Another funding option opens up for startups after RBI’s announcement for permitting Startup enterprises to access loans under ECB framework.
RBI via its Circular A.P. (DIR Series) Circular No. 13 dated 27 October 2016 has permitted startups to raise external commercial borrowings (ECBs) of up to USD 3 million in a financial year in any freely convertible currency or in Indian Rupees (INR) or a combination thereof. Under this, Funds can be raised with a minimum maturity of 3 years. Click here to download the Circular.
Opening up ECBs will provide startups one more avenue to access capital without diluting promoters’ equity and will encourage foreign lenders to infuse funds into Indian startups. Borrowing in foreign currency will also reduce the cost of conversion and will also be beneficial for startups that make expenses in foreign currency.
What are External Commercial Borrowings (ECBs)
- ECB is an instrument used to facilitate the access to foreign money by Indian companies.
- ECBs are any kind of funding other than Equity funding. If foreign money is used to finance the Equity Capital, it would be classified as Foreign Direct Investment (FDI). ECB should satisfy ECB regulations stipulated by the Government and regulatory agencies such as RBI.
- ECBs include commercial bank loans, buyers’ credit, and suppliers’ credit, bonds, credit notes, asset backed securities, etc.
Highlights of this circular are:
- Eligibility: An entity recognised as a Startup by the Central Government as on date of raising ECB.
- Amount: The 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.
- Maturity: Minimum average maturity period will be 3 years.
- Recognised lender: Lender / investor shall be a resident of a country who is either a member of Financial Action Task Force (FATF) or a member of a FATF-Style Regional Bodies. Overseas branches/subsidiaries of Indian banks, overseas wholly owned subsidiaries/joint ventures of Indian companies will not be considered as recognized lenders under this framework.
- Instruments: The borrowing can be in the form of loans or non-convertible, optionally convertible or partially convertible preference shares.
- End-use: For any legitimate business expenditure of the borrowing Startup.
- Conversion into equity: Subject to regulations applicable for foreign investment in Startups, conversion of ECBs into equity is freely permitted.
- Security & guarantee: Choice of security to be provided to the lender is left to the borrowing entity. Residents as well as non-resident(s) are allowed to issue corporate or personal guarantee.
- Applicability of other provisions related to ECBs: Provisions pertaining to parking of ECB proceeds, reporting to relevant authorities, conversion of ECB into equity, etc will be applicable as per the ECB framework announced vide P. (DIR Series) Circular No. 32 dated November 30, 2015. However, restrictions on leverage ratio and ECB liability to Equity ratio will not be applicable for Startups.
Liberalised provisions for Startups:
- No prescription of cost-ceiling or restriction on the end use of the funds raised. Such conditions are applicable to ECBs by entities across most other sectors.
- Restrictions on leverage ratio and ECB liability to Equity ratio, which are applicable to other ECB borrowers, are not be applicable for Startups.
To qualify for issuing ECBs, Startups have to fulfill the definition laid down by DIPP via G.S.R 180(E) dated 17Feb16. A private limited company is recognized as start-up up to five years from the date of its incorporation if its turnover for any of the financial years has not exceeded Rs.25 crore, and is works towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property.
Read more on whether your startup meets criteria stipulated by DIPP here: http://advantage-consulting.in/does-your-startup-qualify-for-tax-incentives-under-startup-india-initiative-of-the-government/
Disclaimer: Our articles are available for educational purposes only as well as to give you general information and a general understanding of the regulations. It is not intended to be comprehensive nor does it constitute legal advice. While we aim to ensure that the content is current and accurate, we do not provide representation or warranty regarding the accuracy, completeness or correctness of information contained herein.