Know Law on Loan to India from Foreign Country

Know Law

Labz Notification 8 of 2011

A written-cum-video initiative to know your corporate legal position as on date

 

Legal Queries???

Can your company get loan from abroad? Who can be the lenders from abroad? Who can the end-user for loan and what can be the end uses? Whether ECB inflows can be used for miscellaneous purposes? Whether your Joint venture party is an eligible lender? Whether loan can be availed from multilateral financial institutions? Can working capital requirements be financed through borrowings? Can loan be obtained by Non Government Organisation doing rural activities? How to get a loan from abroad?

 

Solution…Execute a loan agreement, in writing!!!

Loan to India from Foreign Country > FEMA > External Commercial Borrowings related Compliances

Whenever a foreign entity decides to invest as loan capital in India OR where an Indian entity decides to borrow from abroad, then it is legally termed as raising of External Commercial Borrowings (ECB) from abroad.  The concerned Indian entity should ensure that the funds are utilized appropriately as per the end-uses permitted in Indian regulatory environment like import of capital goods or financing new projects, expansion of production & infrastructure projects.

Loan can be in the form of lending or borrowing or issue of non-convertible debentures or any other debt securities. It can also take form of guarantees, surety or overdraft. There are certain criteria which shall be ensured in the process. Intimation to RBI at various stages of borrowing shall be made and intimations shall be made during every repayment until the loan is fully repaid. Further, FEMA transactions are affected by the residential status of the investor. Read More... 

Requirement under Indian laws on Loan to India from Foreign Country:

As per the existing requirements of Foreign Exchange Management Act, 1999, the applications for availing a loan from abroad by an Indian company or banks or financial institutions or an SEZ unit will be considered under Automatic route (on satisfaction of certain conditions on maturity period & interest ceilings) or under Approval route (where limits are exceeded).  A limit of 750 million USD (200 million USD for hotel, hospital and software sectors) can be brought in a financial year from the eligible lenders.  Apart from this initial compliance requirement, there are also recurring compliance requirement which shall be complied on a monthly basis till the loan is fully repaid or converted fully or partially into equity capital of the company.

Myth buster on Loan to India from Foreign Country:

Loan capital can be brought in as & when the management wishes; later compliances can be made with RBI if the loan amount is within the ceiling limits!!!  The answer is a big NO, since the process starts with preparing a loan agreement, approach RBI for allotment of Loan Registration Number and then only the loan amount can be remitted through normal banking channels for the specific end-uses which are permitted under laws.  There are many a cases where corporate have borrowed from abroad to meet working capital requirements like paying employees salary, rent, etc., which is not the specified end-use, hence it is a violation of law.

Caution point on Loan to India from Foreign Country!!!

Banks will remit your loan amount even if you put for working capital purposes, which is violation under law and can invite penal actions.  So, it is the borrower’s responsibility to check with the professionals as to what is allowed and what is not before remitting.  RBI or Directorate of Enforcement will also start investigation on the violation.  Further, any non-compliance of the provisions of ECB will invite a humongous penalty under FEMA, which might require the violator to go through compounding process to set right offence.  Once a violation is made under this provision, automatic route will not be available then (meaning further loans will be processed through the rigorous approval route only)!!!

WATCH LAWLABZ VIDEO on Loan to India from Foreign Country (Click Here):

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