(AD Category-I) banks. Under the approval route, the prospective borrowers
are required to send their requests to the RBI through their ADs for
examination. While the regulatory provisions are mostly similar, there are
some differences in the form of amount of borrowing, eligibility of
borrowers, permissible end-uses, etc. under the two routes. While the first
six forms of borrowing can be raised both under the automatic and approval
routes, FCEBs can be issued only under the approval route.

No change

NA

No specific regulation earlier

Specific Standard Operating Procedure (SOP) laid
down which has to be followed by designated AD banks in case of untraceable
entities who are found to be in contravention of reporting provisions for
ECBs by failing to submit prescribed return(s) under the ECB framework,
either physically or electronically, for past eight quarters or more.

i. Definition: Any borrower who has raised
ECB will be treated as ‘untraceable entity’, if
entity/auditor(s)/director(s)/ promoter(s) of entity are not
reachable/responsive/reply in negative over email/letters/phone for a period
of not less than two quarters with documented communication/reminders
numbering 6 or more and it fulfills both of the following conditions:

a) Entity not found to be operative at the
registered office address as per records available with the AD Bank or not
found to be operative during the visit by the officials of the AD Bank or any
other agencies authorized by the AD bank for the purpose; AND

b) Entities have not submitted Statutory
Auditor’s Certificate for last two years or more;

ii. Action: The followings actions are to be
undertaken in respect of ‘untraceable entities’:

a) File Revised Form ECB, if required, and last
Form ECB 2 Return without certification from company with ‘UNTRACEABLE
ENTITY’ written in bold on top. The outstanding amount will be treated as
written-off from external debt liability of the country but may be retained
by the lender in its books for recovery through judicial/ non-judicial means;

b) No fresh ECB application by the entity should
be examined/processed by the AD bank;

c) Directorate of Enforcement should be informed
whenever any entity is designated ‘UNTRACEABLE ENTITY’; and

d) No inward remittance or debt servicing will be
permitted under auto route.

Entire new process has been laid down to find
untraceable entities who have taken ECB

Particulars

Old ECB Regulations

New ECB Regulations

Comments

Amount of borrowing

USD 20 million per import transaction

USD 50 million per import transaction

Increase in limit of trade credit

Period

Import of capital goods – 5 years from date of
shipment

Import of non-capital goods – 1 year from date of
shipment or operating cycle, whichever is less

Import of capital goods – 3 years from date of
shipment

Import of non-capital goods – 1 year from date of
shipment or operating cycle, whichever is less

Trade credit period for import of capital goods
has been reduced from 5 years to 3 years

Trade credit beyond permitted period

No specific provision in respect of trade credit
extending beyond above specified period

Specifically provides trade credit beyond 3 years
period to be ECB

There have been several instances wherein RBI has
compounded non compliances relating to trade credit extending beyond
specified period by viewing it as ECB. The same has now been specifically
included in new ECB regulations.

Recognised lenders

Overseas suppliers, banks, financial
institutions,

Lenders to also include foreign equity holders
and financial institutions in IFC

Recognised lenders list expanded to include
foreign equity holders and financial institutions in IFC. Hence, they can
also give trade credits

Cost

All-in-cost ceiling for raising trade credit was
350 basis points over 6 month LIBOR

All-in-cost ceiling for raising trade credit
reduced to 250 basis points over 6 month LIBOR

Reduction in all in cost ceiling for raising
trade credits

No.

Type of Return/Form

Period of delay

Applicable LSF

1

Form ECB 2

Up to 30 calendar days from due date of submission

Rs. 5,000

2

Form ECB 2/Form ECB

Up to 3 years from due date of submission/date of drawdown

Rs. 50,000 per year

3

Form ECB 2/Form ECB

Beyond 3 years from due date of submission/date of drawdown

Rs. 100,000 per year