Primer. Primer on External Commercial Borrowings (ECBs) Vinita Nair Vignesh Iyer

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1 Primer Primer on External Commercial Borrowings (ECBs) Vinita Nair Vignesh Iyer Arundhuthi Bose M/s Vinod Kothari & Company As updated on July 12, 2016 Check at: for more write ups. Copyright: This write up is the property of Vinod Kothari & Company and no part of it can be copied, reproduced or distributed in any manner. Disclaimer: The following questions are framed by us, and do not represent or necessarily match with views of regulatory authorities. The questions/answers are purely academic, and are not based on facts/circumstances of any particular case. Neither are they intended to be relied upon for any particular transaction or situation. Please do consult your counsel before deciding to rely on the following. For contacting authors of the primer below, kindly use .

2 1. How does ECB compare with domestic borrowings in terms of costs? 4 2. What is the key difference between ECB and FDI? 4 3. What all instruments of borrowings /debt instruments are covered by the definition of ECBs? 5 4. What is the key difference between automatic route and approval route for ECBs? 6 5. What is the recent amendment made in ECB? 6 6. What impact will the revised framework have on the ECBs already availed under the erstwhile framework? 6 7. What will be the nature of ECB that can be availed? 7 8. What are the End-use restrictions in case of ECB? 8 9. Is ECB allowed for working capital or general corporate purposes? Is ECB allowed for capital expenditure? What is the definition of infrastructure under extant ECB guidelines? Can ECB be availed for acquisition of shares under the Government s disinvestment programme of PSUs? Can ECB be availed by Holding Companies/ Core Investment Companies? Can ECB be availed for repaying rupee loans taken by the company? Is it only that Corporates are allowed to accept ECBs or can Non-Corporate Bodies also accept ECBs? Who are the Borrowers eligible to avail ECB? Can Entities engaged in manufacturing sector avail ECBs? Can Corporate engaged in services sector avail ECBs under automatic route: Can NBFCs avail of ECBs? Can HFCs avail ECBs? Can Infrastructure Finance Companies (IFCs) avail ECBs? Can builders/real estate companies avail ECBs? What needs to be done for a builder to avail ECBs through the National Housing Bank? Who can be the lender for an ECB? Is it possible for a foreign equity holder to provide ECBs to the company in which such equity holder holds investment? What is the meaning of the debt/equity ratio in case of foreign equity holders? Whether availing of operating lease by an Indian Entity an ECB? Can an Operating Leasing or Asset Renting entity avail ECBs? 27

3 29. Is a financial lease also treated as ECB? Can securitisation be treated as ECB? What is the procedure for getting ECBs under automatic route? What is the procedure for getting ECBs under approval route? Is it necessary that ECBs must be full hedged? What are the restrictions on all-in cost of ECBs? What all is included in all-in costs? What are the maturity restrictions on ECBs? The maturity restrictions talk about minimum maturity is there anything on maximum maturity? What is Take-out Finance and who are allowed to avail the facility of take-out finance? What are the options available for repayment of ECBs? What are the reporting requirements in case of conversion of ECB into equity? Is prepayment allowed in case of ECB? Can ECB be refinanced by raising a fresh ECB or be rescheduled? What procedure needs to be followed in case of change in the terms and conditions of the ECB? Can Corporate, which have violated the extant ECB policy and are under investigation by the Reserve Bank, avail of ECB? If I go for ECBs, should I hedge myself, or leave it unhedged? How about accounting for forex losses in ECBs? 37

4 1. How does ECB compare with domestic borrowings in terms of costs? The evaluation of cost of domestic borrowings versus ECBs must be done after a careful comparison of the ECB cost, adding together the cost of hedging or the cost due to foreign exchange losses. The decision primarily depends on the prevailing interest rate gaps between INR loans and forex loans. There are situations when the gap is quite large, and even after considering the cost of hedge, an ECB may make sense. However, ECB option is not necessarily cheaper. Hence, please do consult your financial advisors to advise you on the cost comparison. If you leave ECB costs unhedged, you may be taking a substantial risk on forex losses. There is a currency risk involved in ECBs. A depreciating rupee will prove burdensome at the time of repayment of loan. Unless you have a natural hedge, there may be periods where this may cause a significant strain on your financials. 2. What is the key difference between ECB and FDI? Parameters ECB FDI Meaning ECBs are commercial loans raised by eligible resident entities from recognised non-resident entities and should conform to parameters such as minimum maturity, permitted and non-permitted end-uses, maximum all-in-cost ceiling, etc, as stipulated in the RBI Master Circular on External Commercial Borrowings and trade credits, issued from time to time, with a minimum average maturity of 3 /5 / 10 years. Governed by ECBs are governed and included in the following three Regulations framed under FEMA: Foreign Exchange Management Act, 1999 Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000, dated May 3, 2000 as amended from time to time. Foreign Exchange Management FDI means investment by nonresident entity/ person resident outside India in the capital of an Indian company under Schedule 1 of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations 2000 Consolidated FDI Policy, 2012 and Foreign Exchange Management Act, 1999 & Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations 2000 dated May 3, 2000 as amended from time to time.

