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General news alert for an important change in Indian External Commercial Borrowing Guidelines

30. September 2013

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.

A. Background
Indian companies are under heavy restrictions when borrowing funds from foreign lenders, e.g. from their foreign shareholders. Such loans are subject to guidelines on External Commercial Borrowings (“ECB”). Restrictions include caps on maximum interest and minimum average maturity. The most severe restriction however is a limitation of the permissible end-use. This restriction has now partly been lifted.

In Detail:
ECBs i.a. refer to commercial loans in the form of bank loans, buyers’ credit, suppliers’ credit and shareholder’s loans availed by an Indian borrower of from non-resident lenders. ECBs must have a minimum average maturity of at least 3 years.

ECBs can be taken up under two routes:
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.

The permissible end-use of ECBs is strictly limited under both, the Automatic Route and the Approval Route. Until now, ECBs could basically only be availed for financing investments, i.e. purchase of capital assets like machinery. It was especially not allowed to take up an ECB for “general corporate purposes”, “working capital” and “repayment of existing INR loans”. This has now changed. As per the above Circular, the RBI now permits Indian companies to take up ECBs under the Approval Route from their foreign equity holders to finance “general corporate purposes”. We expect this to be a far reaching relaxation for foreign invested Indian companies who earlier had little alternative but to increase their share capital or to take up expensive local INR loans from Indian banks for meeting their financing requirements.

Still, some ambiguity exists with regard to the scope of the new relaxation. The Circular fails to distinguish the term “general corporate purposes” from the term “working capital” and thus leaves it open whether ECBs may be used for financing “working capital” and “repayment of existing INR loans” or whether such end-uses are still prohibited. We expect the RBI to clarify this ambiguity in the months to come. In the meantime, we suggest that any application to the RBI should explicitly mention the proposed usage of the ECB e.g. financing current assets, meeting expenses for general corporate purposes and (if applicable) re-payment of existing Rupee loans.

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  repayment will be allowed before maturity
- 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). Further, the maximum interest rate (including certain costs) that can be agreed between the Indian borrower and the foreign lender currently is 500 basis points over LIBOR-6-Months.

B. Action to be taken
Review the current situation of your enterprise.
ECBs should be considered as an alternative to increasing the share capital or availing a local INR loan for financing an Indian company.

For any further query please do not hesitate to contact any Roedl and Partner office at:
Nuremberg: Martin Wörlein (
Tillmann Ruppert (
Berlin: Seema Bhardwaj (
Delhi: Anthony Sequeira (
Mumbai: Jan Eberhardt (
Pune: Rahul Oza (

This message is a general news alert and cannot be a substitute for legal and tax advice in an individual case.