External Commercial Borrowings & Convertible Notes

Prepared by Khusbu M Kinger

External Commercial Borrowings 

  • ECBs are permitted as ‘commercial’ loans for ‘commercial’ purposes as to be received by the eligible Indian borrowers from the recognized non-resident lenders in accordance to updated guidelines as issued by the RBI.  
  • ECBs are permitted in ‘any’ convertible foreign currency and also in Indian Rupee. 
  • ECBs are permitted in the followings modes as :-  
    • Bank loans  
    • Floating or fixed rates  
      • Notes  
      • Bonds  
      • Non-Convertible Debentures (NCDs). 
    • Trade Credits (TCs) for the minimum period of 3 years  
    • Foreign Currency Convertible bonds (FCCBs)  
    • Foreign Currency Exchangeable bonds (FCEBs)  
    • Long Term Financial Lease  
  • ECBs are permitted under the automatic and approval route (both) 
  • ECBs are also permitted from the foreign equity holder in Indian company where 
  • ‘Directly’ holding minimum 25% equity capital in Indian borrowing company 
  • ‘Indirectly’ holding minimum 51% equity capital in Indian borrowing company 

ECB Routes1  

Automatic Route  Approval Route 
No approval required from RBI -ECB up to USD 750 million or equivalent per financial year irrespective of the category of borrower under automatic route  Prior application to the RBI through the AD Bank (Form ECB) 
Enter into Loan Agreement with Overseas Lender in accordance with ECB Policy    Including ECB exceeding threshold of USD 750 Mn per financial year under Automatic Route 
Obtain LRN from RBI by fling Form ECB through AD Bank (earlier Form 83)  Recommendation of RBI Empowered Committee (Internal RBI & External Members) for application above certain threshold and final decision by RBI 
Drawdown ECB only after LRN  Factors: merits, macroeconomic situations and overall guidelines 
Monthly filings with RBI through AD Bank in Form ECB-2  Post approval, obtain LRN, monthly filings and other compliances as under the Automatic Route 
Includes entities under Investigation under FEMA on without prejudice basis (RBI/ AD Bank to inform the relevant agencies of the ECB)  Not all cases outside Automatic Route fall under Approval Route 


Eligible Borrowers 

  • All entities eligible to receive FDI  
  • Further, following entities are also eligible to raise ECB  
    • Port Trusts 
    • Units in SEZ 
    • SIDBI 
    • EXIM Bank  
    • Registered entities engaged in microfinance activities, viz., registered Not for Profit companies, registered societies / trusts / cooperatives and Non-Government Organizations (permitted only to raise INR ECB). 


Recognised Lenders  

The lender should be resident of FATF or IOSCO compliant country, including on transfer of ECB. However, 

  1. Multilateral and Regional Financial Institutions where India is a member country will also be considered as recognised lenders; 
  2. Individuals as lenders can only be permitted if they are foreign equity holders or for subscription to bonds/debentures listed abroad; and 
  3. Foreign branches / subsidiaries of Indian banks are permitted as recognised lenders only for FCY ECB (except FCCBs and FCEBs). However, underwriting by foreign branches/subsidiaries of Indian banks for issuances by Indian banks will not be allowed 


Minimum Average Maturity Period (‘MAMP’) 

Sr.No  Category  MAMP 
a)  ECB raised by manufacturing companies up to USD 50 million or its equivalent per financial year.  1 Year  
b)  ECB raised from foreign equity holder for working capital purposes, general corporate purposes or for repayment of Rupee loans  5 Years  
c)  ECB raised for
(i) working capital purposes or general corporate purposes
(ii) on-lending by NBFCs for working capital purposes or general corporate purposes 
10 Years 
d)  ECB raised for
(i) repayment of Rupee loans availed domestically for capital expenditure
(ii) on-lending by NBFCs for the same purpose 


7 Years 
e)  ECB raised for
(i) repayment of Rupee loans availed domestically for purposes other than capital expenditure
(ii) on-lending by NBFCs for the same purpose 
10 Years  


for the categories mentioned at (b) to (e) –
i) ECB cannot be raised from foreign branches / subsidiaries of Indian banks
ii) the prescribed MAMP will have to be strictly complied with under all circumstances. 