5 Parameters ECB FDI (Transfer or Issue of any Foreign Security) Regulations, 2004 dated July 7, 2004 as amended from time to time. Foreign Exchange Management (Guarantees) Regulations, 2000 dated May 3, 2000 as amended from time to time. as provided under RBI Master Directions. 1 End-use restrictions Refer Question No. 8 In case of Issue of shares by Indian Companies under FCCB/ADR/GDRs there is a ban on deployment/investment of such funds in real estate or the stock market. Instruments Refer Question No. 3 Equity shares, fully, compulsorily and mandatorily convertible debentures and fully, compulsorily and mandatorily convertible preference shares. 3. What all instruments of borrowings /debt instruments are covered by the definition of ECBs? Commercial loans in the form of bank loans, buyers credit 2, suppliers credit 3, securitized instruments. Foreign Currency Convertible Bonds Financial Lease Non- convertible, optionally convertible or partially convertible Preference Shares. Foreign Currency Exchangeable Bond Buyer s Credit refers to loans for payment of imports in to India arranged by the importer from a bank or financial institution for original maturity of minimum three years. 3 Supplier s Credit refers to credit for imports into India extended by the overseas supplier. 4 means a bond expressed in foreign currency issued by an Issuing Company and subscribed to by a person who is a resident outside India, in foreign currency and exchangeable into equity share of another company, to be called the Offered Company. The principal and interest of the FCEB is payable in foreign currency. The FCEB may be denominated in any freely convertible foreign currency.

6 4. What is the key difference between automatic route and approval route for ECBs? Automatic Route applies to the borrowings made by a person resident in India in accordance with the provisions of the Automatic Route Scheme as specified in Schedule I of the Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000 as amended from time to time. Approval Route applies to the foreign currency loans raised of the nature or for the purposes as specified in Schedule II of the Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000 as amended from time to time by the person resident in India and who satisfies the eligibility and other conditions specified in that Schedule. 5. What is the recent amendment made in ECB? The recent amendments made in the revised ECB framework encompass various elements some of which are:- Inclusion of financial lease as a forms of borrowings Relaxing rules for NBFCs Segmenting the Minimum Average Maturity (MAM) in three tracks - Track I, Track II, Track III A more liberal approach, with fewer restrictions on end uses, higher all-in-cost ceiling, etc. for long term foreign currency borrowings as the extended term makes repayments more sustainable and also minimizes roll-over risks for the borrower; A more liberal regime for INR denominated ECBs where the currency risk is borne by the lender; Expansion of the list of overseas lenders to include long-term lenders, such as, Insurance Companies, Pension Funds, Sovereign Wealth Funds; Only a small negative list of end-use restrictions applicable in case of long-term ECB and INR denominated ECB; Alignment of the list of infrastructure entities eligible for ECB with the Harmonised List of the Government of India. 6. What impact will the revised framework have on the ECBs already availed under the erstwhile framework? Entities raising ECB under extant framework can raise the said loans by March 31, 2016, provided the agreement in respect of the loan is already signed by the date the new framework comes into effect.

7 For raising of ECB under the following carve outs, the borrowers will, however, have time up to March 31, 2016 to sign the loan agreement and obtain the Loan Registration Number (LRN) from the Reserve Bank by this date: i. ECB facility for working capital by airlines companies; ii. ECB facility for consistent foreign exchange earners under the USD 10 billion Scheme; and iii. ECB facility for low cost affordable housing projects (low cost affordable housing projects as defined in the extant Foreign Direct Investment policy) 7. What will be the nature of ECB that can be availed? The nature of ECB that can be availed along with the minimum average maturity will be as under: Particulars Track I Track II Track III Nature of Medium term Long term foreign Indian Rupee ECB foreign currency currency denominated ECB denominated ECB denominated ECB with MAM of 3/5 with Minimum with MAM of 10 years. Average Maturity years. (MAM) of 3/5 years. Minimum Average Maturity 10 years or more irrespective of the amount. i. 3 years or more for ECB upto USD 50 million or its equivalent. ii. 5 years or more for ECB beyond USD 50 million or its equivalent. For FCCBs/FCEBs the MAM will be 5 years irrespective of the amount borrowed 5 For Infrastructure i. 3 years or more for ECB upto USD 50 million or its equivalent. ii. 5 years or more for ECB beyond USD 50 million or its equivalent. 5

8 Particulars Track I Track II Track III sector/ NBFC- IFC/NBFC- AFC/CICs/Holding Companies 8. What are the End-use restrictions in case of ECB? Particulars Track I Track II Track III Permitted end use 1. ECB proceeds can be utilised for capital expenditure in the form of: 1. The ECB proceeds can be used for all i. Import of capital goods including purposes excluding payment towards import of services, technical know-how and license fees, provided the same are part of these capital goods; ii. Local sourcing of capital goods; iii. New project; iv. Modernisation /expansion of existing units; v. Overseas direct investment in Joint the following: i. Real estate activities ii. Investing in capital market iii. Using the proceeds for equity investment domestically; iv. On-lending to other entities with any of the hypothecated ventures (JV)/ Wholly owned above objectives; subsidiaries (WOS); v. Purchase of land. vi. Acquisition of shares of public sector undertakings at any stage of disinvestment under the disinvestment 2. Holding companies programme of the Government of India; can also use ECB vii. Refinancing of existing trade credit proceeds for providing raised for import of capital goods; loans to their viii. Payment of capital goods already infrastructure SPVs. shipped / imported but unpaid; ix. Refinancing of existing ECB provided the residual maturity is not reduced. 2. SIDBI can raise ECB only for the purpose of on lending to the borrowers in the Micro, Small and Medium Enterprises (MSME sector), where MSME sector is as defined under the NBFCs can use ECB proceeds for: a. On-lending to the infrastructure sector; b. providing loans to domestic entities for acquisition of capital goods/equipments; and c. providing capital goods/equipment to domestic entities by way of lease and hire-purchases 2. Developers of SEZs/ NMIZs can raise ECB only for providing infrastructure facilities within SEZ/ NMIZ. 3. NBFCs-MFI, other eligible MFIs, NGOs

