Firms can use ECB to repay loans for foreign ventures

ECB can be used to pay back loans (having average residual maturity of 5 years and above) from domestic banks to invest in overseas joint venture and wholly-owned subsidiary

The Reserve Bank of India (RBI) on Monday said companies from manufacturing, infrastructure and hotel sector having ventures abroad can raise money through external commercial borrowings (ECB) to repay loans taken for foreign investments and acquisitions.

This is a step to boost flow of foreign exchange into the country.

At present, Indian companies in manufacturing, infrastructure and hotel sectors are allowed to avail of ECBs to repay outstanding rupee loans. They are also permitted to use ECB proceeds for fresh rupee capital expenditure under the approval route. ECB raised under this route is capped at $10 billion.

RBI has put conditions to use ECB money to pay-off debt. ECB can be used to pay back loans (having average residual maturity of five years and above) from domestic banks to invest in foreign joint venture and wholly-owned subsidiary (WOS). ECBs availed of under the scheme will have to be repaid from foreign exchange earnings from the foreign JV, WOS and assets.

ECB usage has been linked to the average foreign exchange earnings in the past three financial years. Alternatively, companies can submit assessment for average foreign exchange earnings they can generate from the JV/ WOS/assets abroad for the next three years. This assessment has to be certified by any statutory auditors, chartered accountant, certified public accountant, category-I merchant banker registered with Securities and Exchange Board of India.

An investment banker outside India registered with the appropriate regulatory authority in the host country could also provide such certification. The past earnings like dividend, repatriated profit and other forex inflows like royalty, technical know-how, fee, etc, from overseas ventures (JV/WOS/assets) will be treated as foreign exchange earnings.