At present, Indian corporates are entitled to borrow funds from foreign shareholders who hold at least 25% of the shares in the corporate. However, the end use of such loans is subject to the same restrictions as a general ECB. However, the Reserve Bank of India on 4 September 2013 issued the A.P. (DIR Series) Circular No.31, permitting borrowers to avail ECB from foreign equity holders for general corporate purposes. Availing of such ECBs are subject to the following conditions:
1. Such ECBs will be under the approval route, i.e. with the prior approval of the Reserve Bank of India.
2. The minimum average maturity for such ECBs must be 7 years.
3. Minimum paid-up equity of 25% must be held directly by the lender.
4. Such ECBs must not be used for any other purpose not permitted under the existing ECB guidelines (including on-lending to their group companies/step-down subsidiaries in India).
5. Repayment of the principal must commence only after completion of minimum average maturity of 7 years.
6. No prepayment will be permitted before maturity.
The revised regulations will give greater flexibility to foreign shareholders in terms of funding their Indian operations, since prior to the present changes, working capital and other expenditure could be funded only through subscription to shares.
The notification is available at http://rbidocs.rbi.org.in/rdocs/notification/PDFs/APDIR31_04092013.pdf