9 Particulars Track I Track II Track III MSME Development Act, 2006, as amended from time to time. # 3. Units of SEZs can raise ECB only for their own requirements. # 4. Shipping and airlines companies can raise ECB only for import of vessels and aircrafts respectively. # 5. ECB proceeds can be used for general corporate purpose (including working capital) provided the ECB is raised from the direct / indirect equity holder or from a group company for a minimum average maturity of 5 years. 6. ECBs for the following purposes will be considered under the approval route#: i. Import of second hand goods as per the Director General of Foreign Trade (DGFT) guidelines; ii. On-lending by Exim Bank. 7. ECBs raised by Holding Companies and CICs shall be used only for onlending to infrastructure Special Purpose Vehicles (SPVs).# 6 8. ECBs raised by NBFC-IFCs and NBFC- HFCs is to be used only for the purpose of financing infrastructure. 7 # The respective conditions will be applicable for all three tracks. and not for profit companies registered under the Companies Act, 1956/2013 can raise ECB only for on-lending to selfhelp groups or for micro-credit or for bonafide micro finance activity including capacity building. 4. For other eligible entities under this track, the ECB proceeds can be used for all purposes excluding the following: i. Real estate activities ii. Investing in capital market iii. Using the proceeds for equity investment domestically; iv. On-lending to other entities with any of the above objectives; v. Purchase of land

10 9. Is ECB allowed for working capital or general corporate purposes? Under the revised ECB framework, ECBs raised under Track I can used for general corporate purpose (including working capital) provided the ECB is raised from the direct / indirect equity holder or from a group company for a minimum average maturity of 5 years. Civil Aviation sector is allowed to obtain ECB for working capital, subject to the approval from the Reserve Bank of India. The maximum ECB permissible to be used for working capital is equal to the overall ECB ceiling, being USD one billion for the entire civil aviation sector and USD 300 million for an individual airline company. The ECB needs to be raised within 12 months from April 24, 2012 (date of issue of circular), however, RBI vide A. P. (DIR Series) Circular No. 116 dated June 25, 2013 has extended the scheme of availing ECB till December 31, Further, RBI vide A.P ( DIR Series) Circular No. 113 dated March 26, 2014 had extended the scheme of availing ECB till March 31, However, the borrowing is subject to the restriction that such ECB liability needs to be extinguished only out of the foreign exchange earnings of the borrowing company. Airline companies registered under the Companies Act, 1956 and possessing scheduled operator permit license from DGCA (Director General for Civil Aviation) for passenger transportation are eligible to avail ECB for working capital, with a minimum average maturity of 3 years, depending on their cash flow, foreign exchange earnings and the capability to service the debt. Under the revised ECB framework, these entities can raise ECB under the aforesaid carve-out upto March 31, 2016 by signing loan agreement and obtaining Loan Registration Number (LRN) from RBI by this date. 10. Is ECB allowed for capital expenditure? ECB proceeds raised under Track I needs to be utilized for capital expenditure in the form of : i. Import of capital goods including payment towards import of services, technical know-how and license fees, provided the same are part of these capital goods; ii. Local sourcing of capital goods; iii. New project;

11 iv. Modernisation /expansion of existing units; v. Overseas direct investment in Joint ventures (JV)/ Wholly owned subsidiaries (WOS); vi. Acquisition of shares of public sector undertakings at any stage of disinvestment under the disinvestment programme of the Government of India; vii. Refinancing of existing trade credit raised for import of capital goods; viii. Payment of capital goods already shipped / imported but unpaid; ix. Refinancing of existing ECB provided the residual maturity is not reduced. Proceeds raised under Track II and III also can be utilized for capex purpose. 11. What is the definition of infrastructure under extant ECB guidelines? For the purpose of raising ECB the definition of infrastructure will be as provided under Harmonised Master List of Infrastructure sub-sectors and Institutional Mechanism for its updation approved by Government of India vide Notification F. No. 13/06/2009-INF dated March 27, 2012(as amended / updated from time to time). The expanded infrastructure sector and sub-sectors for the purpose of ECB include: (a) Energy which will include (i) electricity generation, (ii) electricity transmission, (iii) electricity distribution, (iv) oil pipelines, (v) oil/gas/liquefied natural gas (LNG) storage facility (includes strategic storage of crude oil) and (vi) gas pipelines (includes city gas distribution network); (b) Communication which will include (i) mobile telephony services / companies providing cellular services, (ii) fixed network telecommunication (includes optic fibre / cable networks which provide broadband / internet) and (iii) telecommunication towers; (c) Transport which will include (i) railways (railway track, tunnel, viaduct, bridges and includes supporting terminal infrastructure such as loading / unloading terminals, stations and buildings), (ii) roads and bridges, (iii) ports, (iv) inland waterways, (v) airport ( including Maintenance, Repairs

