LOAN TO EQUITY-NON RESIDENT PERSPECTIVE
External Commercial Borrowings (ECB) refer to “commercial loans” in the form of
1. bank loans,
2. buyers’ credit,
3. suppliers’ credit,
4. securitized instruments (e.g. floating rate notes and fixed rate bonds, non-convertible,
5. optionally convertible or partially convertible preference shares)
availed of from non-resident lenders with a minimum average maturity of 3 years.
CONVERSION OF ECB INTO EQUITY(i) Conversion of ECB into equity is permitted subject to the following conditions:
a. The activity of the company is covered under the Automatic Route for Foreign Direct Investment or Government (FIPB) approval for foreign equity participation has been obtained by the company, wherever applicable.
b. The foreign equity holding after such conversion of debt into equity is within the sectoral cap, if any,
c. Pricing of shares is as per the pricing guidelines issued under FEMA, 1999 in the case of listed/ unlisted companies.
(ii) Conversion of ECB may be reported to the Reserve Bank as follows:a. Borrowers are required to report full conversion of outstanding ECB into equity in the form FC-GPR to the Regional Office concerned of the Reserve Bank as well as in form ECB-2 submitted to the DSIM, RBI within seven working days from the close of month to which it relates. The words "ECB wholly converted to equity" should be clearly indicated on top of the ECB-2 form. Once reported, filing of ECB-2 in the subsequent months is not necessary.
b. In case of partial conversion of outstanding ECB into equity, borrowers are required to report the converted portion in form FC-GPR to the Regional Office concerned as well as in form ECB-2 clearly differentiating the converted portion from the unconverted portion. The words "ECB partially converted to equity" should be indicated on top of the ECB-2 form. In subsequent months, the outstanding portion of ECB should be reported in ECB-2 form to DSIM.
(A) AUTOMATIC ROUTE
The following types of proposals for ECBs are covered under the Automatic Route.
i) Eligible Borrowers
(a) Corporates, including those in the hotel, hospital, software sectors (registered under the Companies Act, 1956) and Infrastructure Finance Companies (IFCs) except financial intermediaries, such as banks, financial institutions (FIs), Housing Finance Companies (HFCs) and Non-Banking Financial Companies (NBFCs) are eligible to raise ECB. Individuals, Trusts and Non-Profit making organizations are not eligible to raise ECB.
(b) Units in Special Economic Zones (SEZ) are allowed to raise ECB for their own requirement. However, they cannot transfer or on-lend ECB funds to sister concerns or any unit in the Domestic Tariff Area. ECB by units in SEZ are also governed by the Press Release F.No.4 (2) / 2002-ECB dated September 15, 2002 issued by Government of India, Ministry of Finance (MOF).
(c) Non-Government Organizations (NGOs) engaged in micro finance activities are eligible to avail of ECB. Such NGOs (i) should have a satisfactory borrowing relationship for at least 3 years with a scheduled commercial bank authorized to deal in foreign exchange in India and (ii) would require a certificate of due diligence on `fit and proper’ status of the Board/ Committee of management of the borrowing entity from the designated AD bank.
ii) Recognised Lenders
Borrowers can raise ECB from internationally recognized sources such as (i) international banks, (ii) international capital markets, (iii) multilateral financial institutions (such as IFC, ADB, CDC, etc.) / regional financial institutions and Government owned development financial institutions, (iv) export credit agencies, (v) suppliers of equipments, (vi) foreign collaborators and (vii) foreign equity holders (other than erstwhile Overseas Corporate Bodies (OCBs)).
A "foreign equity holder" to be eligible as “recognized lender” under the automatic route would require minimum holding of paid-up equity in the borrower company as set out below:
For ECB up to USD 5 million - minimum paid-up equity of 25 per cent held directly by the lender,
For ECB more than USD 5 million - minimum paid-up equity of 25 per cent held directly by the lender and debt-equity ratio not exceeding 4:1 (i.e. the proposed ECB not exceeding four times the direct foreign equity holding)
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