Simplifying ECB procedures – A brief analysis
Subodh Dandawate (CS, Venkateshwara Hatcheries Pvt Ltd)
Recently, the regulatory body, Reserve Bank of India (RBI) has issued following circulars to further liberalise the norms governing External Commercial Borrowing (ECB), with respect to parking of ECB proceeds, ECB security and ECB restructuring.
i. ECB Policy – Parking of ECB Proceeds vide A.P. (DIR Series) Circular No. 39, dated November 21, 2014:
Previous Scenario: As per the extant guidelines, eligible ECB borrowers are required to bring ECB proceeds, meant for Rupee expenditure in India for permitted end uses, such as, local sourcing of capital goods, on-lending to Self-Help Groups or for micro credit, payment for spectrum allocation, etc., immediately for credit to their Rupee accounts with AD Category - I banks in India. In other words, ECB proceeds meant only for foreign currency expenditure can be retained abroad pending utilization.
Current Scenario: RBI has, with a view to providing greater flexibility to the ECB borrowers in structuring draw down of ECB proceeds and utilisation of the same for permitted end uses, reviewed the guidelines vide aforesaid circular. Accordingly, pending utilization for permitted end uses, eligible ECB borrowers may be allowed by AD Category-I banks to park ECB proceeds in term deposits with AD Category-I banks in India, however, subject to following conditions:
a. ECB proceeds may be deposited for up to a maximum period of six months
b. Mandatory compliance of applicable guidelines on eligible borrower, recognised lender, average maturity period, all-in-cost, permitted end uses, etc.
c. The term deposits should be kept unencumbered during their currency and therefore no charge in any form is allowed to be created.
d. Term deposits should be exclusively in the name of the borrower.
e. Such term deposits can be liquidated as and when required.
Analysis: The amendments are applicable for ECB both under Automatic Route and Approval Route as well. The amendments will come into force with immediate effect and are subject to review. This allows further flexibility to eligible borrowers to park ECB proceeds, pending utilization towards permitted end use. The RBI has always intended to make procedures simpler for the users and also to ensure that proper compliances are made. This circular is another step in that direction.
ii. Security for ECB vide A.P. (DIR Series) Circular No. 55, dated January 01, 2015:
Subsequent to amending the FEM (Transfer or Issue of any Foreign Security) Regulations, 2000 with respect to the charge creation norms vide notification No. FEMA.322/RB-2014 dated October 14, 2014 effective from 3rd December, 2014, RBI vide aforesaid circular amended ECB norms governing creation of charge over securities for ECB availed by eligible borrower.
Previous Scenario: Under the extant ECB guidelines, the choice of security to be provided to the overseas lender / supplier for securing ECB is left to the borrower. However, creation of charge over immovable assets and financial securities, such as shares, in favour of overseas lender was subject to Regulation 8 of Notification No. FEMA 21/RB-2000 dated May 3, 2000 and Regulation 3 of Notification No. FEMA 20/RB-2000 dated May 3, 2000, respectively, as amended from time to time.
Current Scenario: RBI has decided that in order to liberalise, expand the options of securities and consolidate various provisions related to creation of charge over securities for ECB at one place, AD Category-I banks may allow creation of charge on immovable assets, movable assets, financial securities and issue of corporate and / or personal guarantees in favour of overseas lender / security trustee, to secure the ECB to be raised / raised by the borrower, subject to ensuring compliance of certain specific/general conditions, as follows:
a. Creation of charge on Immovable Assets: (i) such security shall be in accordance with Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2000; (ii) the permission should not be construed as a permission to acquire immovable asset (property) in India, by the overseas lender / security trustee; (iii) in the event of the enforcement of the charge, the charged property will have to be sold only to a person resident in India and the sale proceeds shall be repatriated to liquidate the outstanding ECB.
b. Creation of charge on Movable Assets: In the event of enforcement of the charge, the claim of the lender will be restricted to the outstanding claim against the ECB, whether the lender takes over the movable asset or otherwise, and the encumbered movable assets may be taken out of the country.
c. Creation of charge over Financial Assets: (i) pledge of shares of the borrowing company held by the promoters as well as in domestic associate companies of the borrower is permitted. Pledge on other financial securities, viz. bonds and debentures, Government Securities, Government Savings Certificates, deposit receipts of securities and units of the Unit Trust of India or of any mutual funds, standing in the name of ECB borrower/promoter, is also permitted; (ii) in addition, security interest over all current and future loan assets and all current assets, Rupee accounts of the borrower with AD Category-I banks in India including accounts in form of escrow arrangement or debt service reserve account, standing in the name of the borrower, can be used as security for ECB; (iii) in case of enforcement of pledge, transfer of financial securities must be within sectoral cap and in accordance with the FDI/FII policy and FEMA Regulations.
