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How New ECB Rules Change India Inc.’s Borrowing Plans


Amidst the recent global challenges and trade wars, many developing countries, including India, faced macro-economic issues due to weakness in their currencies. The Indian government has taken many steps to stabilise the volatility in the rupee by carrying out open market operations in the currency markets, boost exports, additional import duties, etc. India has also taken another step in boosting its foreign reserves by liberalising the foreign currency loan regime.

The external commercial borrowings regime provides for a framework for Indian corporates to avail foreign currency loans from an overseas lender. Over the years, the ECB regime has undergone significant changes. However it is still perceived to be stringent, with many restrictions. The RBI had notified the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018, on Dec. 17, 2018. In continuation, the RBI circular on Jan. 16, 2019, has revised the extant ECB framework. This signifies a major change in policy from the government.

In this regard, we have carried out a comparative analysis of the key changes.

Definition Of Indian Entity

The definition of ‘Indian entity’ has been expanded to include limited liability partnerships. This was one of the drawbacks of adopting an LLP structure, which has now rectified.

This makes LLP firms a viable entity option for foreign investors.

Eligible Borrowers

The erstwhile regulations restricted eligible borrowers to manufacturing companies, special economic zone units, software companies, non-banking financial companies, etc. Service companies and trading entities were not eligible for ECB.

The definition of ‘eligible borrowers’ has now been expanded to include all entities that are eligible to receive foreign direct investments and other specified entities like port trust, units in an SEZ, startups, etc. This would imply that LLP, trading entities, etc. would now also be allowed to avail the ECB facility.

This is a significant change and would resolve funding issues for these service and trading companies which so far had to rely only on equity capital from their parent companies for funding requirements.

Individual Annual Borrowing Limits

In the earlier framework, companies could raise up to $500 million (specific categories up to $750 million) or equivalent.

The new framework has revised the limits as follows:

  • The general limit has been extended to $750 million or equivalent.
  • Oil marketing companies shall now be eligible to raise $10 billion or equivalent, on obtaining board approval.
  • Startups can raise $3 million or equivalent, in the new list of eligible borrowers.

RBI has always been conservative when it comes to capital account transactions. This liberalisation would allow Indian corporates to fund their operations by availing ECBs, which could also provide interest arbitrage.

Eligible Lenders

The earlier regulations restricted eligible lenders to international banks, multilateral financial institutions, direct and indirect equity holders, etc.

The ‘recognised lender’ definition has been expanded to include any entity that is a member of the Financial Action Task Force and International Organization of Securities Commissions, for ECB raised in foreign exchange.

This would open up an entirely new set of lenders like private equity firms and venture capital funds, who would now be able to provide funding to Indian corporates without having any equity exposure.

Minimum Average Maturity Period

The earlier minimum maturity period was 3/5/10 years based on the quantum and purpose of ECB raised.

The revised ECB framework reduces the overall minimum maturity period to 3 to 5 years, depending on quantum and purpose. This also increases the attractiveness for foreign lenders to provide short-term loans.

End-Use Restrictions (Negative List)

Earlier, companies availing ECBs were prohibited in using the proceeds in capital market investments, investment in real estate or purchase of land, construction and the development of an SEZ / industrial park / integrated township.

The revised framework has introduced following further prohibition for the end-use of ECB funds:

  • A chit fund business or Nidhi company
  • Agricultural or plantation activities
  • Trading in Transferable Development Rights.

Use Of Credit Card In Or Outside India

The prior regulations did not provide any clarity on whether the use of credit overseas would constitute a borrowing in foreign currency.

The new regulations clarify that use of a credit card overseas would not be considered as borrowing or lending.

Other Key Considerations

  • Under the new regulations, it is explicitly clarified that the ECB framework shall not apply to investments in non-convertible debentures in India made by registered foreign portfolio investors.
  • The new regime has introduced a late-submission fee for delay in reporting which could be in the range of Rs 5,000-50,000 per year, or Rs 1 lakh per year, depending on the delay.
  • A specific framework has been provided for startups availing ECB.
  • It has been clarified that a resident individual studying abroad may raise loans outside India up to $250,000 or equivalent, for the payment of education fees abroad and maintenance.

Also read: Flows to India Stock Funds Smallest in 23 Months as Demand Cools

Tax Implications

With this liberalisation, it is expected that many companies may wish to avail its fund requirements through the ECB route and would see an increase in debt.

Having a higher debt component is an age-old tax planning strategy since the interest on debt is tax-deductible, compared to dividend which is not tax-deductible, and attracts an additional 20 percent dividend distribution tax.

However, one must consider the following tax aspects before deciding on an appropriate debt-equity mix:

Interest Limiting Deduction – Section 94B, Income Tax Act

Section 94B of the Income Tax Act restricts deduction in respect of expenditure by interest—or of similar nature—paid to non-resident associated entities to 30 percent of EBITDA. The provisions do not apply to a banking company and for others, the threshold limit is Rs 1 crore. Further, interest over the 30 percent limit can be carried forward for set-off up to 8 subsequent years.

This provision was introduced from FY18 in line with Action Plan 4 of OECD’s Base Erosion & Profit Shifting project.

Indian corporates availing foreign currency loans from related parties should also be mindful of these provisions and properly plan their debt-equity structure so that there is no disallowance of excess interest.

Foreign Lender – Taxability In India And Withholding Tax

The interest paid on foreign currency borrowing would be liable to a reduced tax rate of 5 percent (plus applicable surcharge and education cess) as per the provisions of Section 194LC of the Income Tax Act if the loans raised prior to July 1, 2020. With this ECB liberalisation, it is expected that the government may extend the time limit of 2020 to boost foreign inflows.

However, it would be advisable for companies to ensure that their ECBs/borrowings are done before the July 2020 deadline to enjoy the 5 percent tax rate.

Since the tax rate is 5 percent, the Indian company paying interest must withhold tax also at 5 percent (plus applicable surcharge and education cess).

Transfer Pricing – Interest Rate To Be At Arm’s-Length

ECB regulations provide for the maximum interest that can be charged. Currently, the limit provided under the ECB framework is the benchmark rate plus a 450 basis point spread. The benchmark rate in case of foreign currency refers to a 6-month LIBOR rate of applicable borrowing currency and for rupee loans, it refers to the prevailing rate of Government of India securities.

While the maximum rate is provided under the regulations, the interest rate for related-party loans must be at an arm’s length interest rate, from the transfer pricing perspective.

Accordingly, corporates are advised to perform an interest rate benchmarking study to save themselves from protracted litigation with the tax authorities.


Most of the developed countries do not have any exchange control regulations and India has always spoken about moving towards capital account convertibility. This liberalisation can be considered as a significant move towards that. The revamped regulations are certainly a welcome move as they provide a larger platform for Indian corporates to have access to global funding.

The revised framework has made certain pragmatic changes allowing trading companies to raise foreign funds, allowing LLP to raise foreign funds, etc. These would overall increase India’s attractiveness as an investment destination and go a long way in improving India’s ranking in the Ease of Doing Business Index.

Corporates have been presented with a unique proposition to relook at their current funding structure and debt-equity mix and accordingly plan their activities to take maximum benefits of the liberalised framework. Obviously, this must be planned holistically, factoring the tax and commercial aspects.

Maulik Doshi is Partner at SKP Business Consulting LLP, and Nishit Parikh is Principal at SKP & Co.

The views expressed here are those of the authors’ and do not necessarily represent the views of BloombergQuint or its editorial team.