External Commercial borrowing (ECB) for Start-ups: An easy funding

With the introduction of economic reforms since the balance of payment crisis, external assistance ceased to be an important element of capital inflows and private capital flows gained prominence. ECB rose significantly in this period; India pursued a regulatory approach of encouraging non-debt-creating flows and placing restrictions on debt-creating flows. Earlier Ministry of Finance used to decide the ECB policy, however, in due course of time the responsibility of reviewing and revision, and implementing of ECB framework was transferred to RBI, under the consultation of the Government of India. External Commercial borrowing (ECB) for Start-ups.

External Commercial Borrowing ForStartups

• Cheaper Funds: Firms borrow from external sources globally the spread of the rate of interest will be attractive and lower than what is domestically available in India. The firms will get a wider scope of borrowing capital with an attractive rate of interest.
• Global Playground: The scope of the global financial market with attractive financial borrowing terms will be beneficial to Start-ups or new firms.
• Controls: External Commercial Borrowing is a form of loan and hence the stake in the Company remains with the borrower hence the Start-up and firms have major control over the stake as it cannot be converted to equity or given any voting rights.
• Access to the international market gives better exposure to opportunities globally.
• Economic development: The development of infrastructure and overall development will lead due to such financial inflow in the economy.

To make Start-ups attractive under “Ease of Doing Business” under the Make in India policy so that Capital is easily available and at an affordable rate of interest External Commercial Borrowings (ECBs) are one such improvement towards financial reforms to enable the Start-up firm’s ability to obtain finance globally.

In India, Startups have occupied an important position in the economy and they are continuously contributing towards growth, new idea,s and innovations. Recognizing their role in the growth of the nation, the Government has given certain incentives to the Start-ups and also has liberalized views for the start-ups. The government has taken further liberal steps by notifying liberal guidelines to avail the ECB from overseas for Startups. As per the specific guidelines issued for them, every Start-up which is eligible to receive FDI can avail of ECB. This great initiative by RBI enables the start-up to avail the foreign funds and use them for the growth

Start-Ups

The Start-up India initiative was launched on the 16th of January, 2016 by Prime Minister Modi. It is a flagship initiative by the government to build a strong ecosystem, improve sustainable economic growth and generate employment opportunities. Its vision is to transform India into a country of job creators instead of job seekers.

Entities that are only eligible to be a start-up

• A Private Limited Company
• Limited liability Partnership
• Registered Partnership firm

Criteria for being recognized as Start-up

• The entity should not be older than 10 years from the date of its incorporation/ registration.
•  Its annual turnover does not exceed Rs. 100 crores in any of the financial years since incorporation/registration.
• Their work is for innovation, development, deployment, or improvement of products or processes, or services, or if it is a scalable business model with a high potential of employment generation or wealth creation.

ECB framework applicable for start-ups

ECB framework applicable for start-ups is as follows:

Eligibility to avail of the ECB: The entity that wishes to avail of the ECB must be recognized as Start-up by the Central Government, i.e., the entity must hold the registration certificate issued by the Central Government recognizing the entity as the Start. The recognition must be valid as of the date of availing the ECB.

Recognized lender:  The lender from whom the ECB funding is being received, must be a resident of a FATF-compliant Country.

The maturity period for the ECB Loan: The maturity period for the ECB is 3 (three) years

Currency for the ECB funding: The Start-up can avail of the ECB loan in any freely convertible currency as well as in Indian Rupee.

Forms of the ECB: ECB borrowing can be availed in many forms. A commercial loan, non-convertible / optionally convertible/ or partially convertible preference shares.

End uses of the ECB funds: The funds availed under the ECB can be used for business purposes.

Conclusion

The Government of India by launching the Start-up India Campaign has taken a great initiative. It will not only help the young and innovative start-up ideas but also will foster the socio-economic development of the country. In India, Startups have occupied an important position in the economy and they are continuously contributing towards growth, new ideas, and innovations. To make Start-ups attractive under “Ease of Doing Business” under the Make in India policy so that Capital is easily available and at an affordable rate of interest External Commercial borrowing (ECB) for Start-ups is one such improvement towards financial reforms to enable the Start-up firm’s ability to obtain finance globally.