Policy & Procedure for External Commercial Borrowings (ECB)

Policy & Procedure for External Commercial Borrowings (ECB)


1. External Commercial Borrowings (ECBs) are defined to include commercial bank loans, buyers’ credit, suppliers’ credit, securitised instruments such as Floating Rate Notes and Fixed Rate Bonds etc., credit from official export credit agencies and commercial borrowings from the private sector window of Multilateral Financial Institutions such as International Finance Corporation (Washington), ADB, AFIC, CDC, etc.

2. ECBs are being permitted by the Government as a source of finance for Indian Corporates for expansion of existing capacity as well as for fresh investment.

3. The policy seeks to keep an annual cap or ceiling on access to ECB, consistent with prudent debt management.

4. The policy also seeks to give greater priority for projects in the infrastructure and core sectors such as Power, oil Exploration, Telecom, Railways, Roads & Bridges, Ports, Industrial Parks and Urban Infrastructure etc. and the export sector. Development Financial Institutions, through their sub-lending against the ECB approvals are also expected to give priority to the needs of medium and small scale units.

5. Applicants will be free to raise ECB from any internationally recognised source such as banks, export credit agencies, suppliers of equipment, foreign collaborators, foreign equity-holders, international capital markets etc. offers from unrecognised sources will not be entertained.


6. ECBs should have the following minimum average maturities :

a) Minimum average maturity of three years for external commercial borrowings equal to or less than USD 20 million equivalent in respect of all sectors except 100% EOUs;

b) Minimum average maturity of five years for external commercial borrowings greater than USD 20 million equivalent in respect of all sectors except 100% EOUs;

c) 100% Export oriented Units (EOUs) are permitted ECB at a minimum average maturity of three years for any amount.

d) Bonds and FRNs can be raised in tranches of different maturities as long as the average maturity of the different tranches within the same overall approval taken together satisfies the maturity criteria prescribed in the ECB guidelines. In such cases, it is expected that longer term borrowings would necessarily precede that of the shorter tenors. The longer the initial tenor the shorter the subsequent tranches can be within the average maturity.


7. All Corporates and Institutions are permitted to raise ECB upto USD 5 million equivalent at a minimum simple maturity of 3 years. Borrowers may utilise the proceeds under this window for general corporate objectives without any end-use use restrictions excluding investments in stock-markets or in real estate. The loan amount may be raised in one or more tranches subject to the caveat that the total outstanding loan under this scheme at any point of time should not exceed USD 5 million. Each tranche should have a minimum simple maturity of 3 years.

As a measure of simplification and de-regulation for the benefit of corporates and institutions, Government have delegated the sanctioning powers to Reserve Bank of India (RBI) under this scheme with effect from 15th December, 1996 and further delegation with effect from 01/01/1999. Corporates and Institutions are advised to submit their applications under this scheme to the Exchange Control Department of RBI, Mumbai.


8. Corporates who have foreign exchange earnings are permitted to raise ECB upto thrice the average amount of annual exports during the previous three years subject to a maximum of USD 200 million without end-use restrictions, i.e. for general corporate objectives excluding investments in stock markets or in real estate. The minimum average maturity will be three years upto USD 20 million equivalent and five years for ECBs exceeding USD 20 million. The maximum level of entitlement in any one year is a cumulative limit and debt outstanding under earlier approvals (earstwhile USD 15 million exporters scheme and thereafter) will be netted out to determine annual eligibility.


9. Holding Companies/promoters will be permitted to raise ECB upto a maximum of USD 50 million equivalent to finance equity investment in a subsidiary/joint venture company implementing infrastructure projects. This flexibility is being given in order to enable domestic investors in infrastructure projects to meet the minimum domestic equity requirements.

10. In case the debt is to be raised by more than one promoter for a single project then the total quantum of loan by all promoters put together should not exceed USD 50 million.


11. (i) ECB of eight years average maturity and above will be outside the ECB ceiling, though MOF/RBI’s prior approval for such borrowings would continue to be necessary. The extent of debt under this window will be reviewed by the Government periodically.

(ii) Funds raised under this window will not be subject to end-use restriction other than that relating to investment in real estate and stock market upto the extent of:

(a) USD 200 million if the maturity is 8 years and above but less than 16 years.

(b) USD 400 million if the average maturity is 16 years and above.

(iii) Amounts raised above the limit at ii(a) and (b) will be subject to the normal end- conditions prescribed under the general ECB guidelines.

(iv) To be eligible for this purpose, the long term debt instrument should not include any “put” or “call” options potentially reducing the stated maturities.

(v) Development Financial Institutions may raise ECB under this window in addition to their normal annual allocation covered by the cap.