All-in-Cost: All-in cost ceiling per annum has been pegged at the benchmark rate* plus 450 bps* spread.  

  • Benchmark interest rate called base interest rate, an interest rate against which other interest rates are calculated. 
  • Basis point (BPS) refers to a common unit of measure for interest rates and other percentages in finance. 


Limits of borrowing: Funds can be raised by way of borrowings to the extent of USD 750 million (approx. INR 5,250 crores) per financial year under the automatic route. 

Refinancing & Conversion 

Refinancing existing ECB 

  • Refinancing of existing ECB by raising fresh ECB is permitted provided:  

‒No reduction in outstanding maturity of the original borrowing; 

‒all‐in‐cost of fresh ECB to be lower than all‐in‐cost of existing ECB  

  • Refinancing of ECBs raised under the previous ECB framework –permitted 
  • Fresh ECB is not availed from overseas branches / Subsidiaries of Indian banks except for         highly rated corporates (AAA) and Maharatna/ Navratnapublic sector undertakings 


Conversion of ECB into equity: Permitted subject to following: 

  • Activity of borrowing company covered under automatic route or required approval is obtained for FDI; 
  • Conversion not to breach applicable sectoral cap under FDI policy; Compliance with pricing guidelines (FV on date of conversion);  
  • Consent of other lenders; and  
  • Conversion at exchange rate on the date of agreement or any lesser rate with mutual Consent. 

ECB interest also permitted to be converted into equity subject to applicable conditions. 


Issue of Corporate and Personal Guarantee Possible subject to below conditions / documents  Issuance of Guarantee, etc. by Indian Banks and Financial Institutions 
A copy of Board Resolution with details specified.   Issuance of Guarantee by Indian banks, All India Financial Institutions and NBFCs (financial intermediaries) relating to ECB is not permitted.  
Specific requests from individuals to issue personal   guarantee indicating details of the ECB should be obtained  Specific requests from individuals to issue personal guarantee indicating details of the ECB should be obtained 
ECB can be credit enhanced / guaranteed / insured by overseas party if it is recognised lender under extant ECB guidelines   


Reporting Requirements 

Form ECB: Borrower is required to submit Form ECB induplicate with AD Bank. AD Bank will forward one copy to the Director, Balance of payments statistics division, Department of Statistics and Information Management, RBI.  

Loan Registration Number: Any draw‐down in respect of ECB as well as payment of any fee/charges for ECB should happen only after obtaining LRN from RBI. 

Changes in terms and conditions of ECB: Revised Form ECB should be submitted with DSIM within 7 days of such changes. 

Monthly Filings:  Borrower to submit Form ECB‐2 on monthly basis with AD Bank so as to reach to DSIM within 7 days from the close of the month. All filings up to date for past ECB/ FCCB before new ECB/ FCCB, etc. It requires compliance certificate from CS/CA apart from that of AD‐Bank.  


Reporting on Conversion of ECB into equity:  

  • Partial Conversion – Converted portion to be reported in Form FC-GPR and appropriately reported in monthly Form ECB2–“ECB Partially converted into Equity” 
  • Full Conversion – Entire portion to be reported in Form FC‐ GPR and appropriately reported in monthly Form ECB2–“ECB fully converted into Equity” 
  • For conversion of ECB into equity in phases, reporting through ECB2 Return will also be in phases. 


Late Submission Fees: Delay in reporting of drawdown of ECB proceeds before obtaining LRN or delay in submission of Form ECB 2 returns can be regularized by payment of LSF as under:   

Sr. No.  Type of Return/ Form  Period of Delay   Applicable LSF 
1  Form ECB 2   Up to 30 calendar days from due date of submission  5,000 
2  Form ECB 2/ Form ECB  Up to three years from due date of submission/ date of drawdown  50,000 per year 
3  Form ECB 2/ Form ECB  Beyond three years form due date of submission/ date to drawdown   1,00,000 per year  



Powers delegated to AD Banks (not for FCCB / FCEB) 

