F

E xternalC ommercial

B orrowing

C
SACHIT  ARORA     02
ASHISHGUPTA      07

B SONEL  JAKHAR    10
NITIN  SINGH         23
SHRUTI  ZATAKIA 26
 In simple terms, ECB refers to a loan from outside
India.


 Source of funds for corporate from abroad with

advantage of :
ü Lower rate of interest prevailing in the
International Financial Markets
ü Longer maturity period.
ü For financing expansion of existing capacity as
well as for fresh investment.
Purpose of ECB
 ECBs are being permitted by the Government as a
source of finance for Indian Corporate for
expansion of existing capacity as well as for
fresh investment.
 The policy seeks to give greater priority for
projects in the infrastructure and core sectors
such as Power, oil Exploration, Telecom, Railways,
Roads & Bridges, Ports, Industrial Parks and
Urban Infrastructure etc. and the export sector.
 Development Financial Institutions, through their
sub-lending against the ECB approvals are also
expected to give priority to the needs of medium
and small scale units.

 Inve stme nts

Equity Long term borrowingsShort term borrowings

Convertible Debentures Unfunded Loans

DebenturesConvertible Preference Shares

ECB’s
Mode :
 Foreign currency loan raised by residents from
recognized lenders.
 It recognizes simple form of credit as suppliers’
credit as well as sophisticated financial products
as securitisation instruments.
 Basically ECB suggests any kind of funding other
than Equity (considered foreign direct investment).
 Bonds, Credit notes, Asset Backed Securities,
Mortgage Backed Securities or anything of that
nature, satisfying the norms of the ECB
regulations.
 Commercial Bank Loans : in the form of term loans from
banks outside India

 Buyer's Credit


 Supplier's Credit


 Securitised instruments : Floating Rate Notes (FRNs), Fixed

Rate Bonds (FRBs), Syndicated Loans, CP.

 Credit from official export credit agencies.

 Commercial borrowings from the private sector window of
multilateral financial institutions such as
International Finance Corporation (Washington), ADB, etc.


 Loan from foreign collaborator/equity holder, etc and
corporate/institutions with a good credit rating from
internationally recognised credit rating agency.
 Lines of Credit from foreign banks and financial
institutions
 Financial Leases
 Import Loans
 Investment by Foreign Institutional Investors (FIIs) in
dedicated debt funds
 External assistance, NRI deposits, short-term credit and
Rupee debt
 Foreign Currency Convertible Bonds
 Non convertible or optionally convertible or partially
convertible debentures
 Redeemable preference shares are considered as part of
ECBs


ü As per Indian corporate law, all preference shares are

mandatorily redeemable unless they are convertible.
ü Hence, convertible preference shares will not be ECB
(will be Foreign Direct Investment)


 Bonds, Credit notes, Asset Backed Securities, Mortgage

Backed securities

ü Not expressly covered but Guidelines refer to
securitised notes

Why is ECB attractive ?
 Investor
ü ECB is for specific period, which can be as short as
three years.
ü Fixed Return, usually the rates of interest are fixed
ü The interest and the borrowed amount are repatriable
ü No owners risk as in case of Equity Investment


 Borrower
ü No dilution in ownership
ü Considerably large funds can be raised as per
requirements of borrower
ü Usually only a fixed rate of interest is to be paid
ü Easy Availability of funds because ECB is more appealing
to Investors
Routes for raising ECB :
 Automatic Route



 Approval Route
What is FCCB ?
 Foreign Currency Convertible Bonds (FCCB) -
quasi debt instruments issued in a currency
different than issuer’s domestic currency to
raise funds at attractive rates.
 Acts like a bond by making regular coupon &
principal payments
 Gives bondholder an option to convert bond into
stock
 Also called FCCN (Foreign Currency Convertible
Notes)
 Treated as FDI by Government of India.
 In US, overseas bond listed with SEC are called
Yankee Bonds, while they are called Bulldog
Bonds (in U.K.) & Samurai Bonds (in Japan).



