Brief Guidelines of FEMA with respect to Foreign Loan availability for Indian Corporates, along with restrictions as prescribed by RBI have been laid down below

Borrowings in Foreign Exchange
  External Commercial Borrowings Trade Credit
Particulars Automatic Route Approval Route
Definition ECBs refer to commercial loans in the form of bank loans, buyers’ credit, suppliers’ credit and shareholder’s loans availed by an Indian borrower from non-resident lenders. ECBs must have a minimum average maturity of at least 3 years. Foreign currency credit/loan extended for imports into India by the overseas supplier, bank and financial institution
How is borrowing availed? Under the Automatic Route, the Indian company can apply with its local Indian bank for a permission to avail an ECB if certain parameters (interest rate / maturity) are met. If the parameters are met, the necessary loan registration number will be issued within a few weeks. Under the Approval Route, the Indian company has to ask the RBI for a specific permission to avail an ECB especially if certain parameters are proposed to be exceeded. The RBI will review the application in detail and it usually takes some months before a decision is rendered.  
Who can take?
  • Any company registered under the Companies Act, 1956, other than a financial intermediary (such as a Bank, financial institution, housing finance company and a non-banking finance company) is eligible to borrow under this Schedule
  • Non-Government Organisations and Micro Finance Institutions engaged in micro-finance activities
  • Any other entity as specified by the Reserve Bank
(a) Any corporate registered under the Companies Act, 1956.
(b) Financial institutions dealing exclusively with infrastructure or export finance such as IDFC, IL& FS, Power Finance Corporation, Power Trading Corporation, IRCON and Exim Bank.
(c) Banks and financial institutions which had participated in the textile or steel sector restructuring package as approved by the Central Government.
(d) Entities falling outside the purview of the Automatic Route as per Schedule I.
(e) Any other entity as specified by the Reserve Bank.
Amount
  • Company – shall not exceed USD 500 million or equivalent in any one financial year (April-March)
  • Non-Government organisation and Micro Finance Institution engaged in micro-finance activities – shall not exceed USD 10 million or equivalent during a financial year (April-March)
(a) Up to USD 20 million per import transaction for import of all items permissible under the Foreign Trade Policy (except Gold) with a maturity period (from the date of shipment) up to one year. (b) For import of capital goods, up to USD 20 million per import transaction.
(c) Trade Credit exceeding USD 20 million per import transaction will require the prior approval of the Reserve Bank of India.
Who can lend? (a) International bank or export credit agency or international capital market, or
(b) Multilateral financial institutions, namely, IFC, ADB, CDC etc., or
(c) Foreign collaborator or foreign equity holder as specified by the Reserve Bank, or
(d) Supplier of equipments provided the amount of loan raised does not exceed the total cost of the equipment being supplied by the lender, or
(e) Any other eligible entity as prescribed by the Reserve Bank in consultation with Government of India.
(a) International bank or export credit agency or international capital market, or
(b) Multilateral financial institutions, namely, IFC, ADB, CDC etc., or
(c) Foreign collaborator or foreign equity holder as specified by the Reserve Bank, or
(d) Supplier of equipments provided the amount of loan raised does not exceed the total cost of the equipment being supplied by the lender, or
(e) Any other eligible entity as prescribed by the Reserve Bank in consultation with Government of India
Overseas supplier, Bank and Financial Institution
Purpose (End-use)
  • for investment (such as import of capital goods, new projects, modernisation/ expansion of existing production units) in real sector – industrial sector including Small and Medium Enterprises (SME) and infrastructure sector – in India
  • for first stage acquisition of shares in the disinvestment process and also in the mandatory second stage offer to the public under the Government’s disinvestment programme of PSU shares,
  • for direct investment in overseas Joint Ventures (JV)/Wholly Owned Subsidiaries (WOS) subject to the existing guidelines on Indian Direct Investment in JV/WOS abroad,
  • any other eligible purpose as specified by the Reserve Bank. 
  • for investment (such as import of capital goods, new projects, modernisation/ expansion of existing production units) in real sector – industrial sector including small and medium enterprises (SME) and infrastructure sector – in India.
  • for first stage acquisition of shares in the disinvestment process and also in the mandatory second stage offer to the public under the Government’s disinvestment programme of PSU shares;
  • (for direct investment in overseas Joint Ventures (JV)/Wholly Owned Subsidiaries (WOS) subject to the existing guidelines on Indian Direct Investment in JV/WOS abroad.
Restriction on End Use The borrowings shall not be utilised for any other purpose including the following purposes, namely:
On-lending, investment in capital (stock) market, investment in real estate business, working capital requirements, general corporate purpose, and repayment of rupee loans.
The borrowings shall not be utilised for any other purpose including the following purposes, namely:-
On-lending, investment in capital (stock) market, investment in real estate business, working capital requirements, general corporate purpose and repayment of Rupee loans.
Recent Change On 4 September 2013, the Reserve Bank of India (RBI) issued a Circular which allows Indian companies to borrow funds from foreign shareholders also for financing general corporate purposes. This is a major relaxation of law. Certain conditions still have to be fulfilled and the loan must be applied for by the Indian company with the RBI under the so called Approval Route (Circular No. 31 A.P. (DIR Series), dated September 4, 2013). The Circular has immediate effect. As per the above Circular, ECBs for general corporate purposes are subject to the following caps and requirements:

The ECB should have an average maturity of at least 7 years;
The foreign lender should have a minimum direct stake (paid-up equity) of 25% in the Indian company;
The repayment of the ECB should not commence before the completion of 7 years; no prepayment will be allowed before maturity; and
The ECB should not be used for any purpose not permitted under the ECB guidelines (including on-lending to other group companies / step-down subsidiaries in India)

 

 

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