ecb project

EXTERNAL COMMERCIAL BORROWINGS

EXTERNAL COMMERCIAL BORROWING

The commercial borrowings consists of:-

- Internal Commercial Borrowings AND

- External Commercial Borrowings

1. INTERNAL COMMERCIAL BORROWINGS

1.1 INTRODUCTION

Internal commercial borrowings are those borrowings, which are borrowed internally

and these borrowings may be receive from the same country like any bank or any

institution may borrow form same countries institution or bank. Like wise any small

institution or any small-scale industry can borrow loan or make the borrowings form

same countries bank.

1.2) WORKING CAPITAL FINANCE FROM BANK: -.

Working capital is an essential requirement for any business activity. Banks in India

today constitute the major suppliers of working capital credit to any business activity.

Recently, however, some term lending financial institution has also announced

schemes for working capital financing.

Before the TONDON AND CHORE committees, bank were employing different

methods for assessing working capital and after the limits sanctioned were either

excess of the requirement or short of them. The former led to division or overtrading

while the latter to outside borrowings. The two committees have evolved definite

guidelines and parameters in working capital financing, which have laid the

foundations for development and innovation in the area.

1


1.3) BANK OVERDRAFT: -

Short-term borrowings of the kind made available principally by the clearing banks

in the forms of overdraft is very flexible. When the borrowed funds are no longer

required they can quickly and easily be repaid. It is also comparatively cheap. The

banks will impose limits on the amount they can lend.

The bank issue overdraft with the right to call them in a short notice. Bank advances

are, in fact, legally repayable on demand, through enforcing the letter of the law on

this point is often impractical since it would hardly be in the bank’s interest to drive

its client into a dangerous financial position if that looked likely. Normally the bank

assures the borrower that he can rely on overdraft not being recalled for a certain

period of time, say one year or six month. Any plans that involves an overdraft or

short terms loans should, therefore, refer closely to the Company’s Cash Flow

analysis that it is quite clear how long the funds will be needed and when they can be

repaid.

When credit conditions are normal, the Clearing Banks are generally prepared to lend

to a client whose business sows a healthy state of profitability and liquidity. Usually,

the Bank will require fixed or floating charges on assets as security for advances or in

the case of private companies, to obtain a personal guarantee from the owners.

Banks prefer self-liquidating loans – those likely to be repaid automatically and

reasonably and quickly. These might include, e.g. cash to finance a specified

contract that will eventually result in cash flow for the company.

Firm which carry large stocks of material may obtain a loan or an overdraft secured

by pledging their stocks. The stocks are held in bond and all movements thereof are

reported to the Bank. Banks assist in providing temporary funds to finance

production on the assumption that the goods or products will be sold in a later

season. The cost to a company of bank borrowing depends on the credit worthiness

of the borrower and upon the general interest level in the market.

2


1.4) BRIDGE LOANS.

Bridge loans are available from the banks and financial institution when the source

and timing of the funds to be raised is known with certainty. When there is a time

gap for access of funds, then for speeding up of implementation of the projects,

bridge loans will be provided, such loans are repaid immediately after the raising of

funds. The cost of bridge loans is normally higher than the working capital facilities

provided by banks. At present RBI has put a restriction on banks in giving bridge

loans to curb the malpractices in capital market dealing.

1.5) PUBLIC DEPOSITS

Deposits from the public are one of the important sources of finance particular for

well-established big companies with huge capital base. The period of public deposits

is restricted to maximum three year at a time and hence, this source can provide

finance only for a short term to medium term, which could be more useful for

meeting working capital needs of the company. It is advisable to use the amounts of

public deposits for acquiring assets of long-term nature unless its pay back is very

short.

1.6) COMMERCIAL PAPER

The commercial paper introduced into financial market, on the recommendation of

VAGHUL Committee has become a popular debt instrument of the corporate world.

CP is a debt instrument for short-term borrowings, that enables highly rated corporate

borrowers to diversify their sources of short-term borrowings, and provides an

additional financial instrument to investors with free negotiable interest rate. The

maturity period ranges from three months to less than 1 year. Since it is a short-term

debt, the issuing company is required to meet dealers’ fees, rating agency fees and

any other relevant charges. Commercial paper is short term unsecured promissory

note issued by corporations with high credit rating.

3


ADVANTAGE OF ISSUE OF COMMERCIAL PAPER

High credit rating fetch a lower cost of capital.

Wide range of maturities provided more flexibility.

It does not create any lien on asset of the company.

Tradability of commercial paper provides investors with exit options.

DIS-ADVANTAGES OF ISSUE OF COMMERCIAL PAPER.

Its usage is limited to only blue chip companies

Issuance of commercial paper bring down the bank credit limits.

A high degree of regulatory control is exercised on issue of commercial

papers

Standby credit may become necessary.

1.7) Unit Trust Of India:

Unit trust of India was floated in 1964 in the public sector to harness the saving from

and medium income groups with an objective to make investement in equity shares

and other securities of corporate sector. UTI makes investement in equity shares and

as well as in fixed income bearing securities from UTI is available in the following

forms:

Subscription to secured long-term privately placed debentures.

Underwriting of equity and debentures issue.

Participation in project financing.

Participation in project financing by UTI is based on detailed appraisal carried by

IDBI, IFCI, and ICICI on the lines as by Life Insurance Corporation Of India.

4


1.8) National Bank For Agriculture And Rural Development

(NABARD)

NABARD was established in 1982 with primary objective of providing credit for

promotion of agricultural, small- scale industries, cottage and village industries,

handicraft and other allied activities in the rural sector. The bank does not extend any

direct assistance to borrower but allows refining however, actively associated with

policy formulation for integrated rural development.

1.9) The Industrial Development bank of India: -

The industrial development Bank Of India was established on July 1, 1964 under the

act of parliament as the principal financial institution for industrial development in

the country. IDBI caters to the growing and diverse needs of medium and large scale

industries wit the main object of providing financial assistance and coordinating the

working of institutions engaged in financing, promoting and developing industries.

