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ECB FOR START-UPS

Written By

Pooja Savla, Koustubh Athavale

Published on

May 8,
2023

Last updated on

February 20, 2025
14:15

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https://treelife.in/legal/ecb-for-start-ups/

Quick Summary

External Commercial Borrowings (ECBs) offer Indian startups an avenue to access foreign capital under the automatic route, as per the Reserve Bank of India’s guidelines. Eligible startups can raise up to USD 3 million annually through loans or convertible instruments, with a minimum average maturity period of three years. Recognized lenders must reside in Financial Action Task Force (FATF) compliant countries, excluding Indian banks’ foreign branches and overseas entities where the Indian startup has invested. Borrowed funds can be utilized for any business-related expenditure and may be denominated in freely convertible foreign currencies or Indian Rupees. Startups must adhere to monthly reporting requirements to the RBI and ensure compliance with the Foreign Exchange Management Act, 1999. Understanding the ECB framework is crucial for startups seeking to leverage international funding opportunities.

Blog Content Overview

1 Overview
2 Recognized Lenders
3 Key Considerations
4 Other Provisions
5 Process Flow

Overview

What are ECB?

External Commercial Borrowings (“ECB”) are commercial loans raised by eligible resident entities from recognized non- resident entities and should conform to parameters such as minimum maturity, permitted and non permitted end-uses, maximum all-in-cost ceiling, etc. Transactions on account of ECBs are governed by the provisions of Foreign Exchange Management Act, 1999 and the Master Direction – External Commercial Borrowings, Trade Credits and Structured Obligations (2018-19) issued by the RBI and as amended from time to time (“ECB Master Directions”)

RBI permitted Startups to raise ECB with the introduction of new guidelines vide its circular dated 16th January, 2019. Pursuant to the said guidelines, AD Category-I Banks are permitted to allow recognized Startups to raise ECB under the automatic route as per the prescribed framework

Recognized Lenders

•Lender/Investor, who is a resident of a Financial Action Task Force compliant country

•The recognized lenders do not include the following:

Indian banks’ foreign branches or their Indian subsidiaries; and
Overseas entity in which Indian entity has made overseas direct investment

Key Considerations

Term	Brief description
MAMP*	MAMP for ECB will be 3 years.
Forms	The borrowing can be in form of loans or non-convertible, optionally convertible or partially convertible preference shares
Currency	The borrowing should be denominated in any freely convertible currency or in Indian Rupees (INR) or a combination thereof
Amount	The borrowing per Startup will be limited to USD 3 million or equivalent per financial year (either in INR or any convertible foreign currency or a combination of both)
All-in-cost	As may be mutually agreed between the lender and borrower
End-uses	For any expenditure in connection with the business of the borrower
Choice of Security	At the discretion of the borrower. Security can be in the nature of: -movable assets; -Immovable assets; -intangible assets (including patents, intellectual property rights); -financial securities and shall comply with foreign direct investment or foreign portfolio investment/ or any other norms applicable to foreign lenders -Issuance of corporate and personal guarantee. Guarantee is only allowed if such parties qualify as lender under ECB for start-ups
Conversion Rate	In case of borrowing in INR, the foreign currency – INR conversion will be at the market rate as on the date of agreement

Notes : * MAMP: Minimum Average Maturity Period * All-in-cost: It includes rate of interest, other fees, expenses, charges, guarantee fees, Export Credit Agency charges, whether paid in foreign currency or INR but will not include commitment fees and withholding tax payable in INR.

Other Provisions

Term	Brief description
Parking of ECB Proceeds	ECB Proceeds can be parked abroad as well as domestically •If ECB Proceeds parked/repatriated to India, ECB borrowers are allowed to park ECB proceeds for a maximum period of 12 months cumulatively
Reporting arrangements	Submission of Form ECB and obtaining loan registration number (LRN) •Any change in terms and conditions of ECB should be reported to DSIM through revised form ECB •Monthly reporting through form ECB 2
Conversion of ECB into Equity	• Conversion is allowed subject to the conditions such as (without limitation): – activity should be covered under automatic route for FDI or government approval is received where required -conversion must not contravene eligibility or applicable sectoral cap on foreign equity holding -compliance with applicable pricing guidelines • The exchange rate prevailing on the date of the agreement between the parties concerned for such conversion or any lesser rate can be applied with a mutual agreement with the ECB lender •Equity ratio of 7:1 not applicable
Non applicability of Equity-liability ratio	The requirement of equity liability ratio of 7:1 as prescribed under the ECB Master Directions is not applicable for start-ups

Other provisions summarised in short

Process Flow

About the Author

Pooja Savla

Principal Associate | Transactions | pooja.s@treelife.in

Specializes in transaction advisory, including mergers and acquisitions, investment structuring, and corporate legal matters. Combines a strong background in law and finance to drive seamless transactions and business growth.

Koustubh Athavale

Senior Associate | Legal | koustubh.a@treelife.in

Provides expertise in commercial contracts, dispute resolution, and data privacy. Leverages extensive experience in the startup ecosystem to deliver tailored legal solutions for diverse business needs.