| External Commercial Borrowings (ECB) – Routing of Funds Raised Abroad to India |
| As per extant Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000, dated May 3, 2000, as amended from time to time (“ECB Regulationsâ€) eligible borrowers are allowed to raise external commercial borrowings from the eligible lenders for the permitted end uses. One of such eligible use is raising of ECB for Overseas Direct Investment in Joint Ventures (JV)/ Wholly Owned Subsidiaries (WOS) subject to the existing guidelines on Indian Direct Investment in JV/ WOS abroad. Similarly, eligible borrowers are allowed to raise ECB from a group company provided both the borrower and the foreign lender are subsidiaries of the same parent. Raising of ECBs is, however, subject to certain prescribed conditions including the ceiling on rates and amount of ECB. |
| Moreover, Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004, as amended from time to time (“ODI Regulationsâ€) permit the Indian companies to extend guarantee to an overseas JV / WOS subject to prescribed guidelines. |
| It has been observed that some Indian companies were accessing ECBs through their overseas group companies without compliance to applicable conditions and the funds so raised were being routed to the Indian companies for end use. Various structures/modalities are being used for channelling such funds into the Indian companies including through investment into the rupee bonds of the Indian company. |
In order to plug such loopholes and to discourage such practices, the RBI has vide A.P. (DIR Series) Circular No. 41 dated November 25, 2014 has clarified that:
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| Use or establishment of structures in contravention of the above by Indian companies or their AD Category – I banks shall be in violation of FEMA, 1999. |