Borrowing from Non-residents by Indian entities


A.      Introduction:

At a macro level, one can say that the two broad categories for Indian Entities to raise funding from non-residents are:

1.      Funding by way of Capital; and

2.      Funding by way of Debt / Borrowings.

In this article, we are preliminarily focusing on various options available to raise funding by way of debt / borrowings.

In layman terms, if someone was to explain the meaning of debt / borrowings, then one can say that – It is a mode of funding where the annual returns are usually fixed for e.g., interest rate, coupon rate, etc. Also, it generally carries a pre-decided maturity period. It does not give the lender any ownership right over the borrowing entity. The principal amount invested generally does not see any capital appreciation except for the annual income that accrues on it.

As part of this article, we will touch base upon the basics of various options and modalities available under the Foreign Exchange regulations of India for the Indian Business Entities for raising funding by way of debt. Further, we have drawn special focus around any liberalisations or benefits available if funding is sought from Non-Resident Indians (NRI) or Overseas Citizens of India.

B.      Foreign Exchange regulations:

By Foreign Exchange regulations we mean various regulations and rules framed under the Foreign Exchange Management Act, 1999 (FEMA). At present, there are three distinct regimes under which an Indian Business Entity can accept debt funding from non-residents. The three regimes are:

  1. Raising External Commercial Borrowings as laid down under the Foreign Exchange Management (Borrowing and Lending) Regulations 2018. This is commonly termed as ECB regulations.
  2. Raising debt by issuing various securities as laid down under the Foreign Exchange Management (Debt Instruments) Regulations, 2019. This is commonly termed as Debt Instruments regulations.
  3. Raising funds by accepting deposits from non-residents under the Foreign Exchange Management (Deposit) Regulations, 2016. This is commonly termed as Deposit Regulations.

A brief summary of each of these regimes is discussed in the ensuing paragraphs.

C.      Meaning of NRI & OCI:

NRI stands for Non-resident Indian. It means an individual who is a citizen of India, but who stays abroad. The manner of determining the residential status under FEMA is dependent on the number of days spent by a person in a given country in the preceding financial year. Thus, an NRI is an individual who is an Indian citizen, but majorly stays abroad and thereby becomes a non-resident.

OCI stands for Overseas Citizen of India. Similar to an NRI – even an OCI is an individual who is a non-resident as per the residential status provisions. Additionally, an OCI is a person who in no longer a citizen of India. Meaning that he would have become a citizen of some foreign country and holds that country’s passport. However, that person might have taken an Overseas Citizen of India card as per the provisions of Citizenship Act 1955.

Under many regulations of FEMA – a more liberalised regime has been laid down for NRI / OCI as compared to a Non-resident Foreign National. Reason being that NRI / OCI are deemed to have stronger connects with India and hence are given a preferred status.

D.     Funding under the ECB regulations:

It is pertinent to note the two important terms in the title of the regulation – “External” and “Commercial”. The term External implies funding to be raised from non-residents and the funding should flow by way of inward remittance to the borrowing entity.

The second term “Commercial” implies that the debt so raised under this regulation should be for a commercial or business purpose. No debt or borrowing can be raised for any personal or non-commercial purpose.

Under the ECB regulations, debt funding can majorly happen under two categories – Foreign Currency Denominated Debt; OR Indian Currency Denominated Debt.

The ECB regulation systematically lays down a 4-step process to check the eligibility to raise funding under these regulations:

  1. Check eligibility of the type of debt allowed to be raised. This focuses on the form of debt. The form of debt covered under this regime includes loans, bonds & debentures (other than fully and compulsorily convertible), trade credits, foreign currency convertible bonds, foreign currency exchangeable bonds, financial lease, etc.;
  2. Check eligibility of the borrower. Only the Indian entities that meet the eligibility criteria are allowed to raise funding by way of debt under this regime.
  3. Check eligibility of the lender. Only the lender that meets the eligibility criteria can provide the debt funding under this regime.
  4. Check other allied conditions of minimum average maturity period of the debt, capping the interest rate and other costs that can be paid on the debt, restriction on the end-use of the money so raised, etc.

If all the above 4 steps are successfully met, then the Indian Entity can raise the fund under this regime under the automatic route. Automatic route implies that the Indian Entity can raise the funding without seeking any prior permission from RBI. If any of the parameters are not fulfilled, then the Indian entity also has the option of raising ECB by applying for a prior approval from the RBI or any prescribed authority.

Lastly, it is pertinent to note that under the ECB regulations there is no liberalisation or relaxation given in cases where the lender is an NRI / OCI. All the non-resident lenders are treated at par.