IDBI provides direct finance by way of loans, both in rupees and foreign currencies

besides providing support by way of underwriting and direct subscription to

shares/debentures and in the forms of deferred payment guarantees. It also refinances

term loan given by state level institution or banks to medium scale units and

rediscounts or discounts bills of exchange and promissory notes rising out of the sale

or purchase of machinery and equipment IDBI extends loans to makes investments in

shares and bonds of various intermediaries. In response to the growing needs of

various segments of industries and on-going changes in the finance sector, IDBI has

taking various steps to re-orient its business strategies and expand the range of its

products and services. Instead of this IDBI also provides the Merchant Banking

debentures and trusteeship to various clients

5


1.10) SIDBI (Small Industries Development Bank OF India)

Small Industries Development Bank Of India (SIBDI), a wholly- owned subsidiary

of Industrial Development Bank Of India, set up by an Act of parliament, is the

principal financial institution for the promotion, financing and development of

industry in the small, tiny and cottage sectors and for coordinating the functions of

the similar activities. It commenced its operation on April 2, 1990 by taking over the

outstanding portfolio and activities of IDBI pertaining to the small tiny and cottage

sectors.

Given the apex role, the approach of SIDBI has been to supplement the efforts of

existing institution, strengthening their capabilities trough financial and support

services and instituting suitable co-ordination mechanism while providing assistance

for the small-scale sector. While continuing with the schemes operated by IDBI

under Small Scale Industries Development Fund (SIDF), the bank look activities by

identifying the gaps in existing credit delivery system and divides tailor-made

schemes for direct lending to small scale sector as to supplement the efforts of

primary lending institutions (PLIs), which includes State Financial Corporation

(SFCs) State Industrial Development Corporation (SIDCs) (including twin function

IDCs), Scheduled Commercial Banks (SCBs) both in public and private sector, State

Co-operative Banks, scheduled urban Co-operative Banks And Regional Rural Banks

(RRBs).

Under indirect assistance, assistance, assistance to small scale sector is channelised

through the large network of PLIs across the country by way of refinance, bills

rediscounting and resource support in the form of lines of credit in lieu of refinance

etc.

6


2 .EXTERNAL COMMERCIAL BORROWINGS

2.1) INTRODUCTION

In the emerging border-less world, comparative cost of Capital has assumed

increased significance. In the Indian context, the recommendations of the Committee

on "Capital Account Convertibility [CAC]" (Tarapore Committee) would be highly

relevant. While Rupee has been made convertible on the Current Account, the days

of Capital Account convertibility may not be far off. One of the avowed objectives of

CAC is to make Available Capital at internationally competitive rates. It would,

therefore, emerge that non-availability of domestic capital or availability of domestic

capital at higher costs owing to the domestic market conditions, need not be a

deterrent factor hindering the growth of the economy, once the various controls on

cross-border flows are gradually eased.

External Commercial Borrowings (ECBs), in a limited sense, seek out to bridge by

ensuring availability of cross-border financing vis-à-vis sourcing of capital locally.

ECBs should not be regarded as straightjacket solutions for easing the capital

requirements of the industry by providing alternate avenues of financing but should

be understood properly together with the attendant risks associated with such types of

financing. The recent South East Asian economic crisis can be attributed to the

unbridled approach adopted by certain countries in the matter of encouraging

external sources of financing forgetting the fundamentals there of. External

Commercial borrowings are one of the modes for sourcing of funds for Corporate.

The Government of India has come out with guidelines for approval of external

commercial borrowings. These guidelines reflect the government's desire of

maintaining prudent limits for total external borrowings and at the same time give

flexibility to Corporate. The guiding principles of ECB policy are to keep borrowing

maturities long, costs low, and encourage infrastructure and export sector financing

which are crucial for overall growth of the economy.

7


Therefore, the borrowings raised by the Indian corporate from confirmed banking

sources outside India are called "External Commercial Borrowings" (ECBs).

The Reserve Bank of India has been empowered to give ECB approvals under the US

$ 5 million scheme and to approve ECBs upto US $ 10 million under all other ECB

windows. Corporate are now eligible for ECBs even for project related rupee

expenditure up to 35% of the total project cost and are permitted to obtain credit

enhancements from international banks / international financial institutions / joint

venture partners for their domestic rupee denominated structural obligations.

ECBs are being permitted by the Government as a source of finance for Indian

Corporate for expansion of existing capacity as well as for fresh investment. These

ECBs can therefore be raised within the Policy guidelines of Govt. of India/ Reserve

Bank of India applicable from time to time.

The policy seeks to keep an annual cap or ceiling on access to ECB, consistent with

prudent debt management. The policy also seeks to give greater priority for projects

in the infrastructure and core sectors such as Power, Oil Exploration, Telecom,

Railways, Roads & Bridges, Ports, Industrial Parks and Urban Infrastructure etc. and

the export sector. Development Financial Institutions, through their sub- lending

against the ECB approvals are also expected to give priority to the needs of medium

and small- scale units. Applicants will be free to raise ECB from any internationally

recognized source such as banks, export credit agencies, suppliers of equipment,

foreign collaborators, foreign equity-holders, international capital markets etc. Offers

from unrecognized sources will not be entertained.

8


2.2) INTERNATIONAL MONETORY FUND

Introduction: -

The IMF was conceived in July 1944 at an international conference held at Bretton

Woods, New Hampshire, U.S.A., when delegates from 44 governments agreed on a

framework for economic cooperation partly designed to avoid a repetition of the

disastrous economic policies that had contributed to the Great Depression of the

1930s.

The IMF came into existence in December 1945, when the first 29 countries signed

its Articles of Agreement. The statutory purposes of the IMF today are the same as

when they were formulated in 1944. Since then, the world has experienced

unprecedented growth in real incomes. And although the benefits of growth have not

flowed equally to all—either within or among nations—most countries have seen

increases in prosperity that contrast starkly with the interwar period, in particular.

Part of the explanation lies in improvements in the conduct of economic policy,

including policies that have encouraged the growth of international trade and helped

smooth the economic cycle of boom and bust. The IMF is proud to have contributed

to these developments.

The expansion of the IMF's membership, together with the changes in the world

economy, have required the IMF to adapt in a variety of ways to continue serving its

purposes effectively.

