External commercial borrowings(ECB) imply borrowing (debt) from a foreign (non-resident) lender. ECB is an attractive financing route as it generally offers access to finance with low rate of interest available from overseas low interest markets.
ECBs have been in use by many corporations, PSUS and especially by MNCs setting up operations in India. Who can raise an ECB, from where and under what conditions, rate, maturity period etc. are all governed by Reserve Bank of India (RBI) in India. Startups till now did not have access to the ECB route of funding.
Announcement was made by the Reserve Bank in the Fourth Bi-monthly Monetary Policy Statement for the year 2016-17 released on October 04, 2016, for permitting Startup enterprises to access loans under ECB framework.
Sanjay Khan Nagra, iSPIRT volunteer talks about this announcement in the video embedded. Below.
As such RBI circular is self-explanatory attached here. However, for ready reference, some salient features of the RBI announcement are covered in the text given below.
The above circular covers Startups as defined by the Official Gazette of Government of India dated February 18, 2016 (i.e. Startup Policy of DIPP) given here.
A startup can borrow up to US$ 3 million or equivalent per financial year either in Indian rupee or any convertible foreign currency or a combination of both. In case of borrowing in INR, the non-resident lender, should mobilise INR through swaps/outright sale undertaken through an AD Category-I bank in India.
Minimum average maturity period will be 3 years.
Usually there are end-use direction for an ECB. However, for startups under the above said circular of RBI, ECB can be used for any expenditure in connection with the business of the Startup.
There are no limits. The RBI circular says, this shall be mutually agreed between the borrower and the lender
It can be in the form of loans or non-convertible, optionally convertible or partially convertible preference shares and the minimum average maturity period will be 3 years.
Yes, conversion into equity is freely permitted, subject to Regulations applicable for foreign investment in Startups.
Previously, ECB regime inter alia set out various conditions for Indian companies raising loan from external borrowings including conditions relating to (i) eligible borrowers (ii) eligible lenders (iii) permitted end uses etc.
After this circular, the lender / investor shall be a resident of a country who is either a member of Financial Action Task Force (FATF) or a member of a FATF-Style Regional Bodies; and shall not be from a country identified in the public statement of the FATF. (Please see RBI Circular for detail)
However, overseas branches and subsidiaries of Indian banks and overseas wholly-owned subsidiary or joint venture of an Indian company will not be considered as recognized lenders.
Foreign lenders or Investors are allowed to request security for any collateral in the nature of movable, immovable, intangible assets (including patents, IP rights etc.) but shall comply with foreign direct investment norms applicable for foreign lenders holding such securities.
Issuance of corporate or personal guarantee is allowed. Guarantee issued by non-resident(s) is allowed only if such parties qualify as lender under paragraph 2(c) above. Exclusion: Issuance of guarantee, standby letter of credit, letter of undertaking or letter of comfort by Indian banks, all India Financial Institutions and NBFCs is not permitted.
For more details you are requested to refer the RBI circular here.