Applicability of ECB Framework on Indian Rupee Denominated Loan from NRI/PIO via NCD Public Offer

Introduction

A Company incorporated in India intending to raise an Indian Rupee Denominated Loan from a Non-Resident Indian (NRI) or Person of Indian Origin (PIO) through a Non-Convertible Debenture (NCD) issued via public offer must comply with multiple regulatory frameworks. This article analyzes the applicability of the External Commercial Borrowing (ECB) framework to such a transaction by examining three key aspects:

1. Issuance of NCD to NRI/PIO

2. Public Offer of NCD

3. Applicability of ECB Guidelines

1. Issuance of NCD to NRI/PIO

Issuance of NCDs to NRIs/PIOs is primarily governed by the Master Direction on Borrowing and Lending Transactions in Indian Rupee between Persons Resident in India and NRIs/PIOs issued by the Reserve Bank of India (RBI) on January 1, 2016. The key conditions for such issuance are as follows:

Key Conditions:

• The issue of NCDs must be made through a public offer.

• The interest rate must not exceed the prime lending rate of State Bank of India as on the date of approval of the issue by the borrowing company’s General Body Meeting, plus 3%.

• The minimum tenure of the loan must be three years.

• The borrowing company must not engage in:

  • Agricultural/plantation/real estate business

  • Trading in transferable development rights

  • Operating as a Nidhi or Chit Fund company

• Borrowings may be made on either a repatriation or non-repatriation basis:

  • Repatriation Basis: Funds must be received through inward remittance from outside India or by debit to an NRE/FCNR account.

  • Non-Repatriation Basis: Funds must be received via inward remittance from outside India or through debit to NRE/NRO/FCNR(B)/NRNR/NRSR accounts maintained with an authorized dealer in India.

Reporting Requirements:

The borrowing company must file reports with the RBI within 30 days from the date of:

• Receipt of remittance:

  • List of NRIs investing on repatriation and non-repatriation basis

  • Amount and date of receipt of funds

  • Details of authorized dealers processing remittance

• Issuance of NCDs:

  • List of NRIs allotted NCDs on repatriation and non-repatriation basis

  • Certification from the Company Secretary confirming compliance with applicable provisions

2. Public Offer of NCD

The public offer of NCDs is governed under the Securities and Exchange Board of India (Issue and Listing of Non-Convertible Securities) Regulations, 2021. The regulations lay down the following requirements:

Key Conditions:

• Eligibility criteria for companies issuing NCDs via public offer

• Submission of a draft offer document to SEBI

• Obtaining in-principle approval from one or more stock exchanges

• Appointment of key intermediaries:

  • Depositories for dematerialized securities

  • Registrar and Transfer Agents (RTA)

  • Debenture Trustees

  • Credit Rating Agencies

• Listing of NCDs on recognized stock exchanges

3. Applicability of ECB Framework to NCD Issuance

The External Commercial Borrowing (ECB) Framework is governed by the FED Master Direction No. 5/2018-19, issued on March 26, 2019. The framework includes INR-denominated ECBs in the form of debentures and establishes various compliance requirements.

Key Conditions under ECB Guidelines:

• Eligible Borrowers and Recognized Lenders

• Minimum Average Maturity Period

• All-in-Cost Ceiling per Annum

• End-Use Restrictions (Negative List)

• Exchange Rate and Hedging Provisions

• Reporting and Compliance Requirements

Analysis and Conclusion:

• The ECB framework applies to all INR-denominated NCD issuances, regardless of whether they are made via public offer or private placement.

• There is no exemption from the ECB framework for public offers, except for investments made by Registered Foreign Portfolio Investors (FPIs).

• The Guidebook on FDI in India, issued by the Ministry of External Affairs, specifies that issuance of NCDs to foreign entities or individuals must comply with ECB guidelines.

Final Conclusion:

A Company incorporated in India raising an Indian Rupee Denominated loan from an NRI/PIO via NCD through a public offer must comply with the following:

1. Master Direction on Borrowing and Lending Transactions in Indian Rupee between Persons Resident in India and NRIs/PIOs issued by the RBI.

2. SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021.

3. ECB Guidelines, as the issuance of INR-denominated NCDs falls within the ECB framework.

Disclaimer

The information provided herein is for informational purposes only and should not be construed as professional or legal advice. The analysis is based on available regulations and interpretations, and there may be further nuances not covered in this article. Readers are advised to seek professional guidance before making financial or regulatory decisions.

J. Swarnalakshmi