Purposes Of International Monitory Fund

i) To promote international monetary cooperation through a permanent institution

which provides the machinery for consultation and collaboration on international

monetary problems.

ii) To facilitate the expansion and balanced growth of international trade, and to

contribute thereby to the promotion and maintenance of high levels of employment

9


and real income and to the development of the productive resources of all members

as primary objectives of economic policy.

iii) To promote exchange stability, to maintain orderly exchange arrangements

among members, and to avoid competitive exchange depreciation.

iv) To assist in the establishment of a multilateral system of payments in respect of

current transactions between members and in the elimination of foreign exchange

restrictions which hamper the growth of world trade.

v) To give confidence to members by making the general resources of the Fund

temporarily available to them under adequate safeguards, thus providing them with

opportunity to correct maladjustments in their balance of payments without resorting

to measures destructive of national or international prosperity.

vi) In accordance with the above, to shorten the duration and lessen the degree of

disequilibrium in the international balances of payments of members.

Who Makes Decisions at the IMF?

The IMF is accountable to its member countries, and this accountability is essential

to its effectiveness. The day-today work of the IMF is carried out by an Executive

Board, representing the IMF's 184 members, and an internationally recruited staff

under the leadership of a Managing Director and three Deputy Managing Directors—

each member of this management team being drawn from a different region of the

world. The powers of the Executive Board to conduct the business of the IMF are

delegated to it by the Board of Governors, which is where ultimate oversight rests.

The Board of Governors, on which all member countries are represented, is the

highest authority governing the IMF. It usually meets once a year, at the Annual

Meetings of the IMF and the World Bank. Each member country appoints a

Governor—usually the country's minister of finance or the governor of its central

10


bank—and an Alternate Governor. The Board of Governors decides on major policy

issues but has delegated day-to-day decision-making to the Executive Board.

Key policy issues relating to the international monetary system are considered twice-

yearly in a committee of Governors called the International Monetary and Financial

Committee, or IMFC (until September 1999 known as the Interim Committee). A

joint committee of the Boards of Governors of the IMF and World Bank called the

Development Committee advises and reports to the Governors on development

policy and other matters of concern to developing countries.

The Executive Board consists of 24 Executive Directors, with the Managing Director

as chairman. The Executive Board usually meets three times a week, in full-day

sessions, and more often if needed, at the organization's headquarters in Washington,

D.C. The IMF's five largest shareholders —the United States, Japan, Germany,

France, and the United Kingdom—along with China, Russia, and Saudi Arabia, have

their own seats on the Board. The other 16 Executive Directors are elected for two-

year terms by groups of countries, known as constituencies.

Where Does the IMF Get Its Money?

The IMF's resources come mainly from the quota (or capital) subscriptions that

countries pay when they join the IMF, or following periodic reviews in which quotas

are increased. Countries pay 25 percent of their quota subscriptions in Special

Drawing Rights or major currencies, such as U.S. dollars or Japanese yen; the IMF

can call on the remainder, payable in the member's own currency, to be made

available for lending as needed. Quotas determine not only a country's subscription

payments, but also the amount of financing that it can receive from the IMF, and its

share in SDR allocations. Quotas also are the main determinant of countries' voting

power in the IMF.

If necessary, the IMF may borrow to supplement the resources available from its

quotas. The IMF has two sets of standing arrangements to borrow if needed to cope

with any threat to the international monetary system:

11


The New Arrangements to Borrow (NAB), introduced in 1997, with 25 participating

countries and institutions. Under the two arrangements combined, the IMF has up to

SDR 34 billion (about $50 billion) available to borrow.

What is an SDR?

The SDR, or special drawing right, is an international reserve asset introduced by the

IMF in 1969 (under the First Amendment to its Articles of Agreement) out of

concern among IMF members that the current stock, and prospective growth, of

international reserves might not be sufficient to support the expansion of world trade.

The main reserve assets were gold and U.S. dollars, and members did not want global

reserves to depend on gold production, with its inherent uncertainties, and continuing

U.S. balance of payments deficits, which would be needed to provide continuing

growth in U.S. dollar reserves. The SDR was introduced as a supplementary reserve

asset, which the IMF could "allocate" periodically to members when the need arose,

and cancel, as necessary.

The SDR's value is set daily using a basket of four major currencies: the euro,

Japanese yen, pound sterling, and U.S. dollar. On July 1, 2004, SDR 1 = US$1.48.

The composition of the basket is reviewed every five years to ensure that it is

12


representative of the currencies used in international transactions, and that the

weights assigned to the currencies reflect their relative importance in the world's

trading and financial systems.

How Does the IMF Serve Its Members?

The IMF helps its member countries by:

Reviewing and monitoring national and global economic and financial

developments and advising members on their economic policies;

Lending them hard currencies to support adjustment and reform policies

designed to correct balance of payments problems and promote sustainable

growth; and

Offering a wide range of technical assistance, as well as training for

government and central bank officials, in its areas of expertise

IMF Operations

The IMF has gone through two distinct phases in its 50-year history. During the first

phase, ending in 1973, the IMF oversaw the adoption of general convertibility among

the major currencies, supervised a system of fixed exchange rates tied to the value of

gold, and provided short-term financing to countries in need of a quick infusion of

foreign exchange to keep their currencies at par value or to adjust to changing

economic circumstances.

How in practice does the IMF assist its members? The key opening the door to IMF

assistance is the member's balance of payments, the tally of its payments and receipts

with other nations. Foreign payments should be in rough balance: a country ideally

should take in just about what it pays out. When financial problems cause the price of

a member's currency and the price of its goods to fall out of line, balance of payments

13


difficulties are sure to follow. If this happens, the member country may, by virtue of

the Articles of Agreement, apply to the IMF for assistance.

To illustrate, let us take the example of a small country whose economy is based on

agriculture. For convenience in trade, the government of such a country generally

pegs the domestic currency to a convertible currency: so many units of domestic

money to a U.S. dollar or French franc. Unless the exchange rate is adjusted from

time to time to take account of changes in relative prices, the domestic currency will

tend to become overvalued, with an exchange rate, say, of one unit of domestic

currency to one U.S. dollar, when relative prices might suggest that two units to one

dollar is more realistic. Governments, however, often succumb to the temptation to

tolerate overvaluation, because an overvalued currency makes imports cheaper than

they would be if the currency were correctly priced.

