In India, Stat-ups play an important role in the growth of Indian economy and Government has also a liberalized view towards the Start-up. It takes various steps time to time for the benefit of a rising start-up. In an attempt to go one step ahead in ease of doing business the overseas borrowing norms have been simplified for a Startup. In January 2019, Reserve Bank of India (RBI) has issued External Commercial Borrowings (ECB) Policy – New ECB Framework. Under this Framework, every Start-up which is eligible to receive FDI can avail ECB irrespective of the fact that it is registered and recognized or not. This is a great initiative by the RBI with aspire to attract foreign funds by the Startups which can be used by such Startups to leverage their financial health and growth.
As per this new ECB Framework, the AD Category-I bank are permitted to allow Startups to raise ECB under automatic route up to 3 million USD or equivalent per financial year either in rupees or any convertible foreign currency or a combination of both for a minimum average maturity period of three years. The key highlights of the said framework are enumerated as under:
- Eligibility for a Startup:
On the date of raising ECB, an entity should be recognized as a Startup by the Central Government.
Definition of Eligible and Recognized Startup: Only Private Limited Companies, Limited Liability Partnerships (LLPs) and Registered Partnerships are eligible to be registered and recognized as a Startup if it fulfills all of the following condition.
- It should not be older than 10 years from the date of its incorporation/registration.
- Its annual turnover does not exceed Rs. 100 crore in any of the financial year since incorporation/registration.
- It is working towards innovation, development, deployment or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation.
It is important to note that the entity proposing to get registered as startup should have not been formed by splitting up or reconstruction of a business already in existence.
Those Private Limited Companies, LLPs and Registered Partnerships which are recognized as Stat-ups before applicability of new ECB framework are eligible to raise ECBs.
- Eligible and Recognized lender:
Lender / investor shall be a resident of a FATF compliant country. However, overseas branches or subsidiaries of Indian banks and overseas entity in which Indian entity has made overseas direct investment under Overseas Direct Investment Policy are not allowed to lend to startups under this framework.
- Forms of borrowing:
The framework provides that borrowing can be in the form of loans or non-convertible, optionally convertible or partially convertible preference shares only.
Minimum average maturity period will be 3 years.
As per this framework the borrowing should be denominated in any freely convertible currency or in Indian Rupees (INR) or a combination thereof. In case of borrowing in INR, the non-resident lender, should mobilize INR through swaps/outright sale undertaken through an AD Category-I bank in India.
- Restriction on amount of borrowing:
The amount of borrowing per Startup will be limited to USD 3 million or equivalent per financial year either in INR or any convertible foreign currency or a combination of both.
New ECB framework does not specify the maximum cost at which startups can raise money via ECB. The all-in-cost requirements shall be mutually agreed between the borrower and the lender.
Under this framework, ECB proceeds can be utilised for any expenditure in connection with the business of the borrower.
- Conversion into equity:
Conversion ECB into equity is freely permitted, subject to Regulations applicable for foreign investment in Startups.
The choice of security to be provided to the lender is left to the borrowing entity. Security can be in the nature of movable, immovable, intangible assets (including patents, intellectual property rights), financial securities, etc. and shall comply with foreign direct investment / foreign portfolio investment / or any other norms applicable for foreign lenders / entities holding such securities.
Further, issuance of corporate or personal guarantee is allowed. Guarantee issued by a non-resident(s) is allowed only if such parties qualify as lender under ECB for Startups. However, issuance of guarantee, standby letter of credit, letter of undertaking or letter of comfort by Indian banks, all India Financial Institutions and NBFCs is not permitted.
The overseas lender, in case of INR denominated ECB, will be eligible to hedge its INR exposure through permitted derivative products with AD Category – I banks in India. The lender can also access the domestic market through branches/ subsidiaries of Indian banks abroad or branches of foreign bank with Indian presence on a back to back basis.
It is important to note that Startups raising ECB in foreign currency, whether having natural hedge or not, are exposed to currency risk due to exchange rate movements and hence are advised to ensure that they have an appropriate risk management policy to manage potential risk arising out of ECBs.
- Conversion rate:
The framework provides that in case of borrowing in INR, the foreign currency – INR conversion will be at the market rate as on the date of agreement.
- Other provisions:
Other provisions relating to parking of ECB proceeds, reporting arrangements, powers delegated to AD banks, borrowing by entities under investigation, conversion of ECB into equity will be in accordance with the provisions provided under this revised ECB framework. However, provisions on leverage ratio and ECB liability: Equity ratio will not be applicable.
Further, the Startups as defined above as well as other startups which do not comply with the aforesaid definition but are eligible to receive FDI, can also raise ECBs under the general ECB route/framework.