12 and Overhaul 8 ) and (vi) urban public transport (except rolling stock in case of urban road transport); (d) Water and sanitation which will include (i) water supply pipelines, (ii) solid waste management, (iii) water treatment plants, (iv) sewage projects (sewage collection, treatment and disposal system), (v) irrigation (dams, channels, embankments, etc.) and (vi) storm water drainage system; (e) (i) mining, (ii) exploration and (iii) refining; (f) Social and commercial infrastructure which will include (i) hospitals (capital stock and includes medical colleges and para medical training institutes), (ii) Hotel Sector which will include hotels with fixed capital investment of Rs. 200 crore and above, convention centres with fixed capital investment of Rs. 300 crore and above and three star or higher category classified hotels located outside cities with population of more than 1 million (fixed capital investment is excluding of land value), (iii) common infrastructure for industrial parks, SEZs, tourism facilities, (iv) fertilizer (capital investment), (v) post-harvest storage infrastructure for agriculture and horticulture produce including cold storage, (vi) soil testing laboratories and (vii) cold chain (includes cold room facility for farm level pre-cooling, for preservation or storage or agriculture and allied produce, marine products and meat. (g) Through the notification RBI/ /349 of A.P. (DIR Series) Circular No.56, RBI inserted Exploration, Mining and Refinery sector in the list. 12. Can ECB be availed for acquisition of shares under the Government s disinvestment programme of PSUs? Yes, the same is a permitted end use under Track I, II and III. 13. Can ECB be availed by Holding Companies/ Core Investment Companies? Under the revised ECB framework, Holding Companies and Core Investment Companies are permitted to raise ECB under Track-I and Track II. The ECB availed is subject to end use restrictions mentioned in Question 8. Also, for ECB raised by 8 Inserted vide AP (DIR Series) Circular No. 85 dated January 6, 2014

13 these entities under Track-I, the MAM will be 5 years and with 100% hedging. The CICs and Holding Companies raising ECBs under Track I also need to have a board approved risk management policy. The AD-I category bank needs to ensure the hedging requirement and file ECB-2 with regard to that. Moreover, the ECB raised under Track-I by them have to be used only for on-lending to infrastructure SPVs. 14. Can ECB be availed for repaying rupee loans taken by the company? Permitted end use under Track II and Track III specify a negative list. The ECB proceeds can be utilized for any purpose other than those specifically prohibited. All ECB loan agreements entered into before December 02, 2015 may continue with the disbursement schedules as already provided in the loan agreements without requiring any further consent from the RBI or any AD Category I bank. For raising of ECB under the following carve outs, the borrowers will, however, have time up to March 31, 2016 to sign the loan agreement and obtain the LRN from the Reserve Bank by this date: o ECB facility for working capital by airlines companies (refinancing of the outstanding working capital Rupee loan(s) availed of from the domestic banking system); o ECB facility for consistent foreign exchange earners under the USD 10 billion Scheme (can raise ECBs for repayment of outstanding Rupee loans availed of for capital expenditure from the domestic banking system and/ or fresh Rupee capital expenditure subject to below mentioned certain terms and conditions); Indian Companies in the manufacturing and infrastructure sector and as per A.P. (DIR Series) Circular No.78 dated January 21, 2013, Indian Companies in the hotel sector (with a total project cost of INR 250 crore or more) who were consistent foreign exchange earners during the past three financial years and not in default list/caution list of the Reserve Bank of India can avail of ECBs, subject to overall limit of USD 10 billion and approval of the Reserve Bank of India, for repayment of rupee loans availed of for capital expenditure from the domestic banking systems which are still outstanding and/or fresh Rupee capital expenditure. The maximum permissible ECB that could be availed of by an individual company will be limited to 75 % of the average annual export earnings realized during the past 3 financial years or 50% of the average annual export earnings realised during past 3 financial years, whichever is higher. However, the borrowing is subject to the restriction that such ECB liability needs to be extinguished only out of the foreign exchange earnings of the borrowing company.

14 In furtherance to Circular no 78, RBI vide A.P. (DIR Series) Circular No.12 dated July 15, 2013 extended the benefit of USD 10 billion scheme to Indian companies in the aforesaid sectors which have established Joint Venture (JV) / Wholly Owned Subsidiary (WOS) / have acquired assets overseas, subject to following conditions: (a) ECB can be availed of for repayment of all term loans having average residual maturity of 5 years and above / credit facilities availed of by Indian companies from domestic banks for overseas investment in JV/WOS, in addition to Capital Expenditure ; (b) ECB can be availed of within the scheme based on the higher of 75 per cent of the average foreign exchange earnings realized during the past three financial years and / or 75 per cent of the assessment made about the average of foreign exchange earnings potential for the next three financial years of the Indian companies from the JV / WOS / assets abroad as certified by Statutory Auditors / Chartered Accountant / Certified Public Accountant / Category I Merchant Banker registered with SEBI / an Investment Banker outside India registered with the appropriate regulatory authority in the host country; (c) ECB availed of under the scheme will have to be repaid out of forex earnings 9 from the overseas JV / WOS / assets. However, RBI vide RBI/ /585 A.P. (DIR Series) Circular No.129 dated May 9, 2014 has specified that eligible Indian companies will NOT BE permitted to raise ECB from overseas branches / subsidiaries of Indian banks for the purpose of refinance / repayment of the Rupee loans raised from the domestic banking system in respect of spectrum allocation, repayment of existing Rupee loans for companies in infrastructure sector and Repayment of Rupee loans. Former Provisions Formerly, ECB availed under Automatic Route could not be utilised for repayment of existing rupee loans. However, as per A.P. (Dir Series) Circular No. 54 dated November 26, 2012, successful bidders making the upfront payment for 9 The past earnings in the form of dividend/repatriated profit/ other forex inflows like royalty, technical know-how, fee, etc from overseas JV/WOS/assets will be reckoned as foreign exchange earnings for the purpose of US$ 10 billion scheme.

