Presentation on External Commercial Borrowings

8/19/2019 Presentation on External Commercial Borrowings

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External CommercialBorrowings

Neha GuptaVinod Kothari & Company

1012 Krishna, 224 AJC Bose Road

Kolata! "00001"

#h$ %1!!22'1""1() 22'112"*

+mail$ neha-inodothari./om

mailto:[email protected]:[email protected]


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What is ECB?

• Source of funds for corporates from abroad with advantage of

• lower rates of interest prevailing in the international financial markets

• longer maturity period

• for financing expansion of existing capacity as well as for fresh investment

• Defined as to include commercial loans in the form of bank loans! buyers" credit!suppliers" credit! securitised instruments #e$g$ floating rate notes and fixed ratebonds! C%&' availed from non(resident lenders with minimum a-erae maturityo years


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Source of )aw

• *he set of rules that governs foreign investment in form of borrowings is calledECB +egulations by ,-.

• Section /#0d& of the orein +3/hane anaement A/t, 1%%% read with theorein +3/hane anaement 5Borro6in or 7endin in orein

+3/hane8 Reulations, 2000 which is also known as 1otification 1o$ .E,2 0 3

4555(+B dated 0rd ,ay 4555$• Consolidated +B6 aster Cir/ular 1o$ 357 34558(59 on :External Commercial

Borrowings and *rade Credits; dated


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Basic .inancing Structure

6nvestments

E>uity )ong *ermBorrowings

Short *ermBorrowings

.D6 .E, #Borrowing or )ending in.oreign Exchange&+egulations! 4555

Debentures Convertible%referenceShares

ConvertibleDebentures nfunded)oans

ECBs


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,odes of raising ECBs( contd$$

• .oreign currency loan raised by residents from recognised lenders

• *he ambit of ECB is wide$

• 6t recogni@es simple form of credit as suppliers" credit as well as sophisticatedfinancial products as securitisation instruments$

• Basically ECB suggests any kind of funding other than E>uity #considered

foreign direct investment& be it Bonds! Credit notes! 2sset Backed Securities!,ortgage Backed Securities or anything of that nature! satisfying the normsof the ECB regulations$


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,odes of raising ECBs( contd$$

• Commercial Bank )oans A in the form of term loans from banks outside 6ndia

• Buyers Credit

• Suppliers Credit

• Securitised instruments such as .loating +ate 1otes #.+1s&! .ixed +ateBonds #.+Bs&! Syndicated )oans etc$ Syndicated )oan! C%

• Credit from official export credit agencies

• Commercial borrowings from the private sector window of multilateral financialinstitutions such as 6nternational .inance Corporation #Washington&! 2DB! 2.6C! CDC!

• )oan from foreign collaborator3e>uity holder! etc and corporate3institutions witha good credit rating from internationally recognised credit rating agency

•

)ines of Credit from foreign banks and financial institutions• .inancial )eases

• 6mport )oans


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,odes of raising ECBs

• 6nvestment by .oreign 6nstitutional 6nvestors #.66s& in dedicated debt funds

• External assistance! 1+6 deposits! short(term credit and +upee debt

• .oreign Currency Convertible Bonds

• 1on convertible or optionally convertible or partially convertible debentures

• +edeemable preference shares are considered as part of ECBs

• 2s per 6ndian corporate law! all preference shares are mandatorily redeemable unlessthey are convertible

• ence! convertible preference shares will not be ECB #will be .oreign Direct 6nvestment&

• 1on convertible! partly convertible or optionally convertible preference shares are treatedas ECBs

• Bonds! Credit notes! 2sset Backed Securities! ,ortgage Backed securities

• 1ot expressly covered but uidelines refer to securitised notes


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Exclusions from ECBs

• 6nvestment made towards core capital of an organi@ation vi@$• investment in e>uity shares!