In addition to assisting its members in this way, the IMF also helps by providing

technical assistance in organizing central banks, establishing and reforming tax

systems, and setting up agencies to gather and publish economic statistics. The IMF

is also authorized to issue a special type of money, called the SDR, to provide its

members with additional liquidity. Known technically as a fiduciary asset, the SDR

can be retained by members as part of their monetary reserves or be used in place of

national currencies in transactions with other members. To date the IMF has issued

slightly over 21.4 billion SDRs, presently valued at about U.S. $30 billion.

Over the past few years, in response to an emerging interest by the world community

to return to a more stable system of exchange rates that would reduce the present

fluctuations in the values of currencies, the IMF has been strengthening its

supervision of members' economic policies.

Provisions exist in its Articles of Agreement that would allow the IMF to adopt a

more active role, should the world community decide on stricter management of

flexible exchange rates or even on a return to some system of stable exchange rates.

14


Size of International Monitory Fund

The IMF is small (about 2,300 staff members) and, unlike the World Bank, has no

affiliates or subsidiaries. Most of its staff members work at headquarters in

Washington, D.C., although three small offices are maintained in Paris, Geneva, and

at the United Nations in New York. Its professional staff members are for the most

part economists and financial experts.

15


Prepayment of India’s Debt (2001-02 and 2002-03)

BORROWER Lender Amount of Prepayment

USD MILLION RS. In CRORES

Container

Corporation of

India

IBRD 2.85 13.43

Housing

Development

Finance

Corporation

ADB 19.66 94.36

Mumbai Port

Trust ADB

43.42 209.77

Bombay Sub

Urban Electric

Supply Ltd.

ABD

And

IBRD

70.07 339.65

Housing Urban

Development

Corporation

Ltd

Japan 9.50 46.30

Oil & Natural

Gas

Corporation IBRD 303.09 1562.35

Oil & Natural

Gas

Corporation

ADB 206.77 1007.18

Tata Power Co.

IBRD 22.31 109.31

Tata Power Co.

IBRD 68.57

336.00

16


2.3) WORLD BANK OR INTERNATIONAL BANK FOR

RECOUNSTRUCTION AND DEVELOPMENT:

Introdution

IBRD is commonly referred to as World Bank. The World Bank’s over-arching

objective is to reduce poverty and improve living standards of people in the

developing World. The bank provides lending (“credits” in the cases of IDA and

technical assistance) and non lending (policy advice on the basis of economic and

sector work and increasing global knowledge and experience sharing) services to its

client countries. IBRD rises most of its money from bonds and other debt securities

issued in world financial markets, based on the guarantee of share capital

subscription from its members.other sources of banks funds are shareholders’ capital

and retained earnings. IBRD loans, though non-concessional, are available at

relatively more favorable term than commercial sources. The repayment period for

India is at present 20 years, inclusive of 5 years grace period. The bank offers three

types of loans presently (1) single currency variables spread loans, single currency

fixed spread loans (2) local currency loans. India was earlier borrowing under

currency pool loans. Presently India is borrowing under variable spread single

currency loans.

The currency rate of interest per annum on World Bank/IBRD loans is depending

upon the type of loan, currency mix of loan and year of negotiation.

The World Bank and IDA make loans for high priority projects and programs in

member countries to further their development programmes. These loans are made to

sovereign governments or to entities enjoying the full faith and credit of sovereign

governments.

17


At the end of 1994 over 180 billion dollars had been subscribed but of this only about

3.36 percent is paid in. the bank’s lending programmes is financed in part through the

paid-in-capital, but mainly through commercial borrowings on the international

capital market.

Strength Through Diversity

The World Bank is a specialized agency of the United Nations, devoted to economic

and social development in its member countries. It now has 181 member countries,

each with different historical experiences, social dynamics, and economic and

political systems. The Bank's Articles of Agreement set out its broad scope of

activity in economic and social development. They also establish guidelines that limit

the range of its activities. In particular, the Articles state that, in all its decisions,

"only economic considerations shall be relevant."

World Bank Operations

The World Bank exists to encourage poor countries to develop by providing them

with technical assistance and funding for projects and policies that will realize the

countries' economic potential. The Bank views development as a long-term,

integrated endeavor.

During the first two decades of its existence, two thirds of the assistance provided by

the Bank went to electric power and transportation projects. Although these so-called

infrastructure projects remain important, the Bank has diversified its activities in

recent years as it has gained experience with and acquired new insights into the

development process.

In transportation projects, greater attention is given to constructing farm-to-market

roads. Rather than concentrating exclusively on cities, power projects increasingly

provide lighting and power for villages and small farms. Industrial projects place

greater emphasis on creating jobs in small enterprises. Labor-intensive construction

is used where practical. In addition to electric power, the Bank is supporting

18


development of oil, gas, coal, fuel wood, and biomass as alternative sources of

energy.

Of the 34 very poor countries that borrowed money from IDA during the earliest

years, more than two dozen have made enough progress for them no longer to need

IDA money, leaving that money available to other countries that joined the Bank

more recently. Similarly, about 20 countries that formerly borrowed money from the

IBRD no longer have to do so. An outstanding example is Japan. For a period of 14

years, it borrowed from the IBRD. Now, the IBRD borrows large sums in Japan.

Source of Funding

The World Bank is an investment bank, intermediating between investors and

recipients, borrowing from the one and lending to the other. Its owners are the

governments of its 180 member nations with equity shares in the Bank, which were

valued at about $176 billion in June 1995. The IBRD obtains most of the funds it

lends to finance development by market borrowing through the issue of bonds (which

carry an AAA rating because repayment is guaranteed by member governments) to

individuals and private institutions in more than 100 countries. Its concessional loan

associate, IDA, is largely financed by grants from donor nations.

The Bank is a major borrower in the world's capital markets and the largest

nonresident borrower in virtually all countries where its issues are sold. It also

borrows money by selling bonds and notes directly to governments, their agencies,

and central banks. The proceeds of these bond sales are lent in turn to developing

countries at affordable rates of interest to help finance projects and policy reform

programs that give promise of success.