(vi) Borrowings under this long-term window which are exempted from the cap are not eligible for the purpose of enhancing the maturity of shorter term borrowing prescribed under normal ECB window to reach the required average maturity. In case borrowings 8 years maturity & above are to be used to lengthen the maturity of shorter term borrowing then the entire amount must be treated as within the cap.

(vii) Utilisation of the ECB approved earlier under the regular ECB cap will not be a limiting factor for considering proposals under the long term maturity window. However, additional borrowing under either of the window, i.e., regular or under long-term maturity, is subject to utilisation of earlier approvals in the same window.

(viii) Corporates may raise these borrowings either through FRN/Bond Issues/Syndicated Loan etc. as long as the maturity and the interest spread are maintained as per the guidelines.

(ix) Project appraisal report is not necessary if funds are raised under the long-term maturity window to be utilised for general corporate objectives subject to the limits prescribed at para (ii) above.


12. While DFIs are required to adhere to the average maturity criteria prescribed, namely, minimum of five years for loans more than USD 20 million equivalent and minimum three years for loans less than or equal to USD 20 million quivalent for their borrowing, they are permitted to on-lend at different maturities. They may also on-lend for project-related Rupee expenditure. However, other financial intermediaries are required to adhere to the general ECB guidelines on maturity as well as end-use in their on-lending programmes.

13. All financial intermediaries, including DFIs, are required to on-lend their external commercial borrowings within 12 months of drawdown. 14. To enable better utilisation of ECBs by DFIs, it has been decided that DFIs would be permitted to onlend such Recycled Funds (available with them on account of time mismatch between repayment obligation of their sub-borrowers vis-a-vis those of DFIs to the offshore lenders), out of original ECBs only for import of capital goods and project-related rupee expenditure. Such Recycled Funds may not be onlent for the following purposes :

(i) Investment in Real Estate;

(ii) Investment in Stock markets including secondary market trading;

(iii) Working capital purposes;

(iv) General corporate purposes;


15. (A) External commercial loans are to be utilised for import of capital goods and services (on FOB or CIF basis) and for project reletated expenditure in all sectors subject to following conditions:

(a) ECB raised for project-related rupee expenditure must be brought into the country immediately.

(b) ECB raised for import of capital goods and services should be utilised at the earliest and corporates should strictly comply with RBI’s extant guidelines on parking ECBs outside till actual imports. RBI would be monitoring ECB proceeds parked outside.

(c) ECB raised is not permitted for investment in stock market or in real estate.

(B) Corporate borrowers will be permitted to raise ECB to acquire ships/vessels from Indian shipyards. (C) Under no circumstances, ECB proceeds will be utilised for –

( i) Investment in stock market; and

(ii) Speculation in real estate.


16. Corporate borrowers who have raised ECB for import of capital goods and services through Bonds/FRN/Syndicated loans are permitted to remit funds into India. The funds can be utilised for activities as per their business judgement except investment in stock market or in real estate, for upto one year or till the actual import of capital goods and services takes place, whichever is earlier. In case borrowers decide to deploy the funds abroad till the approved end-use requirement arises, they can do so as per the RBI’s extant guidelines. RBI guidelines would have to be strictly adhered to. RBI would be monitoring ECB proceeds parked outside. Sanction of additional ECB to the Company would be considered only after the Company has certified, that it has fully utilised the amount for the purpose(s) they were raised.


17. All infrastructure and greenfield projects will be permitted to avail ECB to an extent of 35% of the total project cost, as appraised by a recognised Financial Institution/Bank, subject to the fulfillment of other ECB guidelines. However, ECB limits for telecom projects are more flexible and an increase from the present 35% to 50% of the project cost (including the license fee) will be allowed as a matter of course. Greater flexibility may also be allowed in case of power projects and other infrastructure projects based on merits.


18. At present, interest rate limits on ECB for project financing (i.e. to say non-recourse financing) allow interest spreads above LIBOR/US Treasury to be higher than for normal ECB. Keeping market conditions in mind, some flexibility will be permitted in determining the spread on merits. In order to give borrowers greater flexibility in designing a debt strategy, upto 50% of the permissible debt may be allowed in the form of sub-ordinated debt at a higher interest rate, provided the composite spread for senior and sub-ordinated debt taken together comes within the overall project financing limit.


19. In order to enable corporates to hedge exchange rate risks and raise resources domestically, Domestic Rupee Denominated Structured obligations would be permitted to be Credit enhanced by International Banks/International Financial Institutions/Joint Venture Partners subject to following conditions :-

(a) In the event of default, foreign banks giving guarantee will make payment of defaulted amount of principal and interest after bringing in the equivalent amount of foreign exchange into the country.

(b) FERA clearance should be obtained from RBI in advance of issuance.

(c) Prior clearance for rupee bonds/debenture issue from RBI/SEBI should be obtained.

(d) In the event of default, the default should be foreign exchange equivalent amount equal to the principal and interest outstanding calculated in rupee terms.

