Counsel

Yes. There are a lot of restrictions on receipts of unsecured loans in foreign currency from foreign parent company by its subsidiary company in India. These borrowings are called External Commercial Borrowings (ECB). These ECBs are governed by RBI. There are primarily 2 routes for this

• Automatic Route: In this route you can bring in the Debt and then you can report it to RBI. Hence this is an easier and practically feasible method (For any debt less than 50 Crores)
• Approval Method: In this route, you need to first obtain the approval of RBI before the funds hit your bank account. This is a tedious process and hence not viable for any loan less than 50 Crore

The restrictions start from who can lend to whom and to what purpose. The documentation for each of the step is very detailed. Hence I will consider the loan to be worth less than 50 Crore and hence explain in this answer only the restrictions and process for these small borrowings. For higher loans you can contact me directly on kaushik.hoysala@wazzeer.com or Visit our website here

Let us answer the first question, Who can lend under Automatic route?

Following entities can lend under Automatic route

• International Banks
• International Capital Markets
• Multilateral Financial Institutions
• Export Credit Agencies
• Suppliers of Equipment
• Foreign Collaborators
• Foreign Equity Holders

In your case, the parent company of the subsidiary falls under Foreign Equity holders. Hence they can lend to their subsidiary under Automatic route

Now to check on the eligible borrowers for Automatic route, it is easier to see who all cannot borrow under Automatic route?

• Financial intermediaries such as banks; financial institutions (FIs); Housing Finance Companies (HFCs)
• Non Banking Financial Companies (NBFCs) that are exclusively involved in financing of infrastructure sector for on-lending to borrowers up to 50 per cent of their total funds
• Individuals, trusts and Non- Profit making organizations
• However, NGOs can borrow money from overseas organizations and individuals that are qualified to receive money under External Commercial Borrowing (ECB) Regulations.

I assume in your case, you do not fall under these sectors and hence eligible for Automatic route of ECB

There are restrictions on usage of funds as well. The funds raised through ECB cannot be used for following activities

• lending or investment in capital market or acquiring a company (or a part thereof) in India
• Utilisation in Real estate
• Working capital, general corporate purpose and repayment of existing Rupee loans

Assuming you are not using the funds to any of the above activities, you will be eligible for this automatic route of approval for ECB

Now the most important question is How much amount can I borrow through ECB

The limit on borrowing is 2 fold

1. Restriction by Company Law
1. Any private limited company in India cannot borrow more than the total of its Paid up capital and surplus cash reserves from all the sources combined (Foreign & Domestic)
2. Any individual cannot lend more than Rs.35,000/- to the company.
2. Restriction by RBI on ECB
1. Companies that are in the service sector such as hotels, hospitals and software companies can borrow up to maximum of US $100 million for import of capital goods and for rupee or foreign currency capital expenditure
2. Companies in sectors other than these can borrow up to maximum of US $500
3. Micro finance NGOs can borrow up to US $5 million

Since you are talking about a subsidiary you will have to check the restriction in both the sections

Now the crux of the question, Compliance. I will skip compliance under approval method since it is very complicated. So, following is the compliance for ECB under automatic route

• Any loan should be transferred to the bank account of the borrower. This bank is called Designated dealer bank. The designated Authorised Dealer bank is also required to ensure that raising /utilization of ECB is in compliance with ECB guidelines at the time of certification
• Once the Loan is obtained, the company needs to file Form-83 along with Loan Agreement. This form needs to be certified either by a Chartered Accountant or a Company Secretary and submitted to the designated dealer bank
• Borrowers are supposed to submit details regarding actual transaction and utilisation of the ECB by filing ECB-2 Return Form every month. This form has to be verified by the dealer bank and submitted to RBI within seven working days before the close of every month