ECB breather for Start-ups

In its statement on Developmental and Regulatory Policies issued on October 4th, the Reserve Bank of India (RBI) has said that it will allow start-ups to raise an amount to the tune of USD 3 million per financial year (or an equivalent sum either in INR or in any other foreign currency or a combination of both). It plans to issue the corresponding guidelines (i.e., guidelines for external commercial borrowings (ECBs) for startups) by the end of this month end. In the same statement, the RBI has added that this allowance will be made because start-ups have the “potential to play a significant role in economic growth and job creation” through innovation and competition.

Current Stance:

ECBs are regulated by the RBI through the Foreign Exchange Management Act, 1999 and the corresponding regulations including Foreign Exchange Management (Borrowing or lending in foreign exchange) Regulations, 2000, FEM (Transfer or Issue of any foreign security) Regulations, 2004, and FEM (Guarantees) Regulations, 2000 (“Regulations“). The Regulations clearly provide that ECB is permissible in certain specified forms like loans, buyers’ credit,  foreign currency convertible bonds, etc., (except as NCDs made by registered foreign portfolio investor) by certain eligible entities for the maturity period specified and from the recognized lenders. The extant Regulations provide no exclusion for startups and therefore, theoretically speaking, an entity in the specified sectors/categories is allowed to borrow through the ECB route for the permitted end-use which is largely towards capital expenditure or for purposes other than real estate activities, investing in capital markets , purchase of land, etc.. [Note that the article is the Hindu has erred by stating the  following: Till now, only large Indian corporations and public sector holdings were allowed to raise ECBs.]

The reasons for the separation for start-ups is obvious, its definitely to create a more conductive atmosphere to  enable opportunities for debt funding to propel the start-up ecosystem in the country. Further, such a concentrated measure of borrowing provides a less expensive alternate to the existing equity route that start-ups are invariably forced to explore which costs them entrepreneurial stake. This recent statement also follows from RBI’s recent regulatory relaxations for start-ups relating to acceptance of payments and to the issuance of shares.