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.