Brief Introduction to Corporate Funding

Corporates need funding for carrying out their manufacturing activities and the funding requirements can be broadly categorized into funds for Operating Expenditure and for Capital Expenditure. In today’s world, corporates have many sources of raising funds for meeting both. The sources can be grouped under:

• Equity Capital
• Debt Funds
• Retained Earning

Other sources of funding include raising funds through private equity and venture capital. 

Every Corporate aim at sourcing the fund at a least cost to keep the total financial costs in control, as the financial costs are part of indirect costs and do not contribute directly to the manufacturing of the goods. In addition to the facility of raising funds from Banks/FIs in Indian Rupees, allowing corporates to raise funds from foreign institutional lenders and suppliers, in foreign currency is another method to tap the foreign funds and reducing the cost of funds. In India, Reserve Bank of India (RBI), progressively introducing the regulations to liberalise the foreign borrowings and at the same time keeping control over the risk of external borrowings through excessive borrowings.

RBI has introduced products to enable the corporates involved in export & import business avail funding at a concessional-rates and making the fund raising through an easy process. Enabling the exporters to raise funds at cheaper rates will bring down the total cost of manufacturing and they will be able to compete on the price front in other international markets. At the same time, RBI is permitting the importers to explore the alternate sources of raising funds to meet their operating & capital costs with the objective of keeping the financial costs at control.

External Sources of Funding

Under RBI regulations, Importers can raise funds through external sources for both short-term for meeting their operating expenses and long-term for capital intensive investments through the intervention of Authorised Dealer Banks. Within India, banks also do have a product ‘Foreign Currency Loans’ extended in major currencies in the form of Demand Loan and Term Loan. The Scheme is subject to RBI regulations and each bank’s internal lending policies. Banks extend such type of loans in foreign currency from their FCNRB Deposit portfolio or through FCL Line of Credit. Transactions under Foreign Currency Borrowings and Lending are governed by: 

Foreign Exchange Management (Borrowing and Lending) Regulations, 2018, notified vide Notification No. FEMA 3R/2018-RB dated December 17, 2018, as amended from time to time; and 

Foreign Exchange Management (Guarantees) Regulations, 2000, notified vide Notification No. FEMA 8/2000-RB dated May 03, 2000, as amended from time to time. 

Within the contours of the Regulations, Reserve Bank of India also issues directions to Authorised Persons under Section 11 of the Foreign Exchange Management Act (FEMA), 1999. These directions lay down the modalities as to how the foreign exchange business must be conducted by the Authorised Persons with their customers/constituents with a view to implementing the regulations framed.

Apart from FCNRB Loans, two other funding products available for importers are:

• Trade Credits
• External Commercial Borrowings

PART 1

Trade Credits

Trade Credits (TC) refer to the credits extended by the overseas supplier, bank, financial institution, and other permitted recognised lenders for maturity, as prescribed in RBI Trade Credit & ECB framework, for imports of capital/non-capital goods permissible under the Foreign Trade Policy of the Government of India. Depending on the source of finance, such TCs include suppliers’ credit and buyers’ credit from recognised lenders. 

Trade Credit (TC) Framework

TC for imports into India can be raised in any freely convertible foreign currency (FCY denominated TC) or Indian Rupee (INR denominated TC), as per the framework given in the table below:

Security for Trade Credit

The provisions regarding security for raising TC are as under: 

Guarantees may be given by the ADs, on behalf of the importer, in favour of overseas lender of TC not exceeding the amount of TC. Period of such guarantee cannot be beyond the maximum permissible period for TC. 

TC may also be secured by overseas guarantee issued by foreign banks/overseas branches of Indian banks. Issuance of such guarantees i.e. guarantees by Indian banks and their branches/subsidiaries located outside India will be subject to compliance with the provisions contained in Department of Banking Regulation Master Circular No.DBR.No.Dir.BC.11/13.03.00/2015-16 dated July 1, 2015 on “Guarantees and Co-acceptances” as amended from time to time.

