External Commercial Borrowings
External Commercial Borrowings is also known as ECB. They are commercial loans which are provided by foreign institutional investors. These loans carry a lower rate of interest in comparison to the interest rates which are offered by commercial banks in India. Therefore companies and Public Sector Undertakings (PSU) prefer opting for ECB.
As these borrowings can be used only for a specific commercial purpose, there is an End-use requirement. This means that the ECB borrowed can be used only for the purpose mentioned in the End-use. Therefore it is essential to consider the business needs and long term goals of the organisation before opting for ECBs. Hence the user must follow the rules related to ECB compliance. Non-Compliance with the provisions of ECB will attract a penalty
Benefits of ECB Compliance
Rules Compliance
ECB compliance is required for all forms of borrowers that carry out activities. Such activities which would be carried out by borrowers should be according to ECB compliance requirements.
Specified Borrowings
Borrowers can utilize these forms of ECB loans to carry out work related specified commercial activities.
Low Interest Rates
Interest rates which are offered by foreign institutions are less when compared to other public sector undertakings.
End- Use Specified
Another benefit of utilizing the ECB is to fulfill the end use requirement of the borrower. Hence the borrower would only be allowed to utilize ECB for carrying out the work which is stated in the particular proposal
Routes for ECB
Automatic Route
In the Automatic Route, borrowers don’t need prior Reserve Bank of India (RBI) approval; they can proceed if they meet all the regulations and their request is examined by an Authorised Dealer (AD) Category-I bank.
Process: The borrower gets the ECB from an eligible source, and the case is examined by an AD Category-I bank.
Approval: No prior RBI approval is needed.
Eligibility: Specific corporates (including hotels, hospitals, and software companies), SEZ units, and NGOs in microfinance are eligible, among others.
Example: Raising an ECB for an eligible purpose without needing specific RBI permission beforehand.
Approval Route
Under the Approval Route, borrowers must apply to the RBI for prior approval through their AD Category-I bank.
Process: The borrower must submit a request to the RBI through their AD Category-I bank for examination.
Approval: Prior approval from the RBI is required before borrowing.
Eligibility: This route is for cases that do not meet the parameters of the automatic route, such as those with different end-uses or borrower eligibility.
Example: A company that is not eligible under the automatic route would need to seek approval from the RBI before borrowing.
Common Procedures Under Both Routes
Loan Registration Number (LRN): Before drawing down any funds, the borrower must obtain an LRN from the RBI.
Form ECB: The borrower submits a duly certified Form ECB to their AD Category-I bank, which then forwards it to the RBI to get the LRN.
Reporting: After the borrowing is finalized, a monthly ECB2 Return must be submitted to the RBI through the AD Category-I bank
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