External Commercial Borrowing

Presented by, Nishant Raja (BBA-FT 3rd Semester)

Introduction
We can define External Commercial Borrowing as a Trade Credit extended to buyers for a maturity period exceeding 3 years. External Commercial Borrowings include bank loans, suppliers' and buyers' credits, fixed and floating rate bonds (without convertibility) and borrowings from private sector windows of multilateral Financial Institutions such as International Finance Corporation.

External Commercial Borrowings (ECB) are defined to include : commercial bank loans, buyers credit, suppliers credit, securitized instruments such as floating rate notes, fixed rate bonds etc., credit from official export credit agencies, commercial borrowings from the private sector window of multilateral financial institutions such as IFC, ADB, AFIC, CDC etc. and Investment by Foreign Institutional Investors (FIIs) in dedicated debt funds

Eligibility for availing ECB

ECB can be accessed under two routes, i.e, Automatic Route and Approval Route. Eligibility under Automatic Route: Corporates (registered under the Companies Act except financial intermediaries such as banks, financial institutions, housing finance companies and NBFCs. NGOs engaged in micro finance activities. Units in SEZs for their own requirement.

Eligibility under Approval Route: Financial institutions dealing exclusively with infrastructure or export finance such as IDFC, IL & FS, Power Finance Corporation, Power Trading Corporation, IRCON and Exim Bank. Banks and Financial institutions which had participated in the textile or steel sector restructuring package as approved by the Government, to the extent of their investment in the package and assessment by the RBI based on prudential norms. NBFCs from multilateral financing institutions, reputable regional financial institutions, official export credit agencies and international banks.

Special Purpose Vehicles, or any other entity notified by the RBI, set up to finance infrastructure companies / projects exclusively. Multi-state Co-Operative Societies engaged in manufacturing activity provided that they are financially solvent and submits their up-to-date audited balance sheet. Cases falling outside the purview of the automatic route limits and maturity period.

1.

2.

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4.

FCCB by housing finance companies satisfying the following minimum criteria: The minimum net worth of the financial intermediary for the prevailing 3 years shall not be less than Rs.500 crore. A listing on the BSE or NSE. Minimum size of FCCB is US $100 million. The applicant should submit the purpose / plan of utilization of funds.

Recognised Lenders
Borrowers can raise ECB from internationally recognised sources such as: Multilateral Financing Institutions International Banks International Capital Markets Export Credit Agencies Suppliers of equipment Foreign Collaborators Foreign Equity Holders

Amount and Maturity

Borrowing conforming to the following will be permitted under automatic route: The maximum amount of ECB which can be raised by a corporate is UD $500 million or equivalent during a financial year. ECB upto US $20 million or equivalent in a financial year with minimum average maturity of 3 years. ECB above US $20 million and upto US $ 500 million or equivalent with minimum average maturity of 5 years.

NGOs engaged in micro finance activities can raise ECB upto US $5 million during a financial year. ECB upto US $20 million can have call / put option provided the minimum average maturity of 3 years is complied with before exercising call / put option.

All-in-Costs Ceilings
All-in-costs include rate of interest, other fees and expenses in foreign currency except commitment fee, pre-payment fee, and fees payable in Indian Rupees. The payment of withholding tax in Indian Rupees is excluded for calculation of the all-in-cost.

The all-in-cost should not exceed the following limits:

Average Maturity Period More than 3 years upto 5 years More than 5 years All-in-cost ceiling over 6 month LIBOR 200 basis points 350 basis points

The all-in-cost ceilings for infrastructure projects is 400 basis points over six months LIBOR, for the respective currency in which the loan is being raised or applicable benchmark(s), as the case may be. The all-in-cost ceilings for long term ECBs is 450 basis points over six months LIBOR, for the respective currency in which the loan is being raised or applicable bench mark(s), as the case may be.

Schemes available under ECB

There are basically two schemes available under the External Commercial Borrowing, which are: US $5million scheme: Raising of ECB under the scheme will be considered by RBI provided the amount to be raised does not exceed USD 5 million (USD 3 million earlier) or its equivalent and the borrowing should be for a minimum simple maturity of 3 years. Corporates / institutions may utilize the proceeds of such borrowings for their business related expenditure (including rupee expenditure) subject to the caveat that only one such loan should be outstanding at any point of time.

US $100 million Scheme: Raising of ECBs will be considered provided: 1. The amount to be raised does not exceed US $100 million or its equivalent and 2. The minimum average maturity of the loan should be of 3 years under various windows i.e. Exporters/Foreign Exchange Earners Scheme, Infrastructure Project Scheme, Long Term Borrowers Scheme and others.
The proceeds of the ECB raised under the scheme may be utilized for the purpose for which it has been sanctioned. The RBI is the sanctioning authority for all proposals received under this scheme.

