During November 2003, Government of India/RBI made the policy with reference to ECBs more liberal and permitted shot term borrowings for less than 3 years. With a view to replace temporary measures announced on November 14, 2003 with more transparent and simplified policies and procedures, a review of the ECB guidelines was undertaken by RBI. This review is based on the current macro-economic situation, challenges faced in external sector management and the experience gained so far in administering ECB policy.

Vide A.P.(DIR Series) Circular No.60 dated January 31, 2004, addressed to All Authorised Dealers in Foreign Exchange RBI has pointed out as under:-

ECB are a key component of India's overall external debt which includes, inter alia, external assistance, buyers' credit, suppliers' credit, NRI deposits, short-term credit and Rupee debt. ECB guidelines, therefore, need to be assessed in the backdrop of various external debt sustainability indicators relevant to emerging economies in order to explore the head-room available for more external debt. An analysis of various indicators of external debt (e.g. short-term debt, debt to GDP ratio, debt servicing ratio, vis-à-vis the proportion of debt to non-debt capital flows) indicates that there is some head-room for increase in the magnitude of debt especially for real investment activity. As a part of overall management of the external sector, there is a case for putting in place a liberalised ECB policy provided there is no bunching of residual maturity of ECB in any particular year and the option of restricting the capital flows in future, if need be, is kept open.

ECB refer to commercial loans, [in the form of bank loans, buyers' credit, suppliers' credit, securitised instruments (e.g. floating rate notes and fixed rate bonds)] availed from non-resident lenders with minimum average maturity of 3 years. Until November 14, 2003, any legal entity such as a corporate /financial intermediary was an eligible borrower. In view of its implication for potential systemic risks, ECB availed by financial intermediaries need to be distinguished from those availed by corporates. Furthermore, banks have the facility (i) to borrow from its head office or branch or correspondents outside India up to 25 per cent of its unimpaired Tier-I Capital or US$ 10 million, whichever is higher, (ii) to borrow from its head office or branch or correspondents outside India without limit for the purpose of replenishing Rupee resources (not for investment in call money or other markets) and (iii) to avail lines of credit from a bank / financial institution outside India without any limit for the purpose of granting pre-shipment / post-shipment credit to its constituents.

Accordingly RBI revised ECB guidelines are set out below. ECB can be accessed under two routes, viz.,

1. Automatic Route outlined in paragraph 2(A) of the circular and

2. Approval Route indicated in paragraph 2(B).

ECB for investment in real sector -industrial sector, especially infrastructure sector-in India, will be under Automatic Route, i.e. will not require RBI/Government approval. In case of doubt as regards eligibility to access Automatic Route, applicants may take recourse to the Approval Route.

Eligible borrowers:
Corporates registered under the Companies Act except financial intermediaries (such as banks, financial institutions (FIs), housing finance companies and NBFCs) are eligible.

Recognised Lenders:
Borrowers can raise ECB from internationally recognised sources such as-

1. international banks, international capital markets, multilateral financial institutions (such as IFC, ADB, CDC etc.,),

2. export credit agencies and

3. suppliers of equipment, foreign collaborators and foreign equity holders.

Amount and Maturity:

• ECB up to USD 20 million or equivalent with minimum average maturity of three years.

• ECB above USD 20 million and up to USD 500 million or equivalent with minimum average maturity of five years

• ECB up to USD 20 million can have call/put option provided the minimum average maturity of 3 years is complied before exercising call/put option.

All-in-cost ceilings:

• All-in-cost includes rate of interest, other fees and expenses in foreign currency except commitment fee, pre-payment fee, and fees payable in Indian Rupees. Moreover, the payment of withholding tax in Indian Rupees is excluded for calculating the all-in-cost.

• The all-in-cost ceilings for ECB will be indicated from time to time. The following ceilings will have immediate effect and will be valid till reviewed.

Minimum Average Maturity Period:

• All-in-cost Ceilings over six month LIBOR*

• Three years and up to five years: 200 basis points

• More than five years: 350 basis points

* for the respective currency of borrowing or applicable benchmark.

End-use:

1. ECB can be raised only for investment (such as import of capital goods, new projects, modernization/expansion of existing production units) in real sector - industrial sector including small and medium enterprises (SME) and infrastructure sector - in India. Infrastructure sector is defined as-

   • power,

   • telecommunication,

   • railways,

   • road including bridges,

   • ports,

   • industrial parks and

   • urban infrastructure (water supply, sanitation and sewage projects);

2. Utilisation of ECB proceeds is permitted in the first stage acquisition of shares in the disinvestment process and also in the mandatory second stage offer to the public under the Government's disinvestment programme of PSU shares.

3. Utilisation of ECB proceeds is not permitted for on-lending or investment in capital market by corporates

4. Utilisation of ECB proceeds is not permitted in real estate. The term 'real estate' excludes development of integrated township as defined by Ministry of Commerce and Industry, Department of Industrial Policy and Promotion, SIA (FC Division), Press Note 3 (2002 Series, dated 04.01.2002).

Guarantees:
Guarantee/standby letter of credit or letter of comfort by banks, financial institutions and NBFCs relating to ECB is not permitted.

Security:
The choice of security to be provided to the lender/supplier is left to the borrower. However, creation of charge over immovable assets and financial securities, such as shares, in favour of overseas lender is subject to Regulation 8 of Notification No. FEMA 21/RB-2000 dated May 3, 2000 and Regulation 3 of Notification No. FEMA 20/RB-2000, dated May 3, 2000, respectively.

Parking of ECB proceeds overseas:
ECB proceeds should be parked overseas until actual requirement in India.

Prepayment:
Prepayment of ECB up to USD 100 million is permitted without prior approval of RBI, subject to compliance with the stipulated minimum average maturity period as applicable for the loan.

Refinance of existing ECB:
Refinancing of existing ECB by raising fresh loans at lower cost is permitted subject to the condition that the outstanding maturity of the original loan is maintained.

Debt Servicing:
The designated Authorised Dealer (AD) has the general permission to make remittances of instalments of principal, interest and other charges in conformity with ECB guidelines issued by Government / RBI from time to time.

Procedure:
Borrower may enter into loan agreement with recognised overseas lender for raising ECB under Automatic Route without prior approval of RBI. The borrower may note to comply with the reporting arrangement under paragraph 2(C)(i). The primary responsibility to ensure that ECB raised / utilised are in conformity with the ECB guidelines and the Reserve Bank regulations/directions/circulars is that of the concerned borrower.