24 July 2024
Yes, an Indian company can raise funds via External Commercial Borrowings (ECBs) and issue debentures against these borrowings, subject to certain regulations and guidelines issued by the Reserve Bank of India (RBI). Here’s how it typically works:
### External Commercial Borrowings (ECBs):
1. **Definition and Purpose:** - ECBs refer to commercial loans in the form of bank loans, buyers' credit, suppliers' credit, securitized instruments (e.g., floating rate notes and fixed-rate bonds, non-convertible, optionally convertible or partially convertible preference shares), credit from official export credit agencies, and commercial borrowings from the private sector window of multilateral financial institutions such as International Finance Corporation (Washington), ADB, AFIC, CDC, etc.
2. **Regulatory Framework:** - ECBs are governed by the regulations set forth by the RBI under the Foreign Exchange Management Act (FEMA). - Companies eligible to raise ECBs include those in sectors eligible to receive foreign direct investment (FDI) and those companies that are not part of the Reserve Bank of India's (RBI) caution list or list of defaulters.
3. **End-use Restrictions:** - The utilization of ECB proceeds is subject to end-use restrictions as per RBI guidelines. Typically, ECB proceeds can be used for capital expenditure, import of capital goods, and meeting working capital requirements of the company. - Issuance of debentures against ECB proceeds is a permissible end-use under RBI guidelines, provided it is for the stated purposes and complies with the stipulated conditions.
4. **Currency and Tenor:** - ECBs can be raised in foreign currency as well as Indian Rupees (INR), subject to specific conditions and regulations. - The tenor of ECBs varies depending on the type of borrowing and purpose, generally ranging from 3 to 10 years.
### Issuance of Debentures:
1. **Purpose:** - Debentures issued against ECB proceeds serve as a mechanism to provide security or a guarantee for the borrowed funds. The debentures can be issued to the lenders or investors who provide the ECBs.
2. **Conditions:** - The issuance of debentures must comply with the Companies Act, 2013, and relevant SEBI (Securities and Exchange Board of India) regulations, if applicable. - The terms of the debentures, including interest rates, repayment schedule, and security or guarantees provided, must be in accordance with RBI and SEBI guidelines.
### Compliance and Reporting:
1. **Reporting Requirements:** - Indian companies raising ECBs must comply with reporting requirements specified by the RBI. This includes periodic reporting of ECB utilization, compliance with end-use restrictions, and other relevant details.
2. **Legal and Regulatory Considerations:** - It is essential for companies to consult with legal and financial advisors to ensure compliance with all applicable laws, regulations, and guidelines while structuring ECBs and issuing debentures against them.
In conclusion, an Indian company can raise funds via ECBs and issue debentures against these borrowings, provided it adheres to the regulatory framework set by the RBI and complies with all applicable guidelines. The issuance of debentures must serve a permissible end-use purpose as specified under RBI guidelines, and proper reporting and compliance procedures must be followed throughout the tenure of the ECBs.
CAclubindia