For the purpose of raising TC, the importer may also offer security of movable assets (including financial assets) / immovable assets (excluding land in SEZs) / corporate or personal guarantee for raising trade credit. ADs may permit creation of charge on security offered /accept corporate or personal guarantee duly ensuring that:

• There exists a security clause in the loan agreement requiring the importer to create charge in favour of overseas lender/security trustee on immoveable assets/moveable assets/financial securities/issuance of corporate and/or personal guarantee.
• NoC, wherever necessary, from the existing lenders in India has been obtained
• Such arrangement is co-terminus with underlying TC
• In case of invocation, the total payments towards guarantee should not exceed the dues towards trade credit and
• Creation/enforcement/invocation of charge shall be as per the provisions contained in Foreign Exchange Management (Acquisition and Transfer of Immoveable Property in India) Regulations. 2018 and Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 as amended from time to time or any other relative regulations under FEMA, 1999 and should also comply with FDI/FII/SEZ policy/rules/guidelines.

Trade Credit – Reporting Requirements

Monthly reporting

AD Category I banks are required to furnish details of TCs like drawal, utilisation, and repayment of TC approved by all its branches, in a consolidated statement, during a month, in Form TC to the Director, Division of International Trade and Finance, Department of Economic Policy and Research, RBI, Central Office, Fort, Mumbai – 400 001 (and in MS-Excel file through email) so as to reach not later than 10th of the following month. 

Each TC may be given a unique identification number by the AD bank. Format of Form TC is available at Annex IV of Part V of Master Directions – Reporting under Foreign Exchange Management Act dated January 1, 2016, as amended from time to time. 

Note: Suppliers’ credit beyond 180 days and up to one year/three years from the date of shipment for non-capital/capital goods respectively, should also be reported by the AD banks. Further, permissions granted by the AD banks/Regional offices of Reserve Bank for settlement of delayed import dues in terms of paragraphs B.5 and C.2 of the Master Direction on Import of Goods and Services dated January 1, 2016, as amended from time to time, should also be reported by the AD banks as per the aforesaid procedure. 

Quarterly reporting

AD Category I banks are also required to furnish data on issuance of bank guarantees for TCs by all its branches, in a consolidated statement, at quarterly intervals on the XBRL platform. For the above purpose AD banks may login to the site https://secweb.rbi.org.in/orfsxbrl/ using their Username, Password and Bank code. For downloading the relevant form, AD banks may follow the link ‘Download Returns Package’ and download the form. After following the successive steps, AD banks may upload the file. For Username and Password, AD banks may write at fedcoecbd@rbi.org.in along with contact details. Clarification required, if any, may also be sent to the aforesaid email of the Reserve Bank and/ or may be communicated at Telephone No. 022-22601000 (extension- 2715). Guide for using XBRL website is also available under the Help option on the same page. Format of this statement is also available at Annex V of Part V of Master Directions – Reporting under Foreign Exchange Management Act dated January 1, 2016, as amended from time to time.

Role of ADs 

While the primarily responsibility of ensuring adherence to the TC policy lies with the importer, the ADs are also expected to ensure compliance with applicable parameters of the trade credit policy / provisions of Foreign Exchange Management Act, 1999 by their constituents. As the Reserve Bank has not prescribed any format or manner in which TC arrangements / loan agreements are to be documented, ADs may consider any document to satisfy themselves with the underlying TC arrangement. ADs should ensure that there is no double financing on account of these transactions between a unit or a developer in a SEZ including FTWZ for purchase of non-capital and capital goods within an SEZ including FTWZ or from a different SEZ including FTWZ. ADs should also ensure that for import of non-capital goods, the period of TC, as applicable, is lower of operating cycle or one year (three years for shipyards / shipbuilders).

PART 2

External Commercial Borrowings (ECB)

External Commercial Borrowings are commercial loans raised by eligible resident entities from recognised non-resident entities and should conform to parameters such as minimum maturity, permitted and non-permitted end-uses, maximum all-in-cost ceiling, etc. The parameters given below apply in totality and not on a standalone basis.

