ECB for Startups - Foreign Currency Loan

Startups in India have thus far had restrictions on raising loans from foreign investors or institutions due to stringent External Commercial Borrowing norms. To attract foreign funds at cheaper cost and to build a vibrant startup eco-system, The Reserve Bank of India has announced a new scheme allowing startups to access foreign currency loans from foreign lenders. In this article, we look at the regulations pertaining to ECB for Startups in detail.

Startup Eligible to Raise Foreign Loans

Only Private Limited Companies, Limited Liability Partnership and Registered Partnerships are eligible. Those Companies, LLPs and Registered Partnerships registered even before the announcement are eligible and it is best for Entrepreneurs starting a new business hereon-forth to

register a Private Limited Company or Limited Liability Partnership or Registered Partnership. In addition, a startup is defined as an entity, incorporated or registered in India not prior to five years, with an annual turnover not exceeding Rs.25 crores in any preceding financial year, working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property. Provided that such entity is not formed by splitting up, or reconstruction, of a business already in existence. Provided also that an entity shall cease to be a Startup if its turnover for the previous financial years has exceeded INR 25 crore or it has completed 5 years from the date of incorporation/ registration. Provided further that a Startup shall be eligible for tax benefits only after it has obtained certification from the Inter-Ministerial Board, setup for such purpose. Read more about Startup Eligibility.

Eligible Lenders or Investors

Resident of a country that is a member of the Financial Action Task Force or any such Regional Bodies can lend money to an Indian startup under this scheme. Countries that are members of the Financial Action Task Force are:

Argentina
Australia
Austria
Belgium
Brazil
Canada
China
Denmark
European Commission
Finland
France
Germany
Greece
Gulf Co-operation Council
Hong Kong, China (originally joined under the designation Hong Kong in 1991)
Iceland
India
Iran
Ireland
Italy
Japan
Republic of Korea
Kingdom of the Netherlands (comprises Netherlands, Aruba, Curacao and Sint Maarten)
Luxembourg
Mexico
New Zealand
Norway
Portugal
Russian Federation
Singapore
South Africa
Spain
Sweden
Switzerland
Turkey
United Kingdom
United States

In case the country does not fall under any of the countries listed above, residents of a country could still lend under the scheme, if the country is

NOT in:

A jurisdiction having a strategic Anti-Money Laundering or Combating the Financing of Terrorism deficiencies to which counter measures apply; or
A jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the Financial Action Task Force to address the deficiencies.

Its important to note that overseas branches or subsidiaries of Indian Banks and joint venture of an Indian company cannot lend under this scheme.

Eligible Loans

Loans that have a minimum average maturity period of 3 years that are under USD 3 million are eligible. The borrowing can be in the forms of a loan or non-convertible, optionally convertible or partially convertible preference shares. The borrowing must be in a freely convertible currency or Indian rupees. Startups can borrow upto USD 3 million or equivalent per financial year either in INR or any convertible foreign currency or a combination of both under this scheme for any end-use of the business.

Collateral Security

Foreign lenders or investors are allowed to request for any collateral in the nature of movable, immovable, intangible assets (including patents, intellectual property rights), financial securities, etc., as per their requirements. In addition, issuance of corporate or personal guarantee is allowed in favour of the foreign lender. However, bank guarantee, letter of credit or letter of comfort issued by an Indian Bank or Financial Institution cannot be offered as collateral.

Currency Risk

There is no specific requirement for hedging of currency mandated under the scheme for either the lender of borrower. However, the lender can hedge the loan through banks in India or access domestic banks in India for a hedge. Startups are required to be aware of the exposure to currency risk due to exchange rate movements and must have an appropriate risk management policy to manage currency fluctuation risk arising out of ECBs.

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Frequently Asked Questions

Only Private Limited Companies, Limited Liability Partnerships, and Registered Partnerships are eligible to raise foreign loans under the ECB for Startups scheme. These entities must be registered in India and meet certain criteria related to their annual turnover, innovation focus, and years of operation.

To be considered a Startup under the ECB scheme, an entity must be incorporated or registered in India not more than five years ago, have an annual turnover not exceeding Rs. 25 crores in any preceding financial year, and work towards innovation, development, deployment, or commercialization of new products, processes, or services driven by technology or intellectual property.

Investors or lenders residing in countries that are members of the Financial Action Task Force or any such Regional Bodies can lend money to Indian startups under this scheme. The article provides a list of eligible countries that are members of the Financial Action Task Force.

The foreign loans must have a minimum average maturity period of 3 years, and the borrowing limit is up to USD 3 million or equivalent per financial year, either in INR or any convertible foreign currency or a combination of both.

Yes, foreign lenders or investors are allowed to request collateral in the form of movable, immovable, intangible assets (including patents, intellectual property rights), financial securities, etc., as per their requirements. Issuance of corporate or personal guarantees in favor of the foreign lender is also allowed.

There is no specific requirement for currency hedging mandated under the scheme for either the lender or the borrower. However, startups are required to be aware of the exposure to currency risk due to exchange rate movements and must have an appropriate risk management policy to manage currency fluctuation risk arising out of ECBs.

No, overseas branches or subsidiaries of Indian Banks and joint ventures of an Indian company cannot lend under this ECB for Startups scheme.

Yes, the foreign loans raised under this scheme can be used for any end-use of the startup's business.

The borrowing can be in the form of a loan or non-convertible, optionally convertible, or partially convertible preference shares. The borrowing must be in a freely convertible currency or Indian rupees.

No, a startup shall cease to be eligible for this scheme if its turnover for the previous financial years has exceeded INR 25 crores or it has completed 5 years from the date of incorporation/registration.