Although under special and highly restrictive circumstances the IMF borrows from

official entities (but not from private markets), it relies principally on its quota

subscriptions to finance its operations. The adequacy of these resources is reviewed

every five years.

19


Recipients of Funding

Neither wealthy countries nor private individuals borrow from the World Bank,

which lends only to creditworthy governments of developing nations. The poorer the

country, the more favorable the conditions under which it can borrow from the Bank.

Developing countries whose per capita gross national product (GNP) exceeds $1,305

may borrow from the IBRD.

(Per capita GNP, a less formidable term than it sounds, is a measure of wealth,

obtained by dividing the value of goods and services produced in a country during

one year by the number of people in that country.)

Structure of World Bank

The structure of the Bank is somewhat more complex. The World Bank itself

comprises two major organizations: the International Bank for Reconstruction and

Development and the International Development Association (IDA). Moreover,

associated with, but legally and financially separate from the World Bank are the

International Finance Corporation, which mobilizes funding for private enterprises in

developing countries, the International Center for Settlement of Investment Disputes,

and the Multilateral Guarantee Agency. With over 7,000 staff members, the World

Bank Group is about three times as large as the IMF, and maintains about 40 offices

throughout the world, although 95 percent of its staff work at its Washington, D.C.,

headquarters. The Bank employs a staff with an astonishing range of expertise:

economists, engineers, urban planners, agronomists, statisticians, lawyers, portfolio

managers, loan officers, project appraisers, as well as experts in telecommunications,

water supply and sewerage, transportation, education, energy, rural development,

population and health care, and other disciplines.

The International Monetary Fund and the World Bank at a Glance

International Monetary World Bank

20


Fund Oversees the

international monetary system

Promotes exchange stability and orderly exchange relations among its member countries

Assists all members--both industrial and developing countries--that find themselves in temporary balance of payments difficulties by providing short- to medium-term credits

Supplements the currency reserves of its members through the allocation of SDRs (special drawing rights); to date SDR 21.4 billion has been issued to member countries in proportion to their quotas

Draws its financial resources principally from the quota subscriptions of its member countries

Has at its disposal fully paid-in quotas now totaling SDR 145 billion (about $215 billion)

Has a staff of 2,300 drawn from 182 member countries

Seeks to promote the economic development of the world's poorer countries

Assists developing countries through long-term financing of development projects and programs

Provides to the poorest developing countries whose per capita GNP is less than $865 a year special financial assistance through the International Development Association (IDA)

Encourages private enterprises in developing countries through its affiliate, the International Finance Corporation (IFC)

Acquires most of its financial resources by borrowing on the international bond market

Has an authorized capital of $184 billion, of which members pay in about 10 percent

Has a staff of 7,000 drawn from 180 member countries

2.4ASIAN DEVELOPMENT BANK.

Introdution: -

21


The Asian Development Bank (ADB) an International partnership of 59 members’

countries was established in 1966 with its headquarters in Manila, Philippines. India

is its founder member. The bank is engaged in promoting economic and social

progress of its developing countries in the Asia and public region with principle

functions as follows:

To make loans and equity investment for the economic and social

advancement of its developing member countries.

To provide technical assistance for the preparation and execution of

development projects and programmes and advisory services.

To response to the requests for assistance in coordinating development

policies and plans of developing member countries.

ADB’s primary operational strategy is to assist government of India in rapid

industrlization. ADB provides finances to projects aimed at improving the structure

of the industrial sector, increasing its share of GDP, export earnings and employment

and making more effective use of productivity capacity. The Bank may also provide

the loans for big light energy programmes, transport, communication, industries and

non-fuel minerals, social infrastructure and multi-secton.

ADB’s Charter requires it to “foster economic growth and cooperation in the region”

and “to contribute to the acceleration of the process of economic development of the

developing member countries in the region, collectively and individually.” The

Charter states that “the operations of the Bank shall provide principally for the

financing of specific projects…” In its initial years, ADB translated this mandate into

the role of a project financing institution. This approach was based on the assumption

that growth and development would result from the transfer of capital and technology

to ADB’s developing member countries (DMCs). For 20 years, under this paradigm,

ADB successfully implemented an extensive project finance program in its DMCs.

22


ADB has adopted poverty reduction as its overarching goal, and developed a

comprehensive strategy to combat poverty in the region. Building on this strategy as

well as other policy initiatives, ADB has recently adopted its LTSF, which commits

ADB to supporting the International Development Goals. Recognizing the important

role of the private sector in development, ADB has also adopted a wide-ranging

private sector development strategy.7 The Medium-Term Strategy (MTS),8 which has

been submitted to the Board, provides more detailed guidance on how ADB should

work with its DMCs to achieve these goals. With this, the strategic reorientation

process has been completed.

“To remain an effective institution relevant to the changing needs of the region,

ADB has continually been adapting its priorities, assistance modalities, and

organizational structure, and has transformed itself from what was essentially a

project financier to a full-fledged development institution. On the organizational

front, major changes have included

a) Creating regional vice presidencies, each with one programs and two projects

departments (east and west);

b) Establishing the Office of Pacific Operations (OPO);

c) Merging the Office of Environment and the Social Dimensions Unit into the

Office of Environment and Social Development (OESD), reporting to the

President;

d) Merging the Development Policy Office and Strategic Planning Unit to create

the Strategy and Policy Office, (now Strategy and Policy Department [SPD]);

and

e) Upgrading the Co financing Division into the Office of Co financing

perations; and

f) Strengthening resident missions (RMs) under a new policy (2000).

23


In response to these imperatives for change, ADB has already started to address

organizational issues with the redesign of operational business processes and the RM

Policy. These changes must now be carried forward in a more comprehensive way.

Organization

ADB is managed by a Board of Director, a Board of Director a President, four Vice-

Presidents, and the Heads Of Departments And Offices.

Each member country nominates one Governor and an Alternate Governor to vote on

its behalf.

The Board of Governors elects the 12 Directors (each with an alternate)—eight

representing countries within the Asia-Pacific region and four representing countries

outside the region.

The Board of Governors also elects the President for a term of five years, with the

possibility of reelection. The President chairs the Board of Directors and follows its

directions in conducting the business of ADB.

