WHAT ARE THE COMPLIANCES OF FOREIGN DEBT FUNDING

Foreign funding has been one of the core drivers of the economic development of India. New Age startups from a range of various sectors such as Fintech, Edtech, Aggregator Platforms, and Agritech amongst others have been at the forefront of raising funds for foreign investors through various equity, debt and convertible instruments. As per World Bank data, the total amount of FDI inflow in 2000 was USD 3.58 Billion as compared to USD 49.94 Billion in 2022 which is a staggering 1395% increase. As the foreign funding increased their compliances have also increased parallelly and significantly.

What are the modes of raising Foreign Funding?

Foreign funding can be raised via the following routes:

Debt Instruments: These include loans, bonds, notes, debentures, trade credits, Foreign Currency Convertible Bonds (FCCB), and Foreign Currency Exchangeable Bonds (FCEB).

Equity Shares

Debt Instruments and Preference Shares convertible into Equity Shares

Compliances in Case of Debt funding: Foreign funding raised through debt are called External Commercial Borrowings (ECB).

1. Currency of Borrowing:

It can be raised in Any Freely Convertible Foreign Currency (FCY-denominated ECB) or Indian Rupee (INR-denominated ECB).

2. Forms of Borrowings

FCY denominated ECB	INR denominated ECB
LoansBondsNotesDebenturesTrade Credits beyond 3 years foreign Currency Convertible Bonds (FCCB) Foreign Currency Exchangeable Bonds (FCEB)	LoansBondsNotesDebenturesTrade Credits beyond 3 years foreign Currency Convertible Bonds (FCCB)Foreign Currency Exchangeable Bonds (FCEB)Plain Vanilla Rupee Denominated Bonds

3. Eligible Borrowers:

The following are the prescribed eligible borrowers of ECB:

FCY denominated ECB	INR denominated ECB
All the entities eligible to receive FDI.Port TrustsUnits in SEZSIDBI EXIM Bank	All entities are eligible for FCY-denominated ECB Regd. Entities engaged in Micro-finance Activities e.g., Non-Profit Organizations, Non-Govt Organization,s and Regd. Societies and Trusts

4. Eligible Lenders:

They shall be a resident of FATF or IOSCO-compliant countries including the transferees of ECB.
Multilateral & regional financial institutions where India is a member can also a eligible lenders.
Individuals, if they are existing foreign equity holders or for subscription of Bonds, debentures listed abroad.
Foreign Branches/Subsidiaries of Indian banks for FCY-denominated ECB (except for FCCB & FCEB).

5. Minimum Average Maturity Period (MAMP):

MAMP shall be 3 years except in specified cases.

6. End Use Restrictions:

ECB proceeds cannot be utilized for the following purposes:

Real Estate Activity
Capital Market Investments
Equity Investment
Working capital purposes except when raised from foreign equity holders.
General corporate purposes except when raised from foreign equity holders.
Repayment of Rupee loans except when raised from foreign equity holders.
On-lending for the above activities

7. Exchange Rate:

FCY denominated ECB	INR denominated ECB
The exchange rate for conversion into INR can be at the rate prevailing on the agreement date or at a rate lesser than that rate if agreed by the lender.	The exchange rate for conversion into INR shall be at the rate prevailing on the settlement date.

8. Hedging Requirements

FCY denominated ECB	INR denominated ECB
Borrowers are required to follow prudential norms prescribed by their sectoral regulators. Infrastructure Space companies should have a hedging policy duly approved by their Board. They shall mandatorily hedge 70% of their FCY exposure if the MAMP is less than 5 years.	Overseas investors can hedge their risk through permitted derivative products of AD Category I Banks.

9. Change in Currency:

FCY denominated ECB	INR denominated ECB
Change of Currency from one freely convertible foreign currency or INR is allowed.	INR ECB cannot be converted to a foreign currency.

10. Maximum Limit:

ECB up to USD 750 million or equivalent per financial year can be raised through an automatic route.
ECB liability to equity ratio shall not exceed 7:1 if it is raised from foreign equity holders. This condition is not applicable if the total ECB amount does not exceed USD 5 million or equivalent.
In the case of Oil Marketing Companies (OMC), the limit is USD 10 billion or equivalent.
In the case of startups, this limit is USD 3 million or equivalent per financial year.

11. Parking of Proceeds

ECB Raised for Foreign Currency Expenditure

ECB Raised for Rupee Expenditure

It can be parked abroad pending utilization. Until utilization, these funds can be invested in the following liquid assets: Deposit or Certificate of Deposits or other products offered by Banks rated not less than AA (-) by Standard and Poor/Fitch IBCA or Aa3 by Moody’s; Treasury bills and other monetary instruments of 1-year maturity with a minimum rating as above; Deposits with foreign branches or subsidiaries of Indian banks situated abroad.

They shall be repatriated immediately for credit to their Rupee accounts with AD Category I banks.It can be invested in term deposits with AD Category I bank for a maximum of 12 months in an unencumbered position.

12. Procedure for Raising ECB

All ECBs can be raised through an automatic route subject to compliance of prescribed conditions. Entities shall submit Form ECB to AD Category I Bank.
In case of approval route, an application in Form ECB shall be sent to RBI through AD Category I Bank.

13. LRN and Reporting Requirements

Entities shall obtain a Loan Registration Number from the Reserve Bank of India (RBI).

Any changes in the terms & conditions of ECB shall be disclosed to RBI within 7 days of the changes in Form ECB.

Borrowers shall disclose the monthly transactions to RBI in Form ECB 2 within 7 working days of the close of the month.

14. Specific Provisions for Startups

Any entity recognized as a Startup by the Central Govt. can raise funds through the ECB.
The borrowing can be made as a loan, non-convertible, optionally convertible, or partially convertible preference shares.
The lender shall be a resident of a FATF-compliant country. Foreign branches/subsidiaries of Indian Banks shall be considered as eligible lenders.
The maximum limit of investment is USD 3 million or equivalent per financial year.

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