E.      Funding by way of issuing debt securities under Debt Instrument Regulations:

This regulation was introduced in October 2019 and it superseded the erstwhile Foreign Exchange Management (Transfer of Issue of Security by a Person Resident outside India) Regulations, 2017.

The Debt Instrument regulations permits certain categories of non-residents to invest in various debt-based securities issued by Indian Entities.

Schedule 1 of the regulations deals with purchase and sale of debt instruments by non-residents. Under Schedule 1 – the Person resident outside India who is eligible to invest is broadly divided into following categories:

  1. Foreign Portfolio Investors
  2. NRIs and OCIs
  3. Foreign Central Banks and Multilateral Banks

The various types of securities that are dealt with in this regulation are government securities, treasury bills, debentures, bonds, commercial papers, debt based mutual funds, etc.

FPI as a category of investor needs to abide by certain limits and conditions as specified by SEBI and RBI in these regards. On the contrary, NRIs and OCIs do not have any limits prescribed. 

Further, an FPI investing under repatriation route are required to invest in the securities by bringing in the money by way of an inward remittance. NRIs / OCIs have similar option available where they can invest under repatriation route by bringing in money by way of inward remittance. However, to give benefit to NRIs / OCIs, they are also allowed to invest under the non-repatriation route whereby they can utilise the balance lying in their NRO bank account in India to invest in certain specified instruments and securities.

The maturity or sale proceeds of FPIs and NRIs / OCIs investing under repatriation route can be freely remitted to their overseas bank accounts. However, maturity / sale proceeds of NRIs / OCIs investing under non-repatriation route can only be credited to their NRO account and these proceeds on repatriation would be subject to the 1-million-dollar annual repatriation limit.

F.      Funding by way of accepting deposits under the Deposit regulations:

The deposit regulations majorly deal with the various types of accounts that can be opened by non-residents with various banks in India. Few of these account types are - NRE account, NRO account, SNRR (Special Non-Resident Rupee) account, etc. Apart from the opening and running of these accounts, this regime permits the non-residents to keep various types of interest-bearing deposits in the banks which are linked to these accounts.

One could be wondering as to why have we covered this regulation as part of this article where we are discussing about various avenues available for Indian entities for raising debt-based funding. You are right in thinking in this direction. This regulation principally talks about various types of bank and deposit accounts that can be kept with the banks in India.

However, in this regulation, there is a small provision contained in regulation 6 and explained in detail in Schedule 7 which warrants our attention. As per this regulation – any Indian entity like proprietary concern, partnership firm, company, trust, or any other person has been permitted to accept deposits from NRIs and Person’s of Indian Origin (PIOs) under Non-repatriation route. A Person of Indian Origin has been defined to include OCI under this regulation.

Thus, an Indian entity who is for some reason unable to raise debt funding under the ECB and Debt Instrument regulations may find it interesting to refer to this schedule 7 of the Deposit regulations and see if it is possible for them to raise money by way of accepting interest bearing deposits from NRIs / PIOs.

Some key features of accepting deposits under this schedule are:

  1. Only NRIs and PIOs are eligible to give deposits under this regime and that to only under non-repatriation route.
  2. The deposit can be accepted by way of debit to the NRO account. Further there is a remark in the schedule which mandates that even the source of funds in the NRO account should not be by way of Inward remittance or transfer from NRE account. Meaning it has to be out of Indian sourced income or sources only.
  3. This should only be a limited period deposit with maximum permissible tenure to be 3 years.
  4. The rate at which interest can be paid should not exceed the ceiling rate prescribed under the Companies (Acceptance of Deposit) Rules, 2014.
  5. There are certain end-use restrictions like it cannot be used for agricultural / plantation activity, real estate business, onward lending etc.

There is no overall limit on the quantum of deposit that can be accepted. Thus, this regime could also be effectively utilised for raising short term debt in form of deposits.

G.     Closing remarks:

Debt is an important source of funding for any entity. With globalisation and liberalisation, we are seeing a surge in Indian entities preferring to raise debt funding from foreign sources. The above regulations laid down by FEMA would help the Indian entities to tap this funding avenue. At this juncture, these regulations are slightly more regulated as compared to the regulations governing funding by way of capital. In future, if the regulations for debt funding are liberalised further, then we will surely start seeing a lot of traction on this front as well.

H.     Acknowledgements:

Special thanks to my mentor and Partner Atul Ambavat for his help in brainstorming various technical aspects that helped in finalising this article. 

I.     About the Author:

CA Dhruv Shah is Partner at Ambavat Jain & Associates LLP. He heads the practice of International Taxation & FEMA.