External Commercial Borrowing norms for Startup (ECB)
“Start-ups have the potential to play a significant role in economic growth and job creation by spurring innovation and injecting competition”.
What is ECB?
External commercial borrowings (ECB) imply borrowing (debt) from a foreign (non-resident) lender. ECB is an attractive financing route as it generally offers access to finance with low rate of interest available from overseas low interest markets.
ECBs have been in use by many corporations, PSUs and especially by MNCs setting up operations in India. Who can raise an ECB, from where and under what conditions, rate, maturity period etc. are all governed by Reserve Bank of India (RBI). Startups can now take foreign currency loans via ECB route.
Start-ups can raise up to $3 million either in rupees or in any convertible foreign currency or a combination of both.
RBI said the lender/investor in the ECB should be a resident of a country which is either a member of the Financial Action Task Force or a member of a FATF-Style Regional Body, and should not be from a country identified in the public statement of the FATF. Overseas branches/subsidiaries of Indian banks and overseas wholly owned subsidiary/joint venture of an Indian company will, however, not be considered as recognized lenders under this framework. According to the RBI, the borrowing can be in the form of loans, non-convertible, optionally convertible or partially convertible preference shares. Conversion into equity is freely permitted, subject to regulations applicable for foreign investment in start-ups.
Borrowing in foreign currency will cut down the cost of conversion for the start-ups.
“The avenues for start-ups will expand as it will help to ease out on liquidity part. It will be very beneficial for those who make payments in dollars, though they need to have necessary backup support to comply with the guidelines,”
RBI’s move is in line with the government’s push to early-stage companies through its Start-up India campaign. Earlier this year, the government introduced incentives for early-stage companies, including an income tax holiday, an inspector-raj-free regime and capital gains tax exemptions on investments in start-ups. It also launched a Rs10,000 crore corpus to provide funding for these firms.
Separately, in July, the capital markets regulator, the Securities and Exchange Board of India, introduced easier regulations for start-ups that want to raise funds from the equity markets.
What are the key announcements?
What is a Startups as per circular?
The circular covers Startups as defined by the Official Gazette of Government of India dated February 18, 2016 (i.e. Startup Policy of DIPP).
How much can a startup borrow and in what currency?
A startup can borrow up to US$ 3 million or equivalent per financial year either in Indian rupee or any convertible foreign currency or a combination of both. In case of borrowing in INR, the non-resident lender, should mobilise INR through swaps/outright sale undertaken through an AD Category-I bank in India.
What is minimum maturity period?
Minimum average maturity period will be 3 years.
For what end-use can startups use ECB?
Usually there are end-use direction for an ECB. However, for startups under the above said circular of RBI, ECB can be used for any expenditure in connection with the business of the Startup.
What is all-in-cost of ECB?
There are no limits. The RBI circular says, this shall be mutually agreed between the borrower and the lender
In what forms can one receive the lending?
It can be in the form of loans or non-convertible, optionally convertible or partially convertible preference shares and the minimum average maturity period will be 3 years.
Can this be converted in to equity?
Yes, conversion into equity is freely permitted, subject to Regulations applicable for foreign investment in Startups.
Who can lend?
Previously, ECB regime inter alia set out various conditions for Indian companies raising loan from external borrowings including conditions relating to (i) eligible borrowers (ii) eligible lenders (iii) permitted end uses etc.
After this circular, the lender / investor shall be a resident of a country who is either a member of Financial Action Task Force (FATF) or a member of a FATF-Style Regional Bodies; and shall not be from a country identified in the public statement of the FATF. (Please see RBI Circular for detail)
However, overseas branches and subsidiaries of Indian banks and overseas wholly-owned subsidiary or joint venture of an Indian company will not be considered as recognized lenders.
What are security norms?
Foreign lenders or Investors are allowed to request security for any collateral in the nature of movable, immovable, intangible assets (including patents, IP rights etc.) but shall comply with foreign direct investment norms applicable for foreign lenders holding such securities.
Issuance of corporate or personal guarantee is allowed. Guarantee issued by non-resident(s) is allowed only if such parties qualify as lender under paragraph 2(c) above. Exclusion: Issuance of guarantee, standby letter of credit, letter of undertaking or letter of comfort by Indian banks, all India Financial Institutions and NBFCs is not permitted.