Objective and Principles of Asian development bank:

The overall objective of organizational change is to enhance ADB’s development

impact by strengthening its capacity to deliver its strategic agenda through a carefully

planned, selective, country-focused, and technically excellent program of assistance

to its DMCs and subregions. Drawing on the discussion in chapter III, a number of

principles have been developed to guide the analysis of options to meet this

objective.

Mainstream: Governance and Capacity Building, Environmental and Social

Development, and Private Sector Development. Operational departments should be

responsible for addressing and delivering products for meeting these objectives—a

process often known as “mainstreaming.” Delivery of products and services in these

24


areas should be organizationally separated from policy development and compliance

oversight.

Balance Country and Sector Considerations: Country considerations and priorities

should drive sector and project decisions. However, measures are also needed to

ensure that sectoral expertise is preserved. The functional responsibilities of sector

units should be realigned with ADB’s current strategic priorities.

Strengthen ADB’s Regional Role and Identity: The country and sector focus

should also support ADB’s regional role. The organization structure should

institutionalize the regional role of ADB and facilitate linkage with regional

institutions.

Greater Client and Stakeholder Orientation: Whatever organization structure is

adopted, ADB should become a more outward-looking, client focused, and

collaborative development partner.

Maintain Technical Excellence and Skills: Maintenance of technical excellence is

essential for effective project design and delivery.

Emphasize Effectiveness and Efficiency: Development impact depends on the

efficiency and effectiveness of assistance. ADB justifiably takes pride in being the

most “efficient” of the MDBs. It is also important to find means to enhance

effectiveness through structural changes that emphasize implementation and outputs

that can be monitored for their impact.

Maintain Checks and Balances Consistent with Effectiveness: Every organization

needs a clear set of checks and balances to ensure compliance with its policies and

procedures; maintain the quality of its output, and reduce the impact of conflicts of

interest. However, such checks and balances should not stifle initiative or reduce the

effectiveness of delivery of services to DMCs.

Clarity of responsibility and Value Addition: Each separate unit and position

within an organization should be justified on the basis of the value it adds to output

25


and should be held accountable for a unique set of results. There is great potential to

streamline, increase productivity, and improve motivation by the application of the

value-added principle to units, positions, and processes, all of which finally

contribute to overall organizational effectiveness. Duplication of responsibility

should be avoided.

Ownership of Change: Organizational change must have the backing and ownership

of the staff affected by it, so that staff morale is maintained and the changes can be

smoothly and successfully implemented.

Procedural Aspects:

1. In processing a sector loan, the following procedures should be

followed:

(i) The borrowing DMC should submit to the Bank (a) an acceptable medium-or

long-term sector/subsector development plan or program; (b) a statement on sector

policies that affect the development of the sector/subsector concerned; and (c) an

assessment of the technical and managerial capabilities of the sector institutions to

develop, process, and implement projects.

(ii) Subject to general acceptability to the Bank of the sector plan, policies, and

institutions, and prima facie justification of Bank assistance, the Bank will send a

fact-finding mission to hold preliminary discussions with the borrower; to assess

broadly the sector development plan, the financing needs of the sector, and the

adequacy of the institutional arrangements available or proposed for implementing

the sector loan; and to identify key sector policy issues including cost recovery

aspects.

(iii) Based on the findings of the mission and after a management review meeting has

cleared the loan proposal, an appraisal mission will be dispatched to the field. The

mission should determine the scope and amount of the proposed sector loan; examine

the availability and types of subprojects for financing; assess the technical and

managerial capabilities of the executing agencies, and whether technical assistance is

26


needed; formulate the relevant technical, financial, and economic criteria for

selection and appraisal of subprojects; agree on the threshold for approval of

subprojects by the Bank; assess the institutional risks in regard to processing and

implementing capabilities; and assess the scope for resolution of key policy issues,

including cost recovery aspects, necessary to achieve sectoral objectives.

2. The processing stages applicable for a project loan 1 will also apply to

sector loans.

Supervision and Monitoring

Direct supervision of subproject implementation and monitoring of subproject

operation and performance are the primary responsibility of the borrower or its

executing agency. Bank staff will, however, review the execution of subprojects on a

selective basis. Bank staff will also monitor, at appropriate time intervals, the

capability and performance of the executing agency, and any change in

circumstances that would have a bearing on the sector development program in

general and on the implementation and operation of the sector projects in particular.

Disbursement

The Bank's standard disbursement procedures are normally used. For qualified

executing agencies, the Bank may agree to the use of an imprest account for

payments of goods and services related to subloans or subprojects, not exceeding six

months' estimated expenditures; statement of expenditures procedures up to the free

limit for subloans may also be used.

Lending and Re-lending polices: -

Article 9 of the Bank's Articles of Agreement (the Charter) states that the Bank's

lending operations will consist of ordinary operations and special operations; the

former are financed from the ordinary capital resources (OCR) and the latter from the

27


Special Funds resources. Articles 19 and 20 of the Charter describe the establishment

and utilization of Special Funds resources.

The Asian Development Fund (ADF), established in 1974, is a Special Fund under

the Charter for carrying out the Bank's concessional lending operations.2

Eligibility for and Allocation of ADF Assistance

DMCs are classified by the Bank into three Groups (A, B, and C) primarily on

considerations of gross national product (GNP) and debt repayment capacity.3 The

eligibility of a DMC for ADF resources is broadly related to the Group to which it

belongs. In principle, Group A countries are fully eligible for ADF financing, Group

B countries are eligible for limited amounts in particular circumstances, and Group C

countries are not eligible. Special consideration is given to certain Pacific island

DMCs in determining their eligibility for ADF resources.

While ADF eligibility criteria have remained unchanged since the establishment of

the ADF, the changing economic environment in certain DMCs, together with the

availability of ADF resources, determines the actual allocation of ADF resources

from time to time.

Terms of Lending

ADF loans for ADF-only countries have a fixed repayment period of 40 years

including a grace period of 10 years. Principal repayment is at the rate of 2 percent of

the total amount of principal outstanding each year for the first 10 years after the

grace period, and 4 percent a year thereafter. ADF loans to OCR/ADF blend

countries have a repayment period of 35 years including a grace period of 10 years;

the principal repayment is at the rate of 2.5 percent of the total amount of principal

outstanding each year for the first 10 years after the grace period, and 5 percent a

year thereafter. There is a service charge of 1 percent for ADF loans, payable on the

principal amount disbursed and outstanding from time to time, but no commitment

fee.

