Indian companies are allowed to access funds from External commercial Borrowing route
External commercial Borrowings (ECB):- ECB are Source of funds for corporate 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, and securitized instruments (e.g. floating rate notes and fixed rate bonds, CP)] availed from non-resident lenders with minimum average maturity of 3 years.
MODES OF RAISING ECB
. Foreign currency loan raised by residents from recognized lenders
• The ambit of ECB is wide.
• It recognizes simple form of credit as suppliers’ credit as well as sophisticated financial products as securitization instruments.
• Basically ECB suggests any kind of funding other than Equity (considered foreign direct investment) be it 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
• Securitized instruments such as Floating Rate Notes (FRNs), Fixed Rate Bonds (FRBs), Syndicated Loans etc. Syndicated Loan, 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, AFIC, CDC,
• Loan from foreign collaborator/equity holder, etc and corporate/institutions with a good credit rating from internationally recognized 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
• As per Indian corporate law, all preference shares are mandatorily redeemable unless they are convertible
• Hence, convertible preference shares will not be ECB (will be Foreign Direct Investment)
• Non convertible, partly convertible or optionally convertible preference shares are treated as ECBs
• Bonds, Credit notes, Asset Backed Securities, Mortgage Backed securities
• Not expressly covered but Guidelines refer to securitized notes
EXCULSION FROM ECB
• Investment made towards core capital of an organization viz.
- investment in equity shares,
- convertible preference share and
- convertible debentures
• The Reserve Bank of India has clarified that only instruments which are fully and mandatorily convertible into equity within a specified time would be reckoned as part of equity under the FDI Policy and will be eligible to be issued to person’s resident outside India under the Foreign Direct Investment Scheme
• Equity capital
• Reinvested earnings (retained earnings of FDI companies)
• Other direct capital (inter-corporate debt transactions between related entities)
TWO ROUTES FOR ECB
• ECBs can be accessed under two routes
(i) Automatic Route and
(ii) Approval Route.
BASES OF COMPARISON
• Eligibility criteria for accessing international financial markets.
• Total quantum limit of funds that can be raised through ECBs.
• Maturity period and the cost involved.
• End uses of the funds raised.
ELIGIBLE BORROWERS
Automatic Route
• Indian Companies except financial intermediaries (such as Banks, Financial Institutions (FIs), Housing Finance companies and NBFCs).
• Units in Special Economic Zones (SEZ) are allowed to borrow funds through ECBs for their own requirements.
• (Individuals, Trusts and Non-Profit making organisations are not eligible to raise ECBs).
Approval Route
• Financial Institutions dealing exclusively with infrastructure or export finance
• Banks and Financial Institutions which participated in the textile or steel sector restructuring package
• ECBs with minimum average maturity of 5 years by
• NBFCs to finance import of infrastructure equipment for leasing to infrastructure projects.
• FCCBs by housing finance companies satisfying the prescribed criteria
• SPVs,or any other entity notified by RBI, set up to finance infrastructure companies / projects.
• Multi-State Co-operative Societies engaged in manufacturing activities.
• Corporates engaged in industrial & infrastructure sector
• NGOs engaged in micro finance activities satisfying the criteria laid down
• Corporates in service sector for import of capital goods.
FORMALITIES OF OVERSEAS ORGANISATIONS /INDIVIDUALS BEFORE LENDING
Overseas organizations and individuals providing ECB need to comply with the following safeguards:
I. Overseas Organizations proposing to lend ECB would have to furnish to the AD bank of the borrower a certificate of due diligence from an overseas bank, which, in turn, is subject to regulation of host-country regulator and adheres to the Financial Action Task Force (FATF) guidelines.
The certificate of due diligence should comprise the following
(i) that the lender maintains an account with the bank for at least a period of two years,
(ii) that the lending entity is organized as per the local laws and held in good esteem by the business/local community and
(iii) that there is no criminal action pending against it.
II. Individual Lender has to obtain a certificate of due diligence from an overseas bank indicating that the lender maintains an account with the bank for at least a period of two years. Other evidence /documents such as audited statement of account and income tax return, which the overseas lender may furnish, need to be certified and forwarded by the overseas bank. Individual lenders from countries wherein banks are not required to adhere to Know Your Customer (KYC) guidelines are not eligible to extend ECB.
RECOGNISED LENDERS
Automatic Route
• Internationally recognized sources (international banks, capital markets, multilateral financial Institutions, export credit agencies, equipment suppliers, foreign collaborators)
• foreign equity holders (other than erstwhile OCBs) if:
o ECB up to 5 MUSD – minimum equity of 25%
o ECB above 5 MUSD – minimum equity of 25% and debt-equity ratio not exceeding 4:1
Approval Route
a. Internationally recognized sources (international banks, capital markets, multilateral financial Institutions, export credit agencies, equipment suppliers, foreign collaborators)
b. foreign equity holders (other than erstwhile OCBs) if:
• such 'foreign equity holder' directly holds minimum 25 % of the paid up equity capital of the borrowing company.