• convertible preference share and

• convertible debentures

• 6n =une 4557 the +eserve Bank of 6ndia has clarified that only

instruments which are fully and mandatorily convertible into equity withina specified time would be reckoned as part of e>uity under the .D6 %olicyand will be eligible to be issued to person"s resident outside 6ndia under the .oreign Direct 6nvestment Scheme

• E>uity capital

• +einvested earnings" #retained earnings of .D6 companies&

• -ther direct capital #inter(corporate debt transactions between relatedentities&


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*rade credits( contd$$

• Credits extended for imports into 6ndia directly by the overseas supplier! bank andfinancial institution for maturity o less than three years

• 9uppliers: /redit relates to credit for imports in to 6ndia extended by theoverseas supplier

• Buyers: /redit refers to loans for payment of imports in to 6ndia arranged by

the importer from a bank or financial institution outside India for maturity of less than three years$

• Buyers" credit and suppliers" credit for three years and a;o-e come under thecategory of +CBs

• 2D banks permitted to approve trade credits up to ,SD 45 per importtransaction with a maturity period up to one year #maturity period of more thanone year and less than three years in case of import of capital goods&

• 1o rollover3 extension permitted beyond the permissible period$


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*rade credits

• *he current all(in(cost ceilings are as underA

aturity period

All!in!/ost /eilins o-er * months7

p to < year 7 bps

,ore than < year but less than 0 years


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.CCBs

• %olicy for ECB also applicable to .oreign Currency ConvertibleBonds #.CCBs& in all respects read with 1otification .E,2 1o$


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Convertible %reference Shares

• %reference shares only fully and mandatorily convertible instruments arenow considered to be .D6$

• .oreign investment in preference shares of any nature other than fullyand mandatorily convertible! including non-convertible (that is, purely redeemable), optionally convertible or partially convertible preferenceshares and preference shares or any instrument with no definite period for conversion in equity would be considered as debt and shall re>uireconfirming to ECB guidelines$

• %roceeds cannot be used for ac>uisition of existing shares #.E,2&

• 6ssue of preference shares of any type would continue to conform tothe guidelines of +B63SEB6 and other statutory bodies and would be

subHect to all statutory re>uirements$


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Convertible Debentures

• Debentures only fully and mandatorily convertible instruments arenow considered to be .D6$

• 2ll other debentures #including non / optionally convertible&treated at par with ECB I i$e$ Debt$


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*wo +outes for ECB

• ECBs can be accessed under two routes

• #i& 2utomatic +oute and

• #ii& 2pproval +oute$


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Bases of Comparison

• Eligibility criteria for accessing international financial markets$

• *otal >uantum limit of funds that can be raised through ECBs$

• ,aturity period and the cost involved$

• End uses of the funds raised$


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Eligible Borrowers

Automati/ Route Appro-al Route• 6ndian Companies except financial intermediaries

#such as Banks! .inancial 6nstitutions #.6s&! ousing.inance companies and 1B.Cs&$

• nits in Special Economic Jones #SEJ& are allowed

to borrow funds through ECBs for their ownre>uirements$

• (Individuals, Trusts and Non-rofit makin!

or!anisations are not eli!ible to raise "#$s)%

• .inancial 6nstitutions dealing exclusively withinfrastructure or export finance

• Banks and .inancial 6nstitutions which participatedin the textile or steel sector restructuring package

• ECBs with minimum average maturity of years by1B.Cs to finance import of infrastructure e>uipmentfor leasing to infrastructure proHects$

• .CCBs by housing finance companies satisfying theprescribed criteria

• S%Ks!or any other entity notified by +B6! set up tofinance infrastructure companies 3 proHects$

• ,ulti(State Co(operative Societies engaged inmanufacturing activities$

• Corporates engaged in industrial L infrastructuresector

• 1-s engaged in micro finance activities satisfyingthe criteria laid down

• Corporates in service sector for import of capitalgoods$


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2mount and ,aturity

Automati/ Route Appro-al Route• Corporates ( additional amount of SD 45 million with average maturity of more than


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2ll(6n(Cost Ceilings

Automati/ Route• 2ll(in(cost includes rate of interest! other

fees and expenses in foreign currency except commitment fee! pre(payment fee!withholding tax and fees payable in

6ndian +upees$

A-erae aturity#eriod

All!in!/ost Ceilinso-er * month

7 56.e.. 22)!10!200'8

0 years and up to years

00 ;ps

,ore than years (00 ;ps

F for the respective currency of borrowing or applicable benchmark

Appro-al Route

• ECB beyond the permissible all(in(cost ceiling can be availed ofunder the 2pproval +oute$ #to bereviewed after =une 05! 4559&


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%ermitted End ses -f ECB %roceeds

Automati/ Route Appro-al Route

• 6mport of capital goods by new or existing production units in realsector( industrial sector! includingS,Es$

• 6nvestment in infrastructure sector!