28


The terms of loans committed from ADF resources may be adjusted to reflect

substantial changes in individual countries' economic circumstances. Accordingly,

repayments of principal on an outstanding ADF loan to a particular country will be

increased by 100 percent of the originally scheduled amount if (i) the per capita GNP

of the country has remained above the ADF eligibility benchmark for five

consecutive years, and (ii) the country has achieved the capacity to repay debt on

OCR terms. In lieu of increasing repayments of some or all remaining principal, the

borrower may request the payment of interest at an annual rate agreed upon with the

Bank on the loan amount disbursed and outstanding, provided that the resulting grant

element would be the same as the one resulting from increasing the remaining

principal repayments by 100 percent. In no case will an adjustment of terms be

considered during the 10-year grace period. If after such an adjustment a country

experiences economic deterioration, the Bank will have the flexibility to allow the

country to revert to its original repayment schedule and service charge.

The standard ADF terms will apply to all lending modalities, including project and

program loans, supplementary loans, and technical assistance loans.

Re-payment of Loan

A borrower can repay all or part of a loan in advance of the maturity specified in the

loan agreement by giving notice to the Bank 45 days in advance (this can be reduced

or waived by the Bank) and upon payment of all accrued service charges.12 On the

date of prepayment of only a portion of the loan, there should not be outstanding any

portion of the loan maturing after the portion to be prepaid.

2.5) FIXED-RATE BORROWINGS INCLUDES:

29


1. BUYER’S CREDIT

2. SUPPLIER’S CREDIT

3. FIXED-RATE LOANS.

1) Buyer’s Credit

Under Buyer’s credit arrangements, a specific Long-Term loans is granted by a

designated lending agency in the exporter’s country to the buyer in the importer

country against a guarantee by an acceptable bank or financial institution. The

supplier receives payment for the exports on his delivering to the lending agency the

requisite documents specified in loan agreement and the relative commercial

contract. The lending agency realizes the payment from buyer (importer) in

installment as and when they fall due. Ordinarily, the period of credit is reckoned as

the duration form the date of completion by the supplier of his obligation under the

contract to the date of final payment by the buyer under the credit.

Supplier’ Credit

Supplier’s Credit, on the other hand, is extended to the supplier’s (exporter) by the

financial institutions (in the exporter-country) to finance his deferred receivables.

The buyer required to provide the requisite guarantee from an acceptable bank or

financial institution in the importer country.

Credit may also be extended by the supplier (exporter) directly to his buyer

(importer) on the deferred payment terms against his providing guarantee as above.

In this case, the supplier will realies the precedes for his exports by the discounting

the bills of exchange (Drawn on and accepted by buyer) with his bank or the

designated government agency in his country. Such credits, however, are not really

supplier’s credit in technical sense. Technically both supplier’s credit and buyer’s

credit are extended by the lending agency in the exporter’s country; when it is

granted to the supplier (exporter), it is a supplier’s credit and when it is granted to the

30


buyer (importer), it is buyer credit. The credit extended by the supplier directly to his

buyer is in the nature of trade credit.

Fixed-Rate Loan

In addition to above two methods, fixed-rate loans can also be raised through

commercial banks. Such loans are normally arranged for a period upto 8 years and

are priced at a specific spread above the going rare is concerned country of the

chosen currency.

Comparative Cost Of Advantage.

Of the above three type of credit, supplier’s credit may, in many cases, prove to be

more expensive as the supplier is likely to add a premium in the price quoted for the

goods or in the rate of interest so as to compensate him for the additional cost

incurred by him in the process. As against this buyer’s credit may be relatively as the

supplier under this arrangement is paid of immediately and the lender realises the

payment from buyer as per agreed terms. The interest rate quoted on the fixed-rate

loan by the commercial banks depends upon the comparative edge of the concerned

bank in the particular Euro-currency market.

31


2.6) INTERNATIONAL DEVELOPMENT ASSOCIATION: -

What is International Development Association?

The International Development Association (IDA), established in 1960, is the part of

the World Bank Group that provides long-term interest-free loans (credits) and grants

to the poorest of the developing countries. It does this to support economic growth,

reduce poverty and improve living conditions. IDA is now the single largest source

of donor funds for basic social services in the poorest countries. In the 12 months to

June 30, 2003, IDA’s support for projects was targeted at human development such

as education, health, social safety nets, water supply and sanitation (44%),

infrastructure (26%), and agriculture and rural development (11%).

IDA, the Soft-Loan affiliate of the bank, depends almost entirely on contributions

made from time to time by the wealthier member governments for its financial

resources, repayment for earlier credits and transfer from the net income of IBRD.

Being the Soft Loan counterpart of the bank, IDA has concentrated its lending in

social sectors consisting of poverty reduction, human development and agricultural/

rural sector, each accounting for about a third of total of IDA commitments in recent

years. The other sectors of funding have been infrastructure, economic adjustment

and natural resources.

Which countries are eligible to borrow IDA resources?

Following three factors determine whether countries are eligible for IDA assistance:

Relative poverty, defined as Gross National Product (income) per person

below an established threshold, currently US$865 per year.

Lack of creditworthiness to borrow on market terms and therefore a need for

concessional resources to finance the country's development program.

32


Good policy performance, defined as the implementation of economic and

social policies that promote growth and poverty reduction.

Some countries, such as India and Indonesia, are eligible for IDA assistance due to

their low per person incomes, but are also creditworthy for some IBRD borrowing.

These countries are known as "Blend" borrowers.

Where do IDA resources come from?

The largest source of IDA resources is new contributions from donor countries. This

accounts for about $13 billion of approximately $23 billion in resources which will

be made available to IDA borrowers during the three year period of IDA13. The

second largest source is internal resources, which include repayments from graduated

and current IDA borrowers, investment income, and other resources including

residual resources from past replenishments. The bulk of internal resources are

repayments, which amount to approximately $4 billion in IDA13. An additional

source of funds is transfers from IBRD net income, which will total about $900

million in IDA13. The largest pledges to IDA13 were made by the United States,

Japan, Germany, United Kingdom, France, Canada and Italy. Combined, these

countries account for about 70% of donor contributions to IDA13.