15 the award of 2G spectrum initially out of Rupee loans availed from the domestic lenders could refinance such rupee loans with a long-term ECB, under the Automatic Route subject to following conditions: o the long term ECB shall be raised within a period of 18 months from the date of sanction of such Rupee loans for the stated purpose from the domestic lenders. o the designated AD Category I bank has evidenced the payment of upfront fees to GoI in the form of a receipt/challan from DoT; and o the designated AD - Category I bank shall monitor the end-use of funds. However, eligible borrowers in the Telecom Sector who were successful bidders for spectrum allocation could avail rupee loan initially to make the payment and refinance the same with a long-term ECB, subject to approval from the Reserve Bank of India and fulfillment of following conditions: o The ECB should be raised within 12 months from the date of payment of the final installment to the Government; (ECB window for financing 3G spectrum rupee loans, that are still outstanding in telecom operator s books of accounts, will be open upto March 31, 2014 RBI vide A.P. (DIR Series) Circular No.114 dated June 25, 2013.) o The end-use of funds should be monitored by the designated AD-Category I bank. o No guarantee in any form will be given by the Banks in India. o The borrower needs to comply with all other conditions relating to eligible borrowers, recognized lenders, all-in-cost etc. Further, Indian Companies in the infrastructure sector (except companies in the power sector) are permitted to utilise 25% of the fresh ECB raised by them, towards refinancing of the Rupee loans availed from the domestic banking system subject to the approval of the Reserve Bank of India and fulfillment of following conditions: o Atleast 75% of the fresh ECB proposed to be raised should be utilised for capital expenditure towards new infrastructure project(s) o In respect of the remaining 25%, the refinance needs to be utilized only for repayment of the Rupee loan availed for capital expenditure of earlier completed infrastructure project(s); and o The refinance needs to be utilised only for the Rupee loans which are outstanding in the books of the financing bank concerned. The term Infrastructure Sector has the same meaning as given in the Harmonised Master List of Infrastructure sub-sectors approved by Government of India vide

16 Notification F. No. 13/06/2009-INF dated March 27, 2012 as amended / updated from time to time. Companies in the power sector are permitted to utilize up to 40% of fresh ECB raised by them towards refinancing of the Rupee loan/s availed from the domestic banking system subject to approval of the Reserve Bank of India and fulfilment of the condition that atleast 60% of the fresh ECB proposed to be raised should be utilized for fresh capital expenditure for infrastructure project(s). 15. Is it only that Corporates are allowed to accept ECBs or can Non-Corporate Bodies also accept ECBs? In case of Companies, only those who qualify as an eligible borrower are allowed to accept ECB under the Automatic Route under the respective tracks allotted. This means Corporate, including few in services sector, and Infrastructure Finance Companies except financial intermediaries, such as banks, financial institutions, Housing Finance Companies. Non-Corporate like Trusts and Non-Profit making organizations are eligible to raise ECB under Track III provided they are engaged in micro finance activities and satisfy the following criteria: (i) should have a satisfactory borrowing relationship for atleast three years with an AD Cat I bank in India, and (ii) should have a certificate of due diligence on fit and proper status from the AD Cat I bank Who are the Borrowers eligible to avail ECB? The list of entities eligible to raise ECB under the three tracks is set out in the following table Track I Track II Track III Companies in All entities listed under Track I All entities listed under manufacturing, and Track I software development sectors. Shipping and airlines Companies in infrastructure All Non-Banking companies. sector. Financial Companies (NBFCs) Small Industries Holding companies and Core Developers of Special Development Bank of India (SIDBI). Investment Companies (CICs) Economic Zones (SEZs)/ National Manufacturing and Investment Zones (NMIZs).

17 Track I Track II Track III Units in Special Real Estate Investment Trusts Companies engaged in Economic Zones (REITs) and Infrastructure miscellaneous services (SEZs). Investment Trusts (INVITs) viz. research and Export Import Bank coming under the regulatory development (R&D), of India (Exim Bank) framework of the Securities and training (other than (only under the Exchange Board of India (SEBI). educational institutes), approval route companies supporting infrastructure, companies providing logistics services. Infrastructure sector, NBFCs-Micro Finance NBFC-IFC, NBFC-AFC, Institutions (NBFCs- CICs, Holding MFIs), Not for Profit Companies 10 companies registered under the Companies Act, 1956/2013, Societies, trusts and cooperatives (registered under the Societies Registration Act, 1860, Indian Trust Act, 1882 and State-level Cooperative Acts/Multilevel Cooperative Act/State-level mutually aided Cooperative Acts respectively), Non- Government Organisations (NGOs) which are engaged in micro finance activities Can Entities engaged in manufacturing sector avail ECBs? Companies in manufacturing and software development sectors can avail ECB under Track I subject to conditions laid down by the RBI. Also refer the carve out available to manufacturing sector under Question Entities engaged in micro-finance activities to be eligible to raise ECB: (i) should have a satisfactory borrowing relationship for atleast three years with an AD Cat I bank in India, and (ii) should have a certificate of due diligence on fit and proper status from the AD Cat I bank.