Salient Features of FCCB
 Have a ‘Call’ & ‘Put’ option to suit structure of the Bond.
 Coupon is generally 30% - 40% less than on normal debt
paper or foreign currency loans or ECBs.
 Coupon can also be zero as in case of ZCB.
 Redemption can be made at a premium or at par or even at a
discount depending upon the coupon offered.
 YTMs normally ranges from 2 % to 7 %.
 Generally issued by Corporate, which have high promoter
shareholding.
 Pricing of FCCB options is generally between 30% - 70%
premium over Current Market Price giving sufficient
cushion to issuer.




 Foreign holder of FCCB can trade it in part or in full.
Holder can sell debt part while holding the Option or
vice versa.
 Issuance of FCCB like any incremental borrowing
invariably requires approval of existing consortium of
lenders.
 FCCB can be secured or unsecured. Most of FCCB issued by
Indian Companies are generally unsecured.
 FCCB can be converted into Indian Shares or American
Depository Shares (ADS).
 Issue expenses as well as premium on redemption of FCCB
are generally charged to Securities Premium Account.
 Issuing company need to hedge its forex exposure arising
out of FCCB, till the time of redemption or conversion.



 Right to convert FCCB into equity can arise any
time, starting immediately after allotment & can
vest for 2-3 years.
 FCCB carries fewer covenants as compared to a
syndicated loan or a debenture, hence these are
more & more convenient to raise funds.
 Credit rating is not mandatory but rating
definitely helps to price the coupons
competitively.
 Generally listed to improve liquidity, generally
Indian issuer have listed at Singapore Stock
Exchange & in many cases also on Luxembourg
Stock Exchange.



Benefits
 Issuer 
 Better fund raising option Investor
compared to QIP, PE &  Advantage of both equity
public issue & debt – upside of
 Coupon rate lower than pure investment in equity &
debt or zero, thereby downside protected by
reducing debt financing debt element
cost  Assured return in form of
 Raised within short time fixed coupon rate
(month) payments
 Rating & covenant not  Significant YTM guaranteed
mandatory at maturity
 Book value accretive on  Lower tax liability as
conversion. Save risk of compared to pure debt
immediate equity dilution. instruments
 
Alternatives with Issuer Company
o Look for resources to pay debt
ØRaising additional debt
ØAdditional equity
ØInternal accruals or sale of assets
o Reset conversion clause to bring it closer to
reality
o Altering the terms of issue
o Buy-back of FCCBs
ØInitiation power vested with issuer
ØBonds purchased must be cancelled
ØBuyback routed through designated AD for FCCB
ØCompanies should open escrow account
Translational Loss
 Arise due to fluctuation in foreign exchange
 Ideally companies should plan for risk of non-conversion
of FCCB & keep aside some amount of money for
eventuality of investor not converting debt into
equity.
 In reality, many companies do not provide for forex
losses with assumption that FCCB can get converted
into equity.
 As a result companies have boosted profits. This is not
a good practice
 On the other hand, some companies considering
translational losses while issuing of FCCBs, go in for
fixed rate of exchange on conversion of rupee to
dollar at time of redemption of FCCBs. e.g Aurbindo
Pharma fixed rate of exchange on conversion of
Rs.45.145 per dollar.

Accounting , taxation &
reporting
Accounting Treatment - FCCB
 Earlier AS 29 on provisions, contingent liabilities in
conjunction with section 78 of Companies Act, 1956 was
used
 Some charged it to securities premium account, while some
treated it as contingent liabilities & hence, not
accounted for it.
 Balance sheet carries entire debt but since it is not
charged in P & L.
 actual burden of servicing FCCB is not factored in.
 1st April,2009 - AS 31 (Financial Instrument Presentation )
came into effect
 Optional for 2 yrs & compulsory from 2011
 Requires FCCB to be classified either as equity or debt
right from start
 Lead to uncertainty in earnings of issuer