Performance Ratings

Every year World Bank staff assesses the quality of each borrower's policy

performance on the following parameters.

Economic Management

Structural Policies

Policies for Social Inclusion/Equity

Public Sector management and Institutions

33


Finally, the performance assessment also takes into account the performance of the

country's active project portfolio performance. The combined rating is scaled up or

down depending on the strength of the country's performance.

Allocation Process

The allocation of IDA's resources is determined primarily by each borrower's rating

in the annual country performance and institutional assessment. In addition, the

IDA14 Agreement recommends that because the acceleration of economic and social

development in Sub-Saharan Africa remains foremost among IDA's priorities, these

countries should receive priority in the allocation process, provided that policy

performance warrants it. Finally, for borrowers that are eligible for both IDA and

IBRD funds ("Blend countries"), allocations must take into account those countries'

creditworthiness for and access to other sources of funds as well as their ability to use

IDA resources effectively to tackle poverty.

Individual country performance-based allocations serve as an anchor for the

formulation of Country Assistance Strategy (CAS) lending programs.

34


2.7) International Finance Syndication Of Loans: -

International finance plays a very important role in financing the cost of capital of

projects the corporate sector.

International finance in Indian private business has been encouraged by the

government in a selective and phased manner. After independence the inflow took

shape of collaboration and foreign loans and grant on government basis from

different countries as also international agencies like International Bank For

Reconstruction and development (IBRD) and International Development Association

(IDA) are mainly utilize for financing the public sector projects and meeting the

countries deficit. Foreign capital in private company came through investment made

by multinational corporation (MNCs) in Indian subsidiaries. In 1973, Govt. of India

enacted Foreign Exchange Regulation Act (FERA) with a view to synchronizing the

inflow of foreign investment with the changing need of the country.

Today, international finance for the development of industry in India is coming

through many channels viz., Bilateral arrangement of Government as discussed

above, all India financial Institutions, Foreign Banks operating in international

markets, Indian Banks operating in international market.

All India Financial Institutions raise their resources in foreign currencies to enable

the Indian entrepreneurs the import of capital goods, technical know-how and

technology in India for accelerating the pace of industrial development. These

institutions raised the resources in foreign currencies through prescribed modes.

Besides the above, finance in international market is being arranged by private

organisations with the permission of Central Govt. through bond issue or syndicated

loan arranged through Commercial Banks and Foreign Banks.

35


2.8) INTRNATIONAL FINANCE MARKET :

In international financial market, the borrow from one country may seek lenders in

other countries in specific currencies which need not be of the participant country. In

International Finance market, the availability of foreign currency is assured under

four main systems:

I. Euro Currency Market;

II. Export Credit Facilities;

III. Bond Issue, and,

IV. Financial Institutions

I. Euro Currency Market

Here funds are made available as loans through syndicated Euro credits or

instruments known as floating rate notes (FRNS). Interest rates very every six

months based on London-inter bank offered – rate (LIBOR). Syndicated Euro

currency bank loan has developed into one of the most important instruments for

international lending. Syndicated Euro credit is available through instruments viz.,

Term Loan Revolving Line Facility.

II Export Credit Facility:

Export Credit facilities are made available by several countries through an

institutional frame work in which EXIM Banks play a prominent role EXIM of India

is playing a significant role in financing export and other off-shore deals.

III. Bond Markets :

International bond market provided facilities to raise long term funds by using

different types of instruments. The bond market is generally known as Euro bond

market

36


IV Financial Institution:

UN Agency Financial Institution Viz. IMF of World Bank and its allied agencies,

IFC(W), ADB, etc. provides finance foreign currency.

New International Instruments:

Swap is an international finance market instruments for managing funds. The basic

concept involved in Swaps is matching of difference between spot exchange rate for

a currency and the forward rate. The Swap rate is the cost of exchange one currency

into another for a specified period of time. The Swap will represent an increase in the

value of forward exchange rate. The Swap will represent an increase in the value of

the forward exchange rate (premium of a decrease discount). There are main three

types of Swaps (a) interest Swap (b) currency Swap (c) combination of both.

Nonetheless, the amount of foreign direct investment in these has been rising over

the past few years. To attract funds from foreign investors, well-functioning domestic

financial system must exist and particularly interest rates need to be market

determined. Two factors viz. lack of credit worthiness and standards of investor

protection on domestic financial market prevent fuller utilization of international

financial markets by developing countries. International financial markets offer

developing countries the possibilities of attracting the funds they need for their

development. The share of development countries utilization of international bonds is

negligible.

Syndicated Eurocurrency Loans:

The Eurocurrency market refers to the availability of a particular currency in the

international financial market outside the ‘Home country’ of that currency. For

example, the Eurodollar market refers to the financial market for US dollars in

England, France, West Germany, Hong Kong and other financial centres outside the

37


US. The Eurodoller borrowing may be evidence by issue of commercial paper in the

form of promissory notes, or by subscription to bond/debentures or it may be

syndicated loan type.

Main Objectives of Syndication (Borrower’ point of view)

Large sums is arranged without delay and at least cost.

Gets better introduction to enter into international loan market without much

difficulty.

Funds are made available easily for meeting balance of payment deficit and

for financing large industrial projects.

The borrower is allowed to select the length of the roll over period and in

choosing different currencies to repay or cancel agreement after a short notice

period without penalty.

Lenders’ point of view

It helps the bank to share large credits with other bank, to finance many

borrowers.

Different size banks can participate.

It provides more profitability to banks as cost are relatively low.

Syndicated loans is under-written by a small group banks which resell

portions of the commitments to other banks.

Type of Euro-bond market instruments- There are four types of

Eurobond instrument Viz.

1. Straight-debt Eurobond carrying a fixed rate of interest.

2. Convertible bonds having a fixed rate of interest with option of conversion

into equity of the borrowing company.

3. Currency option bonds, giving the option of buying them into one currency

while taking payments of interest and principle in another.

38


4. Floating rate notes, where rate of return is adjusted at regular intervals to

reflect changes in short-term money market rates.

During the last