d. Issue of Corporate of Personal Guarantee: (i) a Board Resolution for the issue of corporate guarantee for the company issuing such guarantee and specifying name of the officials authorized to execute such guarantees on behalf of the company or in individual capacity should be obtained; (ii) specific requests from individuals to issue personal guarantee indicating details of the ECB should be obtained; (iii) Such security shall be subject to provisions contained in the Foreign Exchange Management (Guarantees) Regulations, 2000.
5. The general conditions are: (i) the underlying ECB is in compliance with the extant ECB guidelines; (ii) The Loan Agreement consist of the security clause requiring the ECB borrower to create charge on immovable assets / movable assets /financial securities / issuance of corporate and / or personal guarantee in favour of overseas lender / security trustee; (iii) No objection certificate has been obtained from the existing lenders in India, if necessary.
Analysis: With this circular RBI has liberalised security offerings and expanded the options of securities which may be offered, by eligible borrower for underlying ECB, at one place. Further the process to give permission rest with AD Bank on complying with certain general and specific conditions. The circular envisages that subject to compliance with certain general and specific conditions AD Bank may permit creation of charge on aforesaid assets which shall be co-terminus with underlying ECB. These amendments to the ECB guidelines shall come into force with immediate effect, subject to review from time to time.
iii. ECB Policy – Simplification of Procedure vide A.P. (DIR) Series) Circular No. 64, dated January 23, 2015:
RBI on January 23, 2015 simplified procedure for ECB Policy. The directions have been issued under sections 10(4) and 11(1) of the Foreign Exchange Management Act, 1999.
Previous Scenario: Erstwhile powers have been delegated to AD bank to deal with cases related to change in draw- down and repayment schedules of ECBs subject to conditions stipulated in (i) Provisions contained in the paragraph 3 (a) of A.P. (DIR Series) Circular No. 33 dated February 09, 2010; (ii) Provisions contained in paragraphs 3 (a) and (b) of A.P. (DIR Series) Circular No. 75 dated February 07, 2012; and (iii) Provisions contained in the A.P. (DIR Series) Circular No. 128 dated May 09, 2014.
Current Scenario: On a review, as a measure of simplification of the existing procedure for rescheduling / restructuring of ECBs and in supersession of aforesaid provisions, RBI has decided to delegate powers to the designated AD Category-I banks to allow:
a. Changes / modifications (irrespective of the number of occasions) in the draw-down and repayment schedules of the ECB whether associated with change in the average maturity period or not and / or with changes (increase/decrease) in the all-in-cost.
b. Reduction in the amount of ECB (irrespective of the number of occasions) along with any changes in draw-down and repayment schedules, average maturity period and all-in-cost.
c. Increase in all-in-cost of ECB, irrespective of the number of occasions.
d. Banks can permit changes/ modifications in the draw-down and repayment schedules of the ECB provided the revised average maturity period and/or all-in-cost is/are in conformity with the applicable ceilings/guidelines.
e. Banks may also allow the cases requiring transfer of the ECB from one company to another on account of re-organisation at the borrower’s level in the form of merger/demerger/amalgamation/acquisition after satisfying themselves that the company acquiring the ECB is an eligible borrower and ECB continues to be in compliance with applicable guidelines.
Provided that, revised average maturity period and / or all-in-cost is / are in conformity with the applicable ceilings / guidelines and the changes are effected during the tenure of the ECB. If the lender is an overseas branch / subsidiary of an Indian bank, the changes shall be subject to the applicable prudential norms.
Analysis: These measures of simplification will be applicable for ECBs raised both under the automatic and approval routes. FCCBs will, however, not be covered within these provisions. With this circular, the RBI, delegating more powers to AD bank, is trying to ensure that requests are processed faster and lesser hassles. Where on one hand the circular has delegated powers, it has also made the AD Banks more onerous for their acts. The matters delegated with this circular require the AD Banks to exercise proper caution while processing requests and also to ensure that other provisions of the existing guidelines are maintained.
Comments
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tekawade Manoj Baburao on February 5 2015
thanks for sharing and analysisng this in easy way......