External Commercial Borrowing

By

PANKAJ BHOLE

VARIOUS SOURCES OF FOREIGN CAPITAL

Major Sources are:y Foreign Direct Investment (FDI) y Direct Investment by Residents in Joint Venture/wholly owned subsidiaries y External Commercial Borrowings (ECB) y Euro Issues (FCCB/GDR/ADR) y Foreign Currency Exchangeable Bonds y Foreign Institutional Investor Investment (FIIIs) y Off-shore funds y Overseas Venture Capital Investments

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 of from non-resident lenders with minimum average maturity of 3 years.

WHY ECB?
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

ELIGIBILITY/BORROWERS : 1. Corporate other than financial intermediatories and NGOs engaged in micro-finance. 2. Investment in infrastructure. LENDER: Internationally recognized sources such as international Bank/Capital markets, multilateral financial institutions, export credit agencies, suppliers of equipments, foreign collaborators and foreign equity-holders.

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 period 3.5 years. y Over 6 months LIBOR 350 basic points for maturity period over 5 years y Over 6 months LIBOR 500 basic points for maturity period of 7 years

USES
CANNOT BE USED FOR y 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 and y acquisition of shares in disinvestments process of PSU

ROUTES FOR ECB

y ECBs can be accessed under two routes

(i) Automatic Route and (ii) Approval Route.

ROUTES FOR ECB (i) Automatic Route

y Eligibility criteria :

Corporates registered under the companies Act except financial intermediaries

y Total quantum limit of funds :-

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.

ROUTES FOR ECB CONTINUEDuu.

y Recognised lenders

international banks II. international capital markets III. multilateral financial institutions (IFC, ADB, CDC) IV. export credit
I. y Amount Limit

ECB of : I. Maximum of $500 or equivalent in a financial year. II. $20 million or equivalent with min maturity of 3years III. $20 million and upto $500 million or equivalent with a minimum average maturity of five years.

ROUTES FOR ECB CONTINUEDuu.

y Guarantees

Issuance of guarantee  Letter of undertaking or letter of comfort by banks,  Financial Institutions &NBFCs relating to ECB is not permitted.


y Refinancing of an existing ECB

 

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

ROUTES FOR ECB CONTINUEDuu.

y Maturity period and the cost involved:Average Maturity Period All-in-cost Ceilings over 6 month LIBOR*

Three years and upto five years More than five years

200 basis points 350 basis points

y End uses of the funds raised

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

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 of funds :-

Corporates can avail of ECB of an additional amount of USD 250 million with average maturity of more than 10 years

ROUTES FOR ECB CONTINUEDuu.

y Recognised lenders

international banks ,capital markets,multilateral financial institutions (IFC, ADB, CDC) II. foreign equity holder III. Overseas organisations(satisfying ECB norms)
I. y Amount Limit  I. II.

Upto $500 through automatic route. Above this limit :- $250 million with min maturity of 10years NGOs engaged in micro fnance activities can raise ECB up to $5 million during a financial year. Corporates in the services sector viz. hotels, hospitals and software can avail ECB up to $100 million.

ROUTES FOR ECB CONTINUEDuu.

y Guarantees

Issuance of guarantee  Letter of undertaking or letter of comfort by banks,  Financial Institutions &NBFCs relating to ECB is not permitted.


y Refinancing of an existing ECB

 

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

ROUTES FOR ECB CONTINUEDuu.

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 .

ROUTES FOR ECB CONTINUEDuu.

y Maturity period and the cost involved:Average Maturity Period All-in-cost Ceilings over 6 month LIBOR*

Three years and upto five years More than five years

200 basis points 350 basis points

y End uses of the funds raised

Investment in real sector(Industrial & Infrastructure Sector), Overseas direct investment in JV,WOS,Import of Capital Goods

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 and Maturity

For import of all items permissible under the Foreign Trade Policy (except gold), Authorized Dealers have been permitted to approved trade credits up to 20 millions per import transaction with a maturity up to one year.

y All-in-cost Ceilings
Average Maturity Period Up to one year All-in-cost Ceilings over 6 month LIBOR* 75 basis points

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

y Guarantee

AD 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 up to one year.

FOREIGN CURRENCY BONDS (FCCBS)

y FCCB's are issued in currencies different from the issuing

company's domestic currency.

y Corporate issue FCCB's to raise money in foreign

currencies.
y FCCB's are tradable on the stock exchange. y These bonds also give the bondholder the option to convert

the bond into stock.

GLOBAL DEPOSITORY RECEIPTS(GDR)

GDRs are :y Certificate issued by a depository bank which purchases shares of foreign companies and deposits it on the account.
y Global Depository Receipts facilitate trading of shares, and are

commonly 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 london

stock exchange, where they are traded on the International Order Book (IOB). Normally 1 GDR = 10 Shares, but not always.

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.

RECENT UPDATES
y India Inc raised over $ 2.06 billion from overseas markets in April

through external commercial borrowings (ECBs) and foreign currency convertible bonds (FCCBs).
y $ 520 million were raised through the approval route, according to

the RBI data.

y State-sector Shipping Corporation of India raised $ 215.52 million

through ECBs for import of capital goods in April.

y Suzlon Energy mopped up $ 200 million through ECBs during the

month for its overseas acquisition. (Source-Economic Times,Jun23/2011)

DRAWBACKS
y

The Sub prime crisis in the US, in 2008 had ensued into an international economic crisis. As a result, it also affected India. 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 LIBOR does not represent the actual cost of funds.

y Due to which ECBs have received setbacks due to the

economic downturns in the past years .For e.g. The quantum of ECBs drooped drastically from $1.104 billion in October 2007 to $321 million in October 2008 .

CONCLUSION
y RBI liberalized ECB guidelines by permitting hotels,

hospitals and software companies to avail ECB up to certain prescribed limits, although the retail sector has been left out.
y ECBs have emerged as a forerunner in the credit market and

have 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 the same time providing flexibility and keeping the health of the Indian economy in mind.