Legal

ECB FOR START-UPS

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”)

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”)

ECB FOR START-UPS
ECB FOR START-UPS
 

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

ECB FOR START-UPS
ECB FOR START-UPS

Notes :

  1. LRN: Any drawdown in respect of an ECB should happen only after obtaining the LRN from the RBI. To obtain the LRN, borrowers are required to submit duly certified Form ECB, which also contains terms and conditions of the ECB, in duplicate to the bank
  2. Monthly Reporting of Actual Transactions: Form ECB 2 Return through the AD Bank on monthly basis.


Disclaimer:

The content of this document is for information purpose only and does not constitute advice or a legal opinion. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer to relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc. before acting on the basis of this write up. The possibility of other views on the subject matter cannot be ruled out. By the use of the said information, you agree that the Treelife is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof.

 

Last Updated on: 8th December 2023, 12:24 pm


Disclaimer:

The content of this article is for information purpose only and does not constitute advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer to relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc. before acting on the basis of the above write up. The possibility of other views on the subject matter cannot be ruled out. By the use of the said information, you agree that the Author / Treelife is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof.

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