(e) The liability of Indian company will always be rupee denominated and the debt servicing may be done in equivalent foreign exchange funds.

(f) The guarantee fee/commission/charges and other incidental expenses to the Indian company should be in rupee terms only. All-in-cost on this account should not exceed 3% p.a. in rupee terms.

(g) In case of the proposals relating to sectors where conditions apply clearances e.g. relating to the assignability licenses etc., these should be obtained in advance.

(h) In case of default, the interest rate could be coupon on the Bond/or 250 bps over prevailing secondary market yield of 5-year GOI security, whichever is higher.


20. Apart from the maturity and end-use requirements as per paras above, the financial terms and conditions of each ECB proposal are required to be reasonable and market-related. The choice of the sourcing of ECB currency of the loan, and the interest rate basis (i.e. floating or fixed), will be left to the borrowers.


21. The choice of security to be provided to the lenders/suppliers will also be left to the borrowers. However, where the security is in the form of a guarantee from an Indian Financial Institution or from an Indian Scheduled Commercial Bank, counter-guarantee or confirmation of the guarantee by a Foreign Bank/Foreign Institution will not be permitted.


22. Interest @ payable by an industrial undertaking@ in India, related to external commercial borrowings as approved by GOI/RBI would be eligible for tax exemptions as per Section 10(15)(iv)(b), (d) to (g) of the Income Tax Act, 1961. Exemptions under Section 10(15)(iv)(b), (d) to (g) are granted by Department of Economic Affairs while exemption under Section 10(15)(iv)(c) is granted by Department of Revenue, Ministry of Finance. @ as defined in the Income Tax Act, 1961 amended from time to time.


23. After receiving the approval from ECB Division, Department of Economic Affairs, Ministry of Finance, the applicant is required to obtain approval from the Reserve Bank of India under the Foreign Exchange Regulation Act, 1973, and to submit an executed copy of the Loan Agreement to this Department for taking the same on record, before obtaining the clearance from RBI for drawing the loan. Monitoring of end-use of ECB will continue to be done by RBI.

24. At present, ECB approvals under USD 3 million scheme (enhanced to US 5 million) is given by RBI and all other ECB proposals are processed in DEA. As a measure of further simplification and rationalisation, Government has decided to delegate the ECB sanctioning power to RBI up to USD 10 million under all the ECB schemes except structured obligation which is at present being administered by DEA. Accordingly, applications for approval upto USD 10 million will be considered by the Exchange Control Department of RBI, Mumbai. This change in the ECB guidelines would be effective from 1.1.1999. Accordingly, corporates seeking ECBs utpo USD 10 million may approach RBI after 1.1.1999 and applications received in the ECB Division, Ministry of Finance prior to 1.1.1999 will be processed by Ministry of Finance.


25. While ECB for minimum maturity of three years and above will be sanctioned by Department of Economic Affairs, Ministry of Finance, approvals of short term foreign currency loans with a maturity of less than three years will be sanctioned by RBI, according to RBI guidelines.


26. Approvals are valid for a period of six months, i.e. the executed copy of the loan agreement is required to be submitted within this period. In the case of FRNs, Bonds etc., the same are required to be launched within this period. In case of power projects, the validity of the approval will be for a period of one year and 9 months in the case of telecom sector project . Bonds, Debentures, FRNs and other such instruments will have additional validity period of three months for all the ECB approvals across the board. Extension will not be granted beyond the validity period. However, borrowers are free to submit fresh application, after a gap of one month from the expiry of validity period which will be evaluated in the light of the ECB guidelines applicable at that time. In case of infrastructure projects, however, because financial closure may get delayed for reasons beyond the investor’s control, extension of validity may be considered on merits.


27. a) Prepayment facility would be permitted if they are met out of inflow of foreign equity.

b) In addition to ECB being prepaid out of foreign equity, corporates can avail either of following two options for prepayment of their ECBs:

(i) On permission by the Government, prepayment may be undertaken, within the permitted period, of all ECBs with residual maturity up to one year. OR

(ii) Prepayment upto 10% of outstanding ECB to be permitted once during the life of the loan, subject to the company complying with the ECB approval terms. Those companies who had already availed prepayment facility of 20% earlier would not be eligible.

c) Validity of permission under the above two options will be as under :

(i) Prepayment approval for ECBs other than Bonds/Debentures/FRNs will be 15 days or period up to next interest payment date, whichever is later.

(ii) In case of Bonds/FRNs, validity of permission will not be more than 15 days. Prepayment will be allowed with the prior permission of ECB sanctioning authority i.e. Department of Economic Affairs, Government of India/ECD, RBI.


28. Refinancing of outstanding amounts under existing loans by raising fresh loans at lower costs may also be permitted on a case-to-case basis, subject to the condition that the outstanding maturity of the original loan is maintained. Rolling over of ECB will not be permitted.