• -verseas direct investment in =ointKentures #=K& 3 Wholly -wnedSubsidiaries #W-S&

• %ayments to overnment bytelecom companies for obtaininglicense 3 permit for 0 Spectrum

• uisition of shares of %Ss in the disinvestment processby overnment and also in themandatory second stage offer to thepublic$

• +efinancing of an existing ECB


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End uses not permitted

Automati/ Route

• -n(lending or investment incapital market or ac>uisition of companies or part thereof

• 6nvestment in real estateP

• Working capital! general corporatepurpose and repayment of +upeeloans

Appro-al Route

• Same

• owever! the eligible .inancial

6nstitutions and Banks can utilisethe ECB proceeds for ac>uisitionof companies in 6ndia! subHect tothe approval of +B6$


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Security

• Security to be provided to the overseas lender 3 supplier for securing the ECBs is left to the borrower$

• Creation of charge over the immovable assets and financialsecurities! such as shares! in favour of the overseas lender aresubHect to +egulation 8 of 1otification 1o$ .E,2 4


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Structured -bligations

• 6n order to enable corporates to raise resources domestically and hedgeexchange rate risks! domestic rupee denominated structured obligationsare permitted to be credit enhanced by international banks3internationalfinancial institutions3Hoint venture partners$

• Such applications will be considered under the 2pproval +oute$


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Debt Servicing! %repayment 2nd +efinancingof an existing ECB

• *he designated 2D banks have general permission to make remittances of installments of principal! interest and other charges in conformity with theECB guidelines$

• %repayment of ECBs up to ,SD 55 without approval of +B6 subHect tocompliance with minimum average maturity period! whereas amountsexceeding SD 55 million can be prepaid only after obtaining approvalof +B6$

• Existing ECB may be refinanced by raising a fresh ECB subHect to thecondition that the fresh ECB is raised at a lower all(in(cost and theoutstanding maturity of the original ECB is maintained$


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%arking of ECB %roceeds

• *o be parked overseas until actual re>uirement in 6ndia


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+ecent Developments ( ECB

• inimum A-erae aturityA ECB upto SD 55 million per borrower per financial year is permitted for rupee expenditure and3 or foreigncurrency expenditure for permissible end(uses under the automatic route

• #arin o +CB pro/eedsA *he borrowers have been provided with aflexibility to either keep their ECB proceeds offshore or keep it with theoverseas branches3 subsidiaries of 6ndian banks abroad or to remit thesefunds to 6ndia to credit to their +upee accounts with banks in 6ndia!

pending utili@ation for permissible end(uses$• All!in!Cost CeilinsA ECB beyond the permissible all(in(cost ceiling can

be availed of under the 2pproval +oute$• @einition o


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+ecent Changes in ECB %olicies as part of theQSecond Stimulus %ackage"

• *he Qall(in(cost" ceilings on such borrowing would be removed! under the approvalroute of +B6P

• *o facilitate access to funds for the housing sector! the Qdevelopment of integratedtownships" would be permitted as an eligible end(use of the ECB! under theapproval route of +B6P

•

1B.Cs! dealing exclusively with infrastructure financing! would be permitted toaccess ECB from multilateral or bilateral financial institutions! under the approvalroute of +B6$

• 6n order to give a boost to the corporate bond market! .66 investment limit in rupeedenominated corporate bonds in 6ndia would be increased from S R / billion toS R


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Why ECB is attractive?

• Investor

• ECB is for specific period! which can be as short as three years

• .ixed +eturn! usually the rates of interest are fixed

• *he interest and the borrowed amount are repatriable

•

1o owners risk as in case of E>uity 6nvestment• $orrower

• 1o dilution in ownership

• Considerably large funds can be raised as per re>uirements of borrower

• sually only a fixed rate of interest is to be paid

• Easy 2vailability of funds because ECB is more appealing to 6nvestors

Documents

Presentation on External Commercial Borrowings