ECB Framework

Limit and leverage

Under the aforesaid framework, all eligible borrowers can raise ECB up to USD 750 million or equivalent per financial year under the automatic route. Further, in case of FCY denominated ECB raised from direct foreign equity holder, ECB liability-equity ratio for ECB raised under the automatic route cannot exceed 7:1. However, this ratio will not be applicable if the outstanding amount of all ECB, including the proposed one, is up to USD 5 million or its equivalent. Further, the borrowing entities will also be governed by the guidelines on debt equity ratio, issued, if any, by the sectoral or prudential regulator concerned. 

Issuance of Guarantee, etc. by Indian banks and Financial Institutions

Issuance of any type of guarantee by Indian banks, All India Financial Institutions and NBFCs relating to ECB is not permitted. Further, financial intermediaries (viz., Indian banks, All India Financial Institutions, or NBFCs) shall not invest in FCCBs/ FCEBs in any manner whatsoever. 

Parking of ECB proceeds

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 foreign 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 cumulatively. These term deposits should be kept in unencumbered position. 

4To provide relief to ECB borrowers affected by the COVID- 19 pandemic, as a one time measure, with effect from April 07, 2021, unutilised ECB proceeds drawn down on or before March 01, 2020 can be parked in term deposits with AD Category-I banks in India prospectively, for an additional period up to March 01, 2022. 

Procedure of raising ECB

All ECB can be raised under the automatic route if they conform to the parameters prescribed under this framework. For approval route cases, the borrowers may approach the RBI with an application in prescribed format (Form ECB) for examination through their AD Category I bank. Such cases shall be considered keeping in view the overall guidelines, macroeconomic situation and merits of the specific proposals. ECB proposals received in the Reserve Bank above certain threshold limit (refixed from time to time) would be placed before the Empowered Committee set up by the Reserve Bank. The Empowered Committee will have external as well as internal members and the Reserve Bank will take a final decision in the cases taking into account recommendation of the Empowered Committee. Entities desirous to raise ECB under the automatic route may approach an AD Category I bank with their proposal along with duly filled in Form ECB. 

Reporting Requirements

Borrowings under ECB Framework are subject to following reporting requirements apart from any other specific reporting required under the framework: 

Loan Registration Number (LRN)

Any draw-down in respect of an ECB should happen only after obtaining the LRN from the Reserve Bank. To obtain the LRN, borrowers are required to submit duly certified Form ECB, 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, Reserve Bank of India, Department of Statistics and Information Management, External Commercial Borrowings Division, 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

Changes in ECB parameters in consonance with the ECB norms, including reduced repayment by mutual agreement between the lender and borrower, should be reported to the DSIM through revised Form ECB at the earliest, in any case not later than 7 days from the changes effected. While submitting revised Form ECB the changes should be specifically mentioned in the communication. 

Monthly Reporting of actual transactions

The borrowers are required to report actual ECB transactions through Form 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 Form ECB 2 Return. 

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 detailed in the following matrix:

The borrower, through its AD bank, may pay the LSF by way of demand draft in favour of “Reserve Bank of India” or any other mode specified by the Reserve Bank. Such payment should be accompanied with the requisite return(s). Form ECB and Form ECB 2 returns reporting contraventions will be treated separately. Non-payment of LSF will be treated as contravention of reporting provision and shall be subject to compounding or adjudication as provided in FEMA 1999 or regulations/rules framed thereunder. 

Standard Operating Procedure (SOP) for Untraceable Entities

The following SOP has to be followed by designated AD Category-I banks in case of untraceable entities who are found to be in contravention of reporting provisions for ECB by failing to submit prescribed return(s) under the ECB framework, either physically or electronically, for past eight quarters or more. 