  1. Change/ Modification in Drawdown/ Repayment Schedule 
  2. Change in currency of borrowing  
  3. Change in AD Bank (subject to no objection certificate from earlier AD Bank) 
  4. Change in name of borrower Company 
  5. Transfer of ECB (on re-organisation at the borrower level – merger/ demerger/ acquisition as per law) 
  6. Change in recognised lender 
  7. Change in name of lender  
  8. Prepayment of ECB (provided MAMP is maintained)  
  9. Cancellation of LRN (only if no draw-down) 

While permitting changes, AD Banks should ensure-  

  • Revised average maturity/ all-in-costs are in conformity with applicable guidelines  
  • RBI DBR Prudential guidelines complied for credit facilities from Indian Banks or their Overseas Branches/ Subs 
  • ECB continues to be in compliance with applicable guidelines  
  • Changes to be communicated in Form ECB/ ECB – 2 within 7 days of the changes being effected. 


Issue of Convertible Notes by startup companies2 

1) A person resident outside India (other than an individual who is citizen of Pakistan or Bangladesh or an entity which is registered / incorporated in Pakistan or Bangladesh), may purchase convertible notes issued by an Indian startup company for an amount of twenty five lakh rupees or more in a single tranche. 

Explanation: For the purpose of this Regulation, a ‘startup company’ means a private company incorporated under the Companies Act, 2013 or Companies Act, 1956 and recognised as such in accordance with notification number G.S.R. 180(E) dated February 17, 2016 issued by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry. 

2) A startup company engaged in a sector where foreign investment requires Government approval may issue convertible notes to a non-resident only with approval of the Government. 

Explanation: For the purpose of this regulation, the issue of shares against such convertible notes shall have to be in accordance with the Schedule 1 of the Principal Regulations. 

3) A startup company issuing convertible notes to a person resident outside India shall receive the amount of consideration by inward remittance through banking channels or by debit to the NRE / FCNR (B) / Escrow account maintained by the person concerned in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016, as amended from time to time. 

Provided that an escrow account for the above purpose shall be closed immediately after the requirements are completed or within a period of six months, whichever is earlier. However, in no case continuance of such escrow account shall be permitted beyond a period of six months. 

4) NRIs may acquire convertible notes on non-repatriation basis in accordance with Schedule 4 of the Principal Regulations. 

5) A person resident outside India may acquire or transfer, by way of sale, convertible notes, from or to, a person resident in or outside India, provided the transfer takes place in accordance with the pricing guidelines as prescribed by RBI. Prior approval from the Government shall be obtained for such transfers in case the startup company is engaged in a sector which requires Government approval. 

6) The startup company issuing convertible notes shall be required to furnish reports as prescribed by Reserve Bank. 

A convertible note (CN) is a debt instrument that allows raising funds by granting the holder of the note the right to be repaid the amount or the right to convert the amount invested into equity shares of the issuing Company. In short, convertible notes are originally structured as debt investments but have a provision that allows conversion of the principal plus accrued interest into equity investment subsequently. Typically, investors can only cash out during a liquidity event, like the sale of the company, but convertible notes are technically debt, and as such if held to maturity, a note holder could demand payback. Convertible Notes usually include a provision in which the notes automatically convert to equity, at a discount or at a set valuation, on the maturity date. 


Advantages of Convertible Note3 

  • The primary advantage of issuing convertible notes is that it does not force the issuer and investors to determine the value of the company when there may not be much to base a valuation on – in some cases the company may just be an idea. The valuation will usually be determined during the Series A financing, when there are more data points to base a valuation. 
  • Another significant advantage of issuing convertible notes is to avoid giving the investors any control. 
  • Finally, another advantage of issuing convertible notes is the extraordinary flexibility they offer in connection with “herding” prospective investors and raising the round and also allow more flexibility in price. 

‘The reason startups have been using more convertible notes in angel rounds is that they make deals close faster. By making it easier for startups to give different prices to different investors, they help them break the sort of deadlock that happens when investors wait to see who else is going to invest. 

The reason convertible notes allow more flexibility in price is that valuation caps aren’t actual valuations, and notes are cheap and easy to do. So, you can do high-resolution fundraising: if you wanted you could have a separate note with a different cap for each investor.’ 

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