• In such cases the debt-equity ratio may exceed 4:1, if the RBI permits.
c. Overseas organizations and individuals may provide ECBs to NGOs engaged in micro finance activities subject to the conditions prescribedoturity
AMOUNT
(i) The maximum amount of ECB which can be raised by a corporate other than those in the hotel, hospital and software sectors and corporate in miscellaneous services sector is USD 750 million or its equivalent during a financial year
(ii) Corporates in the services sector hotels, hospitals and software sector and miscellaneous services sector are allowed to avail of ECB up to USD 200 million or its equivalent in a financial year for meeting foreign currency and/ or Rupee capital expenditure for permissible end-uses. The proceeds of the ECBs should not be used for acquisition of land
MATURITY
(i) ECB up to USD 20 million or its equivalent in a financial year with minimum average maturity of three years.
(ii) ECB above USD 20 million or equivalent and up to USD 750 million or its equivalent with a minimum average maturity of five years
(iii) ECB up to USD 20 million or equivalent can have call/put option provided the minimum average maturity of three years is complied with before exercising call/put option
ALL-IN COST CEILING
All-in-cost includes 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 calculating the all-in cost.
The existing all-in-cost ceilings for ECB are as under:
|
Average Maturity Period |
All-in-cost Ceilings over 6 month LIBOR* |
|
Three years and up to five years |
350 basis points |
|
More than five years |
500 basis points |
For the respective currency of borrowing or applicable benchmark
In the case of fixed rate loans, the swap cost plus margin should be the equivalent of the floating rate plus the applicable margin.
The rate of penal interest should not be more than 2 percent of the all in cost of ECB
End use
• ECBs can be raised for investment (import of capital goods as classified by DGFT in Foreign Trade Policy (FTP)) in new projects, modernization/expansion of existing units in industrial and service sectors including infrastructure sector.
• Overseas direct investment in Joint Ventures (JV)/Wholly Owned Subsidiaries (WOS) subject to the existing guidelines on Indian Direct Investment in JV/ WOS abroad.
• First stage acquisition of shares in the disinvestment process and also in the mandatory second stage offer to the public under the Government’s disinvestment programme of PSU shares.
• NBFCs categorized as Infrastructure Financing Companies (IFC) are permitted to avail ECBs including outstanding in existing ECBs upto 50% of their owned funds under Automatic Route for on lending to infrastructure sector and beyond 50% of owned funds under Approval Route.
• For lending to self-help groups or for micro-credit or for bonafide micro finance activity including capacity building by NGOs engaged in micro finance activities, etc.
Restrictions
• Utilization for on-lending or investment in capital market or acquiring a company (or a part thereof) in India by a corporate, investment in real estate sector, for working capital, general corporate purpose and repayment of existing Rupee loans.
• Issuance of guarantee, standby letter of credit, letter of undertaking or letter of comfort by banks, FIs and NBFCs from India relating to ECB.
• The borrower has the option to offer security against the ECB. Creation of charge over immoveable assets and financial securities, such as shares, in favour of the overseas lender is subject to FEMA regulations and ECB guidelines.
Other provisions
• Borrowers are permitted to either park the ECB proceeds abroad or to remit these funds to India. ECB proceeds parked in various liquid assets as per regulation can be invested in Treasury Bills and other monetary instruments of one year maturity and having minimum rating etc. The funds may be invested in such a way that the investments can be liquidated as and when funds are required by the borrower in India.
• ECB funds may also be repatriated to India for credit to the borrowers’ Rupee accounts with banks (AD) in India, pending utilization for permissible end-uses.
• Upon compliance of minimum maturity period applicable to the loan, prepayment of ECB up to USD 500 Mn. can be made by AD banks without prior approval of RBI.
• An existing ECB may be refinanced by raising a fresh ECB subject to the fresh one raised is at a lower all-in-cost and the outstanding maturity of the original ECB is maintained.
• The designated AD bank has the general permission to make remittances of installments of principal, interest and other charges in conformity with the ECB guidelines.
PROCEDURE TO APPLY
1. Applicants are required to submit an application in form ECB through designated AD bank to the Principal Chief General Manager, Foreign Exchange Department, Reserve Bank of India, Central Office, External Commercial Borrowings Division, Mumbai – 400 001, along with necessary documents
2. Borrowers may enter into loan agreement complying with the ECB guidelines with recognised lender for raising ECB under the Automatic Route without the prior approval of the Reserve Bank. The borrower must obtain a Loan Registration Number (LRN) from the Reserve Bank of India before drawing down the ECB. The procedure for obtaining LRN is detailed as:
i. For allotment of Loan Registration Number (LRN), borrowers are required to submit Form 83, in duplicate, certified by the Company Secretary (CS) or Chartered Accountant (CA) to the designated AD bank. One copy is to be forwarded by the designated AD bank to the Director, Balance of Payments Statistics Division, Department of Statistics and Information Management (DSIM), Reserve Bank of India, Bandra-Kurla Complex, Mumbai – 400 051(Note: copies of loan agreement and offer documents for FCCB are not required to be submitted with Form 83).
ii. The borrower can draw-down the loan only after obtaining the LRN from DSIM, Reserve Bank.
iii. Borrowers are required to submit ECB-2 Return certified by the designated AD bank on monthly basis so as to reach DSIM, Reserve Bank within seven working days from the close of month to which it relates.
WHY ECB IS ATTRACTIVE?
Investor
• ECB is for specific period, which can be as short as three years
• Fixed Return, usually the rates of interest are fixed
• The interest and the borrowed amount are repatriable
• No owners risk as in case of Equity Investment
Borrower
• No dilution in ownership
• Considerably large funds can be raised as per requirements of borrower
• Usually only a fixed rate of interest is to be paid
• Easy Availability of funds because ECB is more appealing to Investors
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