18 18. Can Corporate engaged in services sector avail ECBs under automatic route: Companies in software development sector, Shipping and airline companies can avail ECB under Track I, II and III. Corporate engaged in miscellaneous services viz. research and development (R&D), training (other than educational institutes), companies supporting infrastructure and companies providing logistics services can avail ECB under Track III. Individual limit for service sector has been stipulated of USD200 million or equivalent under automatic route. Corporate in the services sector can avail of ECB beyond USD 200 million or its equivalent in a financial year under approval route. 19. Can NBFCs avail of ECBs? All NBFCs, under the purview of RBI, 12 can avail ECBs under Track III for following purpose: o On-lending to the infrastructure sector; o Providing hypothecated loans to domestic entities for acquisition of capital goods/ equipments; and o Providing capital goods/ equipment to domestic entities by way of lease and hire-purchases. Further, NBFCs-Micro Finance Institutions (NBFCs-MFIs), other eligible MFIs, NGOs and not for profit companies registered under the Companies Act, 1956/ 2013 are also eligible to raise ECB under Track III only for on-lending to selfhelp groups or for micro-credit or for bonafide micro finance activity including capacity building. NBFC-IFC and NBFC-AFC can avail ECB under Track-I too, for the purpose of investment in infrastructure sector only. Position under erstwhile ECB framework: NBFCs other than those specified below were not eligible to avail ECB. NBFCs categorized as Non-Banking Financial Company-Micro Finance Institutions (NBFC-MFIs), by the Reserve Bank, could avail ECBs under Automatic Route. 12

19 NBFCs could obtain ECB under the approval route, with minimum average maturity of 5 years, from multilateral financial institutions, reputable regional financial institutions, official export credit agencies and international banks to finance import of infrastructure equipment for leasing to infrastructure projects. NBFCs categorized as IFCs by the Reserve Bank, were permitted to avail of ECBs, including the outstanding ECBs, upto 75% of their owned funds, under the automatic route as per A.P. (DIR Series) Circular No. 69 dated January 7, NBFC-IFCs desirous of availing ECBs beyond 75 % of their owned funds would require the approval of the Reserve Bank and, therefore, be considered under the approval route. However, the same was subject to fulfillment of compliance norms as stipulated by the Reserve Bank via DNBS circular dated February, 2010 and hedging of the currency risk in full. NBFCs categorized as Asset Finance Companies ( AFCs) by the Reserve Bank had been allowed vide A.P. (DIR Series) Circular No. 6 dated July8, 2013 to avail of ECB subject to following conditions: (i) NBFC-AFCs are allowed to avail of ECB under the automatic route from all recognised lenders as per the extant ECB guidelines with minimum average maturity period of five years in order to finance the import of infrastructure equipment for leasing to infrastructure projects; (ii) in cases, where the NBFC-AFCs avail of ECB in the form of Foreign Currency Bonds from international capital markets, such ECBs will be permitted to be raised only from those international capital markets that are subject to regulations prescribed by the host country regulator in a Financial Action Task Force (FATF) member country compliant with FATF guidelines; (iii) such ECBs (including outstanding ECBs) under the automatic route can be availed upto 75 per cent of owned funds of NBFC-AFCs, subject to a maximum of USD 200 million or its equivalent per financial year; (iv) ECBs by AFCs above 75 per cent of their owned funds will be considered under approval route by Reserve Bank; and (v) the currency risk of such ECBs is required to be hedged in full. 20. Can HFCs avail ECBs? All ECB loan agreements entered into before December 02, 2015 may continue with the disbursement schedules as already provided in the loan agreements without requiring any further consent from the RBI or any AD Category I bank. For raising of ECB under ECB facility for low cost affordable housing projects

20 (low cost affordable housing projects as defined in the extant Foreign Direct Investment policy), the borrowers will, however, have time up to March 31, 2016 to sign the loan agreement and obtain the LRN from the Reserve Bank by this date: o HFCs can avail ECB subject to conditions that:-the HFC should be registered with the National Housing Bank (NHB) and operating in accordance with the regulatory directions and guidelines issued by NHB; o The minimum Net Owned Funds (NOF) for the past three financial years shall not be less than INR 300 crore; o Borrowing through the ECB should be within the HFC's overall borrowing limit of 16 times their Net Owned Funds (NOF); o The net non-performing assets (NNPA) shall not exceed 2.5 % of the net advances; o The maximum loan amount sanctioned to the individual buyer will be capped at INR 25 lakh subject to the condition that the cost of the individual housing unit shall not exceed INR 30 lakh; and o The ECB shall be swapped into Rupees for the entire maturity on fully hedged basis. HFCs while making the applications, shall o submit a certificate from NHB, the nodal agency, that the availment of ECB is for financing prospective owners of individual units for the low cost affordable housing; o ensure that cost of such individual units does not exceed Rs. 30 lakh and loan amount does not exceed Rs. 25 lakh; o ensure that the units financed are having maximum carpet area of 60 square metres; and o ensure that the interest rate spread charged by the HFCs to the ultimate buyer is reasonable. NHB shall ensure that interest rate spread for HFCs for on-lending to prospective owners of individual units under the low cost affordable housing scheme is reasonable. The ECB to be availed will be subject to an aggregate limit of USD 1(one) billion fixed for ECB under the low cost affordable housing scheme which includes ECBs to be raised by developers/builders and NHB/specified HFCs, for each of the financial year , and Can Infrastructure Finance Companies (IFCs) avail ECBs?

21 IFCs can avail of ECBs under the Track I, Track II and Track III of the automatic route. Additionally, NBFC-IFC can also avail of facility of credit enhancement by eligible non-resident entities (viz. Multilateral financial institutions (such as, IFC, ADB, etc.) / regional financial institutions and Government owned (either wholly or partially) financial institutions, direct/ indirect equity holder) to domestic debt raised through issue of capital market instruments, such as Rupee denominated bonds and debentures. o NBFC-IFCs proposing to avail of the credit enhancement facility should comply with the eligibility criteria and prudential norms laid down in the circular DNBS.PD.CC No.168/ / dated February 12, 2010 and in case the novated loan is designated in foreign currency, the IFC should hedge the entire foreign currency exposure; and o The reporting arrangements as applicable to the ECBs would be applicable to the novated loans. 22. Can builders/real estate companies avail ECBs? All ECB loan agreements entered into before December 02, 2015 may continue with the disbursement schedules as already provided in the loan agreements without requiring any further consent from the RBI or any AD Category I bank. For raising of ECB under ECB facility for low cost affordable housing projects (low cost affordable housing projects as defined in the extant Foreign Direct Investment policy), the borrowers will, however, have time up to March 31, 2016 to sign the loan agreement and obtain the LRN from the Reserve Bank by this date: Only Developers/Builders registered as companies may raise ECB for low cost affordable housing projects, qualifying as an eligible borrower, can avail of ECB (not through issue of FCCBs) under the Approval Route. They should have minimum 3 years experience in undertaking residential projects, have good track record in terms of quality and delivery and the project and all necessary clearances from various bodies including Revenue Department with respect to land usage/environment clearance, etc., are available on record. They should also not have defaulted in any of their financial commitments to banks/ financial institutions or any other agencies and the project should not be a matter of litigation.

22 Builders/ developers meeting the eligibility criteria shall have to apply to the National Housing Bank (NHB) in the prescribed format. NHB shall act as the nodal agency for deciding a project s eligibility as a low cost affordable housing project, and on being satisfied, forward the application to the Reserve Bank for consideration under the approval route. Once NHB decides to forward an application for consideration of RBI, the prospective borrower (builder/developer) will be advised by the NHB to approach RBI for availing ECB through his Authorised Dealer in the prescribed format. The ECB availed of by developers and builders shall be swapped into Rupees for the entire maturity on fully hedged basis The ECB to be availed will be subject to an aggregate limit of USD 1(one) billion fixed for ECB under the low cost affordable housing scheme which includes ECBs to be raised by developers/builders and NHB/specified HFCs, for each of the financial year , and What needs to be done for a builder to avail ECBs through the National Housing Bank? If a builder/developer is not able to raise ECB directly as discussed above, National Housing Bank shall be permitted to avail of ECB, under approval route, for on-lending to such developers who satisfy the following eligibility criteria, subject to the interest rate spread set by the Reserve Bank: i) Developers/builders undertaking low cost affordable housing projects should be a company registered under the Companies Act, 1956; ii) Such developers/builders should have minimum 3years experience in undertaking residential projects, and should have good track record in terms of quality and delivery; iii) The developers/builders should not have defaulted in any of their financial commitments to banks/ financial institutions or any other agencies; iv) The project should not be a matter of litigation; v) The project should be in conformity with the provisions of master plan/ development plan of the area. The layout should conform to the land use stipulated by the town and country planning department for housing projects; and vi) All necessary clearances from various bodies including Revenue Department with respect to land usage/environment clearance, etc., are available on record.

23 The ECB to be availed will be subject to an aggregate limit of USD 1(one) billion fixed for ECB under the low cost affordable housing scheme which includes ECBs to be raised by developers/builders and NHB/specified HFCs, for each of the financial year , and The ECB availed of by developers and builders shall be swapped into Rupees for the entire maturity on fully hedged basis. 24. Who can be the lender for an ECB? Track I Track II Track III International banks and International capital markets All entities listed under Track I but for overseas branches / subsidiaries of Indian banks. All entities listed under Track I but for overseas branches / subsidiaries of Indian banks. Export credit agencies, Suppliers of equipment, & Foreign equity holders. Multilateral financial institutions (such as, IFC, ADB, etc.) / regional financial institutions and Government owned (either wholly or In case of NBFCs-MFIs, other eligible MFIs, not for profit companies and NGOs, ECB can also be availed from overseas organisations 13 and individuals Overseas Organizations proposing to lend ECB would have to furnish to the AD bank of the borrower a certificate of due diligence from an overseas bank, which, in turn, is subject to regulation of host-country regulators and such host country adheres to the Financial Action Task Force (FATF) guidelines on anti-money laundering (AML)/ combating the financing of terrorism (CFT). The certificate of due diligence should comprise the following: (i) that the lender maintains an account with the bank at least for a period of two years, (ii) that the lending entity is organised as per the local laws and held in good esteem by the business/local community, and (iii) that there is no criminal action pending against it. 14 Individual lender has to obtain a certificate of due diligence from an overseas bank indicating that the lender maintains an account with the bank for at least a period of two years. Other evidence /documents such as audited statement of account and income tax return, which the overseas lender may furnish, need to be certified and forwarded by the overseas bank. Individual lenders from countries which do not adhere to FATF guidelines on AML / CFT are not eligible to extend ECB.