Definition of Untraceable Entity

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: 

1. 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 authorised by the AD bank for the purpose
2.  Entities have not submitted Statutory Auditor’s Certificate for last two years or more

Action

The followings actions are to be undertaken in respect of ‘untraceable entities:

1. 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
2.  No fresh ECB application by the entity should be examined/processed by the AD bank
3. Directorate of Enforcement should be informed whenever any entity is designated ‘UNTRACEABLE ENTITY’; and 
4.  No inward remittance or debt servicing will be permitted under auto route. 

Powers delegated to AD Category I banks to deal with ECB cases

The designated AD Category I banks can approve any requests from the borrowers for changes in respect of ECB, except for FCCBs/FCEBs, duly ensuring that the changed conditions, including change in name of borrower/lender, transfer of ECB and any other parameters, comply with extant ECB norms and are with the consent of lender(s). Further, the following can also be undertaken under the automatic route

Change of the AD Category I bank: AD Category I bank can be changed subject to obtaining no objection certificate from the existing AD Category I bank. 

Cancellation of LRN: The designated AD Category I banks may directly approach DSIM for cancellation of LRN for ECB contracted, subject to ensuring that no draw down against the said LRN has taken place and the monthly ECB-2 returns till date in respect of the allotted LRN have been submitted to DSIM. 

Refinancing of existing ECB: Refinancing of existing ECB by fresh ECB provided the outstanding maturity of the original borrowing (weighted outstanding maturity in case of multiple borrowings) is not reduced and all-in-cost of fresh ECB is lower than the all-in-cost (weighted average cost in case of multiple borrowings) of existing ECB. Further, refinancing of ECB raised under the previous ECB frameworks may also be permitted, subject to additionally ensuring that the borrower is eligible to raise ECB under the extant framework. Raising of fresh ECB to part refinance the existing ECB is also permitted subject to same conditions. Indian banks are permitted to participate in refinancing of existing ECB, only for highly rated corporates (AAA) and for Maharatna/Navratna public sector undertakings. 

Conversion of ECB into equity: Conversion of ECB, including those which are matured but unpaid, into equity is permitted subject to the following conditions: 

1. The activity of the borrowing company is covered under the automatic route for FDI or Government approval is received, wherever applicable, for foreign equity participation as per extant FDI policy. 
2. The conversion, which should be with the lender’s consent and without any additional cost, should not result in contravention of eligibility and breach of applicable sector cap on the foreign equity holding under FDI policy
3. Applicable pricing guidelines for shares are complied with.
4. In case of partial or full conversion of ECB into equity, the reporting to the Reserve Bank will be as under:

• • For partial conversion, the converted portion is to be reported   FC-GPR prescribed for reporting of FDI flows, while monthly reporting to DSIM in Form ECB 2Return will be with suitable remarks, viz., "ECB partially converted to equity".
  • For full conversion, the entire portion is to be reported in Form FC-GPR, while reporting to DSIM in Form ECB 2 Return should be done with remarks “ECB fully converted to equity”. Subsequent filing of Form ECB 2 Return is not required.
  • For conversion of ECB into equity in phases, reporting through Form FC-GPR and Form ECB 2 Return will also be in phases.
  • If the borrower concerned has availed of other credit facilities from the Indian banking system, including foreign branches/subsidiaries of Indian banks, the applicable prudential guidelines issued by the Department of Banking Regulation of Reserve Bank, including guidelines on restructuring are complied with;
  • Consent of other lenders, if any, to the same borrower is available or atleast information regarding conversions is exchanged with other lenders of the borrower.
  • For conversion of ECB dues into equity, the exchange rate prevailing on the date of the agreement between the parties concerned for such conversion or any lesser rate can be applied with a mutual agreement with the ECB lender. It may be noted that the fair value of the equity shares to be issued shall be worked out with reference to the date of conversion only. 

Security for raising ECB

AD Category I banks are permitted to allow creation/cancellation of charge on immovable assets, movable assets, financial securities and issue of corporate and/or personal guarantees in favour of overseas lender / security trustee, to secure the ECB to be raised/ raised by the borrower, subject to satisfying themselves that: