External Commercial Borrowing(ECB)

8/6/2019 External Commercial Borrowing(ECB)

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By

PANKAJ BHOLE

External Commercial Borrowing


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VARIOUS SOURCES OF FOREIGN

CAPITAL

Major Sources are:-y Foreign Direct Investment (FDI)y Direct Investment by Residents in Joint

Venture/wholly owned subsidiariesy External Commercial Borrowings (ECB)

y Euro Issues (FCCB/GDR/ADR)

y Foreign Currency Exchangeable Bondsy Foreign Institutional Investor Investment (FIIIs)y Off-shore fundsy Overseas Venture Capital Investments


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WHAT IS ECB?

External Commercial Borrowings (ECB) refer to commercial loans in the

form of bank loans, buyers credit, suppliers credit, securitized

instruments (e.g. floating rate notes and fixed rate bonds) availed offrom non-resident lenders with minimum average maturity of 3 years.


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WHYECB?Source of funds for corporate from abroad with advantage of:-

y lower rates of interest prevailing in the international

financial markets

y longer maturity period

y for financing expansion of existing capacity as well as for

fresh investment


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ELIGIBILITY/BORROWERS :

1.Corporate other than financial intermediatories andNGOs engaged in micro-finance.

2. Investment in infrastructure.

LENDER:Internationally recognized sources such as internationalBank/Capital markets, multilateral financial institutions,export credit agencies, suppliers of equipments, foreigncollaborators and foreign equity-holders.


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MATURITY:3-7 years

AMOUNTS :Min. USD 20 M, MAX USD 500 M.

COSTS :The ceiling on all costs :-y Over 6 months LIBOR 300 basic points for maturity

period3.

5 years.

y Over 6 months LIBOR 350 basic points for maturityperiod over 5 years

y Over 6 months LIBOR 500 basic points for maturity

period of 7 years


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USES

CANNOT BE USED FORy lending, investment in Capital Market,y acquiring new Co.,

y real estate,y repayment of Loans.

CAN BE USED FOR

y investment in industrial & infrastructural sectors,y overseas direct investment on JV/WOS andy acquisition of shares in disinvestments process of PSU


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ROUTES FOR ECBy ECBs can be accessed under two routes

(i) Automatic Route and

(ii) Approval Route.


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ROUTES FOR ECB

(i) Automatic Route

y Eligibility criteria :

Corporates registered under the companies Act except

financial intermediaries

y Total quantum limit offunds :-

USD 500 million during a financial year.ECB up to

USD 20 million or equivalent in a financial year with minimum

average maturity of three years.


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y Recognised lenders

I. international banks

II. international capital markets

III. multilateral financial institutions (IFC, ADB, CDC)

IV. export credit

y Amount Limit

ECB of :

I. Maximum of $500 or equivalent in a financial year.

II. $20 million or equivalent with min maturity of3years

III. $20 million and upto $500 million or equivalent with a minimumaverage maturity of five years.

ROUTES FOR ECB CONTINUEDuu.


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y Guarantees

Issuance of guarantee

Letter of undertaking or letter of comfort by banks,

F

inancial Institutions &NBF

Cs relating to ECB is notpermitted.

y Refinancing ofan existing ECB

Fresh ECB is raised at a lower all-in-cost The outstanding maturity of the original ECB is maintained



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y Maturity period and the cost involved:-

y End uses ofthe funds raised

Import of capital goods , Overseas directinvestment in JV,WOS,Import of Capital Goods(New or Existing units)

Average Maturity Period All-in-cost Ceilings over 6 month LIBOR*

Three years and upto five years 200 basis points

More than five years 350 basis points



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Routes For ECB

(ii) Approval Route

y Eligibility criteria :

Financial institutions dealing exclusively with infrastructure or

export finance such as IDFC, IL&FS, Power Finance Corporation etc

y Total quantum limit offunds :-

Corporates can avail of ECB of an additional amount

ofUSD 250 million with average maturity of more than 10 years


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y Recognised lenders

I. international banks ,capital markets,multilateral financial institutions

(IFC, ADB, CDC)

II. foreign equity holder

III. Overseas organisations(satisfying ECB norms)

y Amount Limit Upto $500 through automatic route.Above this limit :-

- $250 million with min maturity of10years

I. NGOs engaged in micro fnance activities can raise ECB up to $5

million during a financial year.