Taxation
 Interest payments on bonds, until conversion
option is exercised, shall be subjected to
deduction of tax at source
 Tax on dividend on converted portion of bond
shall be subjected to deduction of tax at
source
 Conversion into shares shall not give rise to
any capital gains liable to income tax in
India
 Transfers of FCCB made outside India by a non
- resident investor to another non - resident
investor shall not give rise to any capital
gains liable to tax in India

Taxation - ECB
 All interest payments and fees etc. related to
external commercial borrowings would be
eligible for withholding tax exemption under
Section 10(15) (iv) (b) to (g) of the Income
Tax Act, 1961. Exemptions under section 10(15)
(iv) (b), (d) to (g) are granted by the
Department of Economic Affairs while
exemption under section 10(15) (iv) (c) is
granted by the Department of Revenue,
Ministry of Finance.
Section 10( 15) b (iv)

 (B)   Incomes which are not to be included in
the income on satisfaction of some further
condition or conditions

 Any interest from or premium received on
redemption of certain exempted securities.
Section 10(15)
 Financial institutions notified for purposes of section 10(15)(iv)(b) :—

 
1.
2.
3.
4.
5.
6. The Banque Francaise du 
 Institution
International Finance 
Export Import Bank of 
Export Import Bank of Japan, 
The Development Loan Fund, 
The Kreditanstalt fur  Notification
No.
SRO 452
SRO 453
SRO 1896 
SRO 1905 
SO 2610
SO 3673 Date
31-1-1958*
1-9-1958*
30-7-1960*
24-7-1962
5-10-1964
Corporation, Washington
Washington, Washington D.C.
Tokyo
Columbia, U.S.A.
Wiederaufbau (West German
Commerce Exterieur, Paris
Bank for Reconstruction), West 
Germany
Section 10 (15) (iv) (C)


 For purposes of section 10(15)(iv)(c) a single
consolidated order of exemption will be
issued covering the entire amount of the loan
or debt under the agreement, irrespective of
whether the entire goods have been supplied
or part of them are likely to follow in due
course
Reporting Arrangements


 a) With a view to simplify the procedure,

submission of copy of loan agreement is
dispensed with.

 b) Borrowers are required to submit Form 83
(format in Annex II), in duplicate, certified
by the (CS) or ntant (CA) to the designated AD.
One copy is to be forwarded by the designated
AD to (DESACS), Reserve Bank of India, for
allotment of loan registration number.



 DESACS - The Director, Balance of Payments Statistics Division, Department of Statistical Analysis and Computer
Services

 c) The borrower can draw-down the loan only
after obtaining the loan registration number
from DESACS, RBI.

 d) Borrowers are required to submit ECB-2
Return (format in Annex III) on monthly basis
certified by the designated AD so as to reach
DESACS, RBI within seven working days from
the close of month to which it relates.

Dissemination of Information


 For providing greater transparency, information
with regard to the name of the borrower,
amount, purpose and maturity of ECB will be
put on the RBI website by the next working
day of the approval under Approval Route and
on a monthly basis with a lag of one month to
which it relates under Automatic Route.

 RBI Guidelines
 Automatic Vs Approval Route
 Eligible Borrowers  Eligible Borrowers



Ø Corporates (except Ø FIs dealing with

financial infrastructure or
intermediaries) export finance
Ø Units in SEZ Ø SPV set up to finance
Ø NGOs in micro infrastructure
finance companies
 Ø NBFC involved in
 Not eligible financing
ØIndividuals, infrastructure
trusts & non companies
profit Ø
organizations 



Ø
Automatic Vs Approval Route
contd.
 Recognized Lenders
 International Banks
 International Capital markets
 Multilateral FIs
 Export credit agencies
 Foreign equity holders (except Overseas
Corporate Bodies)


 Security
 Choice of security left to borrower




Amount & Maturity
Borrower Max amount of ECB raised
Corporates other than USD 500 mn or equivalent
hotel, hospital & during a financial yr
software sectors
Under approval route -
Service sector viz USD 100 mn or
Corporates canequivalent
avail
hotel, hospital & during a financial
additional USD 250 yr
mn with
software sectors average maturity of more than
10yrs

