New ECB rules open doors to debt funding for startups

Indian companies looking to raise debt overseas have typically had to do so through external commercial borrowings (ECB). ECB can take the form of loans, foreign currency convertible or exchangeable bonds, fixed or floating rate bonds and non-convertible, optionally or partially convertible preference shares. Until recently, the ECB regulations imposed restrictions regarding eligible borrowers, recognized lenders and end-uses that made it a challenge for borrowers and lenders alike. In 2016, changes were introduced to relax some of these conditions. However, these relaxations were of limited help as they applied only to recognized startups and were subject to ambiguities in language.

In January 2019, the Reserve Bank of India (RBI) issued a revised ECB framework that significantly simplified and liberalized the ECB regime. The revised ECB framework could have implications for private equity and venture capital investors looking to extend debt financing to Indian corporates.

The Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 (B&L regulations) issued in December 2018, sought to integrate all regulations governing borrowing and lending, both in Indian rupees and foreign exchange and between persons resident within and outside India under a single umbrella. The B&L Regulations also included an enabling clause that allowed eligible borrowers to raise ECB in both rupees and freely convertible foreign exchange. The revised ECB framework that the RBI issued subsequently in January 2019 provides further clarity on the changes that began with the B&L regulations.

Aparna Ravi is a partner and Samyuktha Damojipurapu is a senior associate at the Bengaluru office of Samvad Partners

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