24 partially) financial institutions. Overseas long term investors such as: a. prudentially regulated financial entities; b. Pension funds; c. Insurance companies; d. Sovereign Wealth Funds; e. Financial institutions located in International Financial Services Centres in India Overseas branches / subsidiaries of Indian banks Is it possible for a foreign equity holder to provide ECBs to the company in which such equity holder holds investment? Eligibility for a foreign equity holder to be a Recognized Lender Particulars For ECB upto USD 5 million For ECB more than USD 5 million Under Automatic Route Minimum paid-up equity of 25% held directly by the lender. Minimum paid-up equity of 25% held directly by the lender & ECB liability- equity ratio # not exceeding 4:1 Under Approval Route Minimum paid-up equity of 25% held directly by the lender. Minimum paid-up equity of 25% held directly by the lender & ECB liability- equity ratio # not exceeding 7:1 15 Participation of Indian banks, their overseas branches / subsidiaries will be subject of prudential norms issued by the Department of Banking Regulation (DBR) of the Reserve Bank.

25 # For computation of ECB liability- equity ratio refer Question No.26 As per A.P (DIR Series) Circular No.31 dated September 4, 2013 eligible borrowers are permitted to avail of ECB under the approval route from their foreign equity holder company with minimum average maturity of 7 years for general corporate purposes subject to the following conditions: i. Minimum paid-up equity of 25 per cent should be held directly by the lender; ii. Such ECBs would not be used for any purpose not permitted under extant the ECB guidelines (including on-lending to their group companies / step-down subsidiaries in India); and iii. Repayment of the principal shall commence only after completion of minimum average maturity of 7 years. No prepayment will be allowed before maturity. 26. What is the meaning of the debt/equity ratio in case of foreign equity holders? Debt/equity ratio in case of foreign equity shareholders means the ECB liabilityequity ratio. ECB liability means the proposed borrowing + the outstanding borrowing from the concerned foreign equity holder lender. Equity means Paid up capital + free reserves (including the share premium received in foreign currency from the concerned foreign equity holder lender) 27. Whether availing of operating lease by an Indian Entity an ECB? As per A.P.(DIR Series)Circular No.24 dated March 1, 2002, authorised dealers may allow remittance of payment of lease rentals, opening of letter of credit towards security deposit etc. in respect of import of aircraft/ aircraft engine/ helicopter on operating lease basis, after verifying documents to show that necessary approval from the appropriate authorities has been obtained. Further, by way of A.P.(DIR Series)Circular No.13 dated September 27, 2005 ADs may permit airline companies (other than a Public Sector company or a Department/Undertaking of the Government of India/State Government/s) to remit up to USD 1,000,000 (US Dollar one million only) per aircraft towards security deposit (for payment of lease rentals) with lessor for import of aircraft / aircraft engine / helicopter on operating lease without a standby letter of credit or a guarantee from a reputed international bank abroad or a guarantee of an AD

26 in India against the counter-guarantee of a reputed international bank abroad subject to following conditions:, o The AD is satisfied about the bona fides of the transaction. o The airline company has obtained necessary approval from appropriate authority like Ministry of Civil Aviation/Director General of Civil Aviation, Government of India for importing the aircraft/helicopter on operating lease. o Remittance is permitted as per the Policy on Advance Remittances approved by the Board of Directors of the bank or with the specific approval of the Board of Directors of the bank. o The final maturity of the security deposit should not be beyond the date of the last installment towards lease rental or date of return of the aircraft / helicopter to the lessor, whichever is later. If required, the deposit amount may be adjusted towards lease rentals. However, the balance security deposit, if any, should be repatriated before expiry of the lease period. In case of an airline company in the Public Sector or a Department/Undertaking of the Government of India/State Government/s, ADs may permit remittance of amount exceeding USD 1,00,000 (US Dollar one hundred thousand only) per aircraft towards security deposit (for payment of lease rentals) with lessor subject to conditions specified above and a specific waiver of bank guarantee from the Ministry of Finance, Government of India. As per A. P. (DIR Series) Circular No.62 dated April 20, 2009, AD Category I banks are allowed to convey no objection from the Foreign Exchange Management Act (FEMA), 1999 angle for issue of corporate guarantee in favour of the overseas lessor, for operating lease in respect of import of aircraft / aircraft engine / helicopter, after obtaining o Board Resolution for issue of corporate guarantee from the company issuing such guarantees, specifying names of the officials authorised to execute such guarantees on behalf of the company. o Ensuring that the period of such corporate guarantee is co-terminus with the lease period. Further, the Reserve Bank videnotificationno. FEMA 206 / 2010-RB. dated June 1, 2010 amended the Foreign Exchange Management (Guarantees) Regulations, 2000 and inserted a new clause to the effect that : a bank which is an authorised dealer may, subject to the directions issued by the Reserve Bank in this behalf, permit a person resident in India to issue corporate guarantee in favour of an overseas lessor for financing imports through operating lease effected in conformity with the Foreign Trade Policy in force and under the provisions of the Foreign Exchange Management (Current Account Transactions)