Automatic Approval Scheme: The Government has recently decided to place fresh ECB approvals up to USD 50 millions under the automatic route. Under this scheme, Indian companies are allowed to raise ECBs up to $ 50 million under the automatic approval route - which means that corporates can raise loans up to $ 50 million without any approval from the Government or the RBI. After signing the loan agreement with the overseas lender, the company has to submit three copies to the concerned regional office of the RBI through an authorized dealer. The regional office of the RBI would then acknowledge the receipt of the copy of the loan agreement and allot a loan identification number to the company.

Exporters/Foreign Exchange Earners: Corporates who have foreign exchange earnings are permitted to raise ECB up to three times the average amount of annual exports during the previous three years subject to a maximum of USD 200 million without end-use restrictions, i.e. for general corporate objectives excluding investments in stock markets or in real estate. The minimum average maturity will be three years up to USD 20 million or equivalent and five years for ECBs exceeding USD 20 million. The maximum level of entitlement in any one year is a cumulative limit and debt outstanding under earlier approvals will be netted out to determine annual eligibility.

Infrastructure Projects: Holding Companies/promoters will be permitted to raise ECB up to a maximum of US $200 million equivalent to finance equity investment in a subsidiary/joint venture company implementing infrastructure projects. In case the debt is to be raised by more than one promoter for a single infrastructure project then the total quantum of loan by all promoters put together should not exceed US $200 million. Also, infrastructure projects are allowed to have ECB exposure of up to 50% of the project cost as appraised by a recognized financial institution/ bank.

It is clarified that the following sectors will qualify as infrastructure sectors under the ECB guidelines: Power Telecommunication Railways Roads (including bridges) Ports Industrial Parks Urban infrastructure Water supply, sanitation and sewage projects.

End Use

The borrowings can be used for the following purposes: Investment Overseas direct investment in Joint Ventures / Wholly owned Subsidiaries The first stage of acquisition of shares in the disinvestment process and also in the mandatory second stage offer to the public under the Governments disinvestment programme of PSU shares

For lending to self-help groups or for micro-credit or for bona fide micro finance activity including capacity building by NGOs engaged in micro finance activities Refinancing of a n existing ECB. The existing ECB may be refinanced by raising a fresh ECB subject to the condition that the fresh ECB is raised at a lower all-in-cost and the outstanding maturity of the original ECB is maintained.

The borrowings cannot be used for the following purposes:

On-lending or investment in capital market or acquiring a company in India by a corporate. For working capital, general corporate purpose and repayment of existing rupee loan. In real estate (exclusive of integrated township as defined by the Ministry of Commerce and Industry).

Guarantees
Issuance of guarantee, letter of comfort by banks, financial institutions and NBFCs relating to ECB is not permitted. However under approval route applications for providing guarantee letter of comfort by banks, financial institutions and NBFCs relating to ECB in the case of SME will be considered on merit subject to prudential norms.

Security
The choice of security to be provided to the lender / supplier is left to the borrower. However creation of charge over immovable assets and financial securities is subject to FEMA regulations.

Prepayment
Prepayment of ECB up to US $200 million may be allowed by AD banks without prior approval of RBI subject to compliance with the stipulated minimum average maturity period as applicable the loan. Prepayment of ECB for amounts exceeding US $200 million would be considered by Reserve Bank under the approval route.

Procedure for availing ECB

Borrowers may enter into loan agreement complying with ECB guidelines with recognized lender for raising ECB under Automatic Route without prior approval of RBI. The borrower must obtain a Loan Registration Number from the RBI before drawing down the ECB. For allotment of LRN, borrowers are required to submit Form 83, in duplicate, certified by the Company Secretary or Chartered Accountant to the designated AD bank. One copy is to be forwarded by the designated AD bank to RBI

Borrowers are required to submit ECB-2 Return certified by the designated AD bank on monthly basis to RBI, within seven working days from the close of the month to which it relates.
For availing ECB under approval route, applicants are required to submit an application in form ECB through designated AD bank to the Reserve Bank of India, along with the necessary documents.

Loan Sanctions
ECB is sanctioned in a particular percentage of the whole amount. The different percentages in various sectors are:

Sector / Project
Green Field EOU Telecom

% Loan Sanctioned
35% 60% 50%

Power

100%

Conversion of ECB into Equity

Conversion of ECB into equity is permitted subject to the following conditions: The activity of the company is covered under the Automatic Route for Foreign Direct Investment or Government Approval for foreign equity participation has been obtained by the company. The foreign equity holding after such conversion of debt into equity is within the sectoral cap, if any. Pricing of shares is as per SEBI and erstwhile CCI guidelines / regulations in the case of listed / unlisted companies as the case may be.

Conclusion
External Commercial Borrowing provides means of not only funding projects but also saves the borrower a lot of money by means of lower interest rates as compared to domestic currency and also frees him from foreign exchange risk.

Bibliography
The following sources have been referred to for making this presentation: Foreign Exchange and Risk Management by C. Jeevanandam www.google.com Wikipedia www.rbi.org.in www.finmin.nic.in

Thank You

Questions ??????