External Commercial Borrowings
Indian companies are under heavy restrictions when borrowing funds from foreign lenders, e.g. from their foreign shareholders. Such loans are subject to guidelines on External Commercial Borrowings ("ECB"). Restrictions include caps on maximum interest and minimum average maturity. The most severe restriction however is a limitation of the permissible end-use. This restriction has now partly been lifted. ECBs i.a. refer to commercial loans in the form of bank loans, buyers' credit, suppliers' credit and shareholder's loans availed by an Indian borrower of from non-resident lenders. ECBs must have a minimum average maturity of at least 3 years.Under the Automatic Route, the Indian company can apply with its local Indian bank for a permission to avail an ECB if certain parameters (interest rate / maturity) are met. If the parameters are met, the necessary loan registration number will be issued within a few weeks.
Under the Approval Route, the Indian company has to ask the RBI for a specific permission to avail an ECB especially if certain parameters are proposed to be exceeded. The RBI will review the application in detail and it usually takes some months before a decision is rendered.
The permissible end-use of ECBs is strictly limited under both, the Automatic Route and the Approval Route. Until now, ECBs could basically only be availed for financing investments, i.e. purchase of capital assets like machinery. It was especially not allowed to take up an ECB for "general corporate purposes", "working capital" and "repayment of existing INR loans". This has now changed. As per the new RBI circular, Government permits Indian companies to take up ECBs under the Approval Route from their foreign equity holders to finance "general corporate purposes".