ECB amount Minimum average maturity

ECB <= USD 250 mn or 3yrs
its equivalent in a
ECB > USD yr
financial 250 & <= 5 yrs
USD 500 mn
 All-in-cost ceiling


 All in cost includes rate of interest, other fees &

expenses in foreign currency except commitment
fee, pre-payment fee & fee payable in Indian
rupees

Average maturity period All-in-cost ceilings over

> 3 yrs & up to 5 yrs 300 basisLibor
6 month points
> 5 yrs 500 basis points

Debt Servicing
 Designated AD banks have general permission to make
remittances of installments of principal, interest
& other
charges in conformity with ECB guidelines issued by
RBI
End Use
 Investment in Infrastructure, Industrial &
specific Service sector
 Overseas direct investment in JV
 1st stage acquisition of shares & mandatory 2nd
stage offer under Govt. disinvestment
programme of PSU shares
 License for 3 G Spectrum
 End use not permitted
Ø Real estate sector
Ø Working capital, general corporate purpose &
repayment of existing rupee loans
Ø Investment in capital market or acquiring a
company in India

 Guarantee


 Issuance of guarantee, stand by letter of credit,

letter of undertaking or comfort by banks, FIs &
NBFCs not permitted
 Exception - SME & Textile companies
 Considered under approval route subject to norms


 Parking of ECB proceeds



 Parked overseas – invested in liquid assets

 Remitted to India for credit to borrower Rupee
account with AD category 1 banks in India

 Prepayment


 Prepayment of ECB upto USD 500 mn may be allowed by

AD banks without prior RBI approval
 Prepayment of ECB exceeding USD 500 mn would be
considered by RBI under Approval route
 Buyback of FCCBs was allowed under approval route
until Jun 30, 2010


 Refinancing of an existing ECB



 By fresh ECB subject provided it is raised at a

lower all in cost & outstanding maturity of
original ECB is maintained


Procedure
 Automatic  Approval Route
route  Borrowers are required
 No RBI approval needed to submit an
 Borrowers enter into application in form
loan agreement with ECB through
recognized lender designated AD bank
 Borrower must obtain
to Chief General
LRN(Loan Manager-in-charge,
Registration No) Forex Dept., RBI, ECB
from RBI Division, Mumbai
along with necessary
documents


Compliance with ECB guidelines


 Primary responsibility to ensure that ECB raised / utilised are in

conformity with ECB guidelines & RBI regulations is that of
borrower concerned & any contravention will invite penal action
under FEMA 1999



Conversion of ECB into equity


 Activity of company is covered under Automatic Route for FDI or

Government approval for foreign equity participation has been
obtained by company, wherever applicable
 Foreign equity holding after such conversion of debt into equity
is within the sectoral cap
 Pricing of shares is as per SEBI & erstwhile CCI regulations in
case of listed/unlisted companies as the case may be.





 ECB under the erstwhile USD 5 million
scheme

 Designated AD banks are permitted to approve elongation
of repayment period for loans raised under the
erstwhile USD 5 Million Scheme, provided there is a
consent letter from overseas lender for such
reschedulement without any additional cost.

 Such approval with existing & revised repayment
schedule along with Loan Key/Loan Registration
Number should be initially communicated to Chief
General Manager-in- Charge, Foreign Exchange
Department, RBI, ECB Division, Mumbai within seven days
of approval


ECB AND FCCB
the Indian story
The Journey 2002-2008
 Indian Companies raised approximately $23 bn
over the period 1997-2008 via the ECB/FCCB
route.
 India Inc emerged as the biggest issuer FCCBs
in the Asia-Pacific region in 2005. Total
FCCBs issued from India were to the tune of
$1.4 bn, accounting for 32.7 per cent share.
 Further, out of about 30 FCCB issues in the
Asia-Pacific region, 15 were from India and
6 from Taiwan.
 Indian companies that raised FCCBs from the
market in the year 2005 included Tata
Chemicals, Jaiprakash Associates, Glenmark,
Tata Power, Bharat Forge, AmtekAuto and
Ballarpur Industries.
The Growth Story
 Indian companies issued
Foreign Currency
Convertible Bonds (FCCBs)
worth $12.7 billion during
the bull run of 2004-2007.
 Though there was a dip in the
number of issues in 2007,the
total value of issues saw
an upswing.  
 FCCB issuances for 2009-10 at
$2.88 billion, a big jump
compared with the measly
$24 million in 2008-09, but
much lower than the 2007-08
number of $5.6 billion.



