External Commercial Borrowings (ECB) Facility for Startups
Written by Himanshu Gupta & Prabhat Dubey Dt. April 27th, 2020
Amid looming financial crisis owing to the Covid-19 outbreak and lockdown in the country, the Government of India has been trying its level best to tackle issues relating to financial services, health care facilities, food supplies or others.
Lately, Government of India provided yet another notification but this time in respect on an amendment in FDI policy stating :-
“An entity of a country, which shares land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, can invest only under the Government route.”
Government stated that the amendment was made for curbing opportunistic takeover/acquisition of Indian Companies due to the current COVID-19 pandemic and hard hit economic condition of the country. Earlier this month, Shareholding disclosures for March quarter of HDFC Bank stated that China’s central bank has bought 1.01 per cent stake in HDFC by acquiring 1.75 crore shares of India’s biggest housing mortgage lender (since Companies need to disclose shareholding changes if Investor’s stake crosses 1 percent. Though whether all 1.75 crore shares were bought between January to March is still to be known.)
Further, Government routes should not be misinterpreted as any step taken to control FDI from neighboring Countries, but to monitor the Investments. Though, Government route shall involve little more clerical procedures making the Investments a little more time barred and less flexible, thus making it difficult for entities such as Startups which were largely funded by China to get financed on a timely basis.
Conversely, prevailing circumstances demand for Investment of fresh funds to combat the financial impact of the pandemic. ECB serves as an alternate for seeking Investment. Herein are the procedural and reporting requirements for raising ECB’s by Startups:-
- Only Authorised category-l banks are permitted to allow startups to raise ECB under Automatic route
- Only Central Government recognized startups shall be eligible for such provision.
- Minimum Average Maturity period for such ECB’s shall be the same as the average of 3 years.
- Lenders/investors should necessarily be residents of FATF (Foreign Action Task Force) compliant countries. (However foreign branch and subsidiaries of Indian company will not be considered as recognized lender)
- The borrowings can be either Foreign currency denominated ECB or Indian currency denominated ECB and should not exceed 3 million USD per Financial year (for automatic route)
- Further, Securities for ECB can be in the nature of : Movable/immovable property, Intangible assets, Financial Securities, etc. and should comply with FDI norms.
But, this intact serves to solve the problems of fresh External Commercial Borrowers only. However, RBI has clearly provided an option to refinance ECB or to convert the same into Equity (in case of non-payments). Following are the insights of regulations and requirements for the same.
REFINANCING OF EXISTING ECB
Furthermore, the companies with existing ECB structure have been permitted The Refinancing of Existing ECB. Following conditions are required to be full-filled before refinancing an existing ECB.
- Outstanding maturity period of original borrowing (Weighted outstanding maturity in case of multiple borrowings) does not get reduced.
- All-in-cost of a fresh ECB should be lower than the all-in-cost (Weighted average cost in case of multiple borrowing) of the existing ECB.
- In case of part refinancing also, all conditions should be met.
- Some approved banks such as Indian Bank are permitted to participate in refinancing of existing ECB, only for highly rated corporates (AAA) and for Maharatna/Navratna public sector undertaking.
Refinancing of these ECB has been made easy but highly regulated by RBI. Although, Entities do have an option to convert ECB into Equity as conversion of ECB into Equity is not only beneficial for the Entity, but also for the Government as it results in non-flow of Foreign Reserves as would have been, had the ECB been repaid. Here is an insight for the same.
CONVERSION OF ECB INTO EQUITY
Indian companies have been granted general permission for conversion of ECB into shares subject to the following conditions, namely:
- The activity of the company should be covered under the Automatic Route or Government Approval route for FDI.
- The Foreign Equity after conversion of ECB into Equity Shares is within the sectoral cap (As of 49% in Insurance sector and others)
- Pricing of the shares should be as per the SEBI guidelines/CCI guidelines in case of listed/unlisted companies (as the case may be).
- Compliance with other requirements as prescribed under any other statute and regulation in force.
As mentioned above, Conversion of ECB into equity has been made easy but highly regulated by RBI. Here are the reporting requirements for Conversion of ECB into Equity.
REPORTING OF CONVERSION INTO EQUITY TO RBI
- Borrowers are required to report full conversion of outstanding ECB into equity in form FC GPR to the concerned regional office of RBI.
- Conversion of outstanding ECB into equity shall also be required to be reported to DSIM in form ECB-2.
- In case of partial conversion of ECB into Equity, borrowers are required to report FC-GPR, ECB-2 by clearly differentiating the converted portion from the unconverted portion.
- The Words “ECB partially converted into Equity” should be clearly mentioned on top of form ECB-2.
- The above reporting is required to compile within 7 working days from the end of the month.
To wind, both raising fresh ECB and refinancing of existing Equity / Conversion of ECB into Equity are easy to comply with whether in regard to raising formalities or other reporting requirements. However, providing security for the ECB, permanent expense burden on the Company in the form of Interest for the ECB, enhanced Debt/Equity ratio are the factors owing to which ECB shouldn’t be promoted over and above FDI.
We at G.K. Kedia & Co., counted amongst one of the top C.A. firm in Delhi, providing various services including all the services related to raising ECB or receiving FDI and all other services related from formation of Company to procurement of land and building, plant, manpower and all legal permissions to MNC.
Himanshu Gupta & Prabhat Dubey