II. Corporates in the services sector viz. hotels, hospitals and softwarecan avail ECB up to $100 million.



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y Guarantees

Issuance of guarantee

Letter of undertaking or letter of comfort by banks,

F

inancial Institutions &NBF

Cs relating to ECB is notpermitted.

y Refinancing ofan existing ECB

Fresh ECB is raised at a lower all-in-cost The outstanding maturity of the original ECB is maintained



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y Prepayment(a)Prepayment of ECB upto USD 500 million may be allowed by

AD bank without prior approval of Reserve Bank

subject to compliance with the stipulated minimum average

maturity period as applicable to the loan.

(b) Pre-payment of ECB for amounts exceeding USD 500 million

would be considered by the Reserve Bank .



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y Maturity period and the cost involved:-

y End uses of the funds raised

Investment in real sector(Industrial &

Infrastructure Sector), Overseas direct investment in JV,WOS,Import ofCapital Goods


Three years and upto five years 200 basis points

More than five years 350 basis points



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TRADE CREDITS FOR IMPORTS INTO

INDIA

y Trade Credits (TC) refer to credits extended for imports directly by

the overseas supplier, bank and financial institution for maturity of

less than three years.

y Amount andMaturity

For import of all items permissible under the Foreign

Trade Policy (except gold), Authorized Dealers have been

permitted to approved trade credits up to20

millions perimport transaction with a maturity up to one year.


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y All-in-cost Ceilings

y GuaranteeAD Bank are permitted to issue Letters of Credit /

guarantees / Letter of Undertaking (LoU) / Letter of Comfort

(LoC) in favour of overseas supplier, bank and financial

institution, upto USD 20 million per transaction for a period upto one year.


Up to one year 75 basis points

More than one year but less than three years 125 basis points


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GLOBAL DEPOSITORY

RECEIPTS(GDR)GDRs are :-

y Certificate issued by a depository bank which purchases shares offoreign companies and deposits it on the account.

y

Global Depository Receipts facilitate trading of shares, and arecommonly used to invest in companies from emerging market.

y Several international banks issue GDRs, such as JP morgan chase,citi group,Deutsche bank, Bank of new york.

y GDRs are often listed in the Frankfurt stock exchange and londonstock exchange, where they are traded on the International OrderBook (IOB). Normally 1 GDR = 10 Shares, but not always.


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AMERICAN DEPOSITORY

RECEIPTS (ADR)ADRs are :-

y Negotiable security that represents the underlying securities

of a non-U.S. company that trades in the U.S. financial

markets.

y Denominated, and pay dividends , may be traded like shares

of stock.

y Each ADR is issued by a domestic depositary bank when the

underlying shares are deposited in a foreign custodian bank.

y Generally Priced in line with price of the foreign security in

its home market.


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RECENT UPDATES

y India Inc raised over $ 2.06 billion from overseas markets in Aprilthrough external commercial borrowings (ECBs) and foreigncurrency convertible bonds (FCCBs).

y $ 520 million were raised through the approval route, according tothe RBI data.

y State-sector Shipping Corporation of India raised $ 215.52 millionthrough ECBs for import of capital goods in April.

y Suzlon Energy mopped up $ 200 million through ECBs during themonth for its overseas acquisition. (Source-EconomicTimes,Jun23/2011)


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y The Sub prime crisis in the US, in 2008 had ensued into aninternational economic crisis.As a result, it also affectedIndia. Lending norms have been tightened across the globe.The costs of funds have shot up considerably. One of the

grievances of international lenders being that the LIBORdoes not represent the actual cost of funds.

y Due to which ECBs have received setbacks due to the

economic downturns in the past years.F

or e.

g.

T

he quantumof ECBs drooped drastically from $1.104 billion in October2007 to $321 million in October 2008.

DRAWBACKS


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CONCLUSION

y RBI liberalized ECB guidelines by permitting hotels,hospitals and software companies to avail ECB up to certainprescribed limits, although the retail sector has been left out.

y ECBs have emerged as a forerunner in the credit market andhave steadily gained huge prominence in the Indian market.

y Indian government should tread cautiously and keep a check

on capricious borrowings from foreign lenders while at thesame time providing flexibility and keeping the health of theIndian economy in mind.


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Documents

External Commercial Borrowing(ECB)