The case of Tata Motors
 Total FCCB issue size of over USD 4 Million in
2003.
 The issue was oversubscribed ten times and received
investor interest to the extent of $4 billion.
 The note issue was in two tranches and was
convertible into either ordinary shares or Global
Depository Shares (GDSs) representing ordinary
shares of the company, at the option of the note
holders.
 The First Tranche -
 $100 million
 Conversion price of Rs 573.106 per share.
 Zero Coupon and redeemable at a discount of 4.89 per
cent after five years.
 The Second Tranche -
 $300 million
 Conversion price of Rs 780.40 per share.
 Coupon of one per cent per annum and were redeemable
at a premium of 21.78 per cent after seven years.



..contd.
 The company had an option to redeem the tranche
notes after one year, subject to relevant
approvals.
 Tata Motors indicated that this transaction
structure would enable the company to meet
various objectives with respect of its
desired capital structure.
 This was the first ever multi - tranche
convertible offering by an Indian company
with the first tranche being the first ever
negative yield structure offered by an
Indian company and the second tranche
achieving the longest tenure of seven
years and the highest conversion premium
of 60 per cent for an Indian convertible
offering.
..contd.
 On March 24, 2010 Tata Motors offered to
convert bonds worth $431 million into shares
about a year before they matured. The
company’s share price fell 3 per cent because
the conversion would dilute the company’s
share capital by 4.3 per cent.
 The conversion was aimed at reducing debt and
preserving cash. Seeing the high debt on the
company’s books early conversion was good as
it would make the capital structure
favourable.

The journey- 2008-10
 landmarks
 The total approvals received by India Inc to raise capital
through ECBs and FCCBs rose 39% to $1.5 billion in
September, up from $1.08 billion in August 2009.
 In September 2009, Indian Railway Finance Corporation got an
approval to raise $450 million for the purpose of rupee
expenditure for a maturity of 5 years, followed by Tata
Steel at $384 million for modernisation with a maturity
period of 13 years and 2 months.
 Indian companies have raised about $2.6 billion from the
international market through ECBs and FCCBs in October 2009
to fund overseas acquisitions and import capital goods and
modernisation and lending.
 Sterlite Industries and Sesa Goa, both from Vednata group,
raised $500 million each through FCCB to modernise
operations, according to data released by Reserve Bank of
India (RBI).





..contd.
 In November 2009, REI Agro placed FCCBs worth
$105 mn.
 The government allowed companies to reprice
their FCCBs on par with QIPs and allowed them
to negotiate with investors at a time when
many of their scrips are trading below the
conversion price.
 Indian corporates borrowed $1.79 billion
through External Commercial Borrowings from
the overseas market in June 2010. While in
May, companies had borrowed only $696.298
million through ECBs.
 Of the total ECBs, $1.77 billion was raised
through the automatic route and $12.9 million
through the approval route.




..contd.
 Forty nine companies raised funds through the ECB
route in June. Infotel Broadband Services, which
was acquired by Reliance Industries, raised the
highest amount through ECB, borrowing $500
million under the approval route.
 In a June Regulation, the Reserve Bank of India has
decided to permit take-out financing arrangement
through external commercial borrowings (ECBs)
under the approval route for infrastructure
projects.
 Conversion prices are now being set closer to the
current market prices and the bonds also carry
higher interest rates than earlier.
 Approximately $2.8 bn worth FCCBs coming up for
redemption in 2010 itself.


ISSUES OF THE DECADE
Reality check
THANK YOU