ECBs-A Next-Gen Avenue of Resource for NBFCs

Bar & Bench April 3 2017

By Saurabh Sharma and Harshit Dusad

External Commercial Borrowings (“ECBs”) have been one of the primary instruments for Indian corporate entities, to source their financial needs. ECBs are essentially commercial loans in the form of bank loans, buyers’ credit, suppliers’ credit, etc., which is regularly availed by a resident Indian borrower from offshore / non-resident lenders.

Since November 2015, India has witnessed revolutionary changes in the framework for ECBs. One such milestone step was the introduction of External Commercial Borrowings (ECB) Policy – Revised framework on 30th November 2015, and consequently a new Master Direction on External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers was issued by the Reserve Bank of India on 1st January 2016 (“New ECB Framework”). The New ECB Framework has been amended multiple times for facilitating the growing needs of the Indian corporate sector.

The New ECB framework divides ECBs under three broad heads (termed as “Tracks”). This is primarily based on the minimum average maturity (“MAM”) and eligible currency.

Track I -Medium term foreign currency denominated ECB with MAM of 3/5 years;

Track II- Long term foreign currency denominated ECB with MAM of 10 years; and

Track III- Indian Rupee denominated ECB with MAM of 3/5 years.

Eligible borrower, recognized lender, all in cost and permitted end use have inter alia been classified for the 3 Tracks under the New ECB Framework.

NBFC as a New Class of Borrower

One major change that was effectuated under the New ECB Framework was permitting all types of non-banking financial companies (“NBFCs”) to raise funds by way of ECBs. This is contrary to the previous regime where only NBFCs – Infrastructure Finance Companies (“NBFCs-IFCs”) or the NBFCs – Asset Finance Companies (“NBFCs-AFCs”) were expressly allowed to raise funds through ECBs. This is a step towards resolving the critical needs of long-term funding for NBFCs.

NBFCs-IFCs and NBFCs-AFCs have been allowed to raise funds in foreign currency under Track I and Track II for financing infrastructure and for all purposes (except for the purposes listed out in negative list as listed below) respectively. In addition to this, all NBFCs regulated by the Reserve Bank of India (“RBI”) and NBFCs – Micro Finance Institutions (“NBFCs – MFIs”) have also been recognised as eligible Borrower under Track III and can borrow the funds in INR for all purposes (except for the purposes listed out in negative list).

End Use

Under Track I, NBFCs can avail ECBs only for financing of infrastructure projects. However, under Track II and Track III, ECBs can be availed for any purpose(s), except for the following negative list sectors:

  • Real estate activities
  • Investing in capital market
  • Using the proceeds for equity investment domestically;
  • On-lending to other entities with any of the above objectives; or
  • Purchase of land.


Pursuant to the New ECB Framework, NBFCs have already availed USD 600 million by way of ECBs under Track I and Track II. Some notable NBFCs that have availed funds by way of ECBs include Siemens Financial Services Private Limited, SREI Equipment Finance Limited, Rural Electrification Corporation Limited, Annapurna Microfinance Private Limited, etc.

Under Track III (i.e. ECB in INR), NBFCs sector has not picked up. This can be attributed to various reasons, including the prime one being the lack of clarity in applicable withholding tax on ECB in INR (under Track III). It must be noticed here that the tax on ECBs availed in foreign currency is only 5%. This benefit has also been extended to Indian Rupee denominated bonds. However as regards ECBs in INR, such benefit has not been expressly extended.

It is widely believed that NBFCs will continue to explore their option to raise funds by way of ECBs under Track I and Track II but Track III would require further clarity.

In our view, the New ECB Framework is certainly a boost for NBFCs critical funding requirements, particularly in light of the leverage in interest rates on account of cross border financing and better avenues for utilisation on account of lack of restrictions for on lending.

Saurabh Sharma is a Senior Associate at the Mumbai office and Harshit Dusad is an Associate at the Delhi office of Juris Corp.

To download the full article, click on the ‘Download Briefing’ button given below.