29. A corporate borrowing overseas for financing its Rupee-related expenditure and swapping its external commercial borrowings with another corporate which requires foreign currency funds will not be permitted.


30. Corporates can undertake liability management for hedging the interest and/or exchange rate risk on their underlying foreign currency exposure. Prior approval of this Department or RBI has been dispensed with for concluding or winding up of the following transactions:

(i) Interest rate swaps

(ii) Currency swaps

(iii) Coupon swaps

(iv) Purchase of interest rate caps/collars

(v) Forward rate agreements Corporates may refer to RBI’s Circular No. A.D.(M.A. Series) Circular No. 12 dated August 5, 1996 (Annex.I).


31. Applications for approval up to USD 10 million will be considered by the Exchange Control Department of RBI, Mumbai, w.e.f. 01/ 01/ 1999

32. Applications for amount more than USD 10 million and under structured obligation may be submitted by the borrowers in the prescribed format (Annex. II) to the Joint Secretary (ECB), Department of Economic Affairs, Ministry of Finance, North Block, New Delhi-110 001.

33. The application should contain the following information:

i) An offer letter from the lender giving the detailed terms and conditions;

ii) Copy of Project Appraisal Report from a recognised Financial Institution/Bank, if applicable;

iii) Copies of relevant documents and approvals from Central/State Governments, wherever applicable, such as FIPB, CCEA and SIA clearances, environmental clearance, techno-economic clearance from Central Electricity Authority, valid licenses from Competent Authorities, no objection certificate from Ministry of Surface Transport, evidence of exports/foreign exchange earnings from the statutory auditor based on the bankers realisation certificate, registration with RBI in case of NBFCs, approval for overseas investment from RBI etc.


34. The ECB guidelines and procedures will be periodically reviewed by the Government in the light of prudent management of external debt, changing market conditions, sectoral requirements etc.

35. The ECB policy and procedures outlined above is operative from 1st April, 1999.

36. Guidelines are available at web site http://www.nic.in/finmin

Annexure- I




MUMBAI- 400 001

A.D. (M.A. Series) Circular No. 12 August 5, 1996

To All Authorised Dealers in Foreign Exchange

Dear Sirs,

Hedging of Loan Exposures

1. As authorised dealers are aware, presently Indian corporates are required to obtain approval on a case-to-case basis from the Ministry of Finance, Government of India, before concluding of unwinding transactions relating to liability management.

2. It has since been decided to permit authorised dealers to offer the undernoted products to corporates either by booking the transaction overseas or on a back-to-back basis, without prior approval of the Government or Reserve Bank.

(i) Interest rate swaps

(ii) Currency swaps

(iii) Coupon swaps

(iv) Purchase of Interest rate caps/ collars

(v) Forward Rate Agreements

3. Before entertaining the corporate’s request, authorised dealers should ensure that –

( i) the Reserve Bank has accorded final approval for the conclusion of the underlined loan transaction.

(ii) the notional principal amount of the hedge does not exceed the outstanding amount of the foreign currency loan.

(iii) the maturity of the hedge does not exceed the remaining life to maturity of the underlying loan.

(iv) the Board of Directors of the corporate has approved (one-time) the financial limits and authorised designated officials to conclude the hedge transactions.

4. Corporates shall also be permitted to unwind from a hedge transaction without prior approval of the Government/ Reserve Bank.

5. Authorised dealers should also ensure that the corporates submit the following reports/certificate:

(a) A report showing complete details of the transactions concluded (booked as well as cancelled) duly countersigned by the authorised dealer to the Regional office of the Reserve Bank under whose jurisdiction they are situated, within a week from the date of conclusion of the transaction.

(b) A quarterly report to the corporate’s Board, furnishing details of all such transactions and a copy thereof alongwith Board’s resolution.

(c) An annual certificate from the statutory auditors that the company has complied with all the prescribed terms and conditions.

6. Payment of upfront premia, if any, as well as all other charges incidental to the hedging transactions may be affected by authorised dealers without prior approval of Reserve Bank.

7. Authorised dealers should ensure that the hedge transactions are allowed to be put through solely for the purpose of liability management and on no account should ‘stand alone’ deals be permitted.

8. Consequently; a new paragraph 3C, 14 may be added as per slip in Part C of Chapter 3 of the Exchange Control Manual (1993 edition) and a suitable entry may be made in Index thereto.

9. The directions contained in this circular have been issued under Section 73(3) of the Foreign Exchange Regulation Act, 1973 (46 of 1973) and any contravention or non-observance thereof is subject to the penalties prescribed under the Act.

Chief General Manager

Ozg Fundraising Consultant


Ozg Fundraising TV


Email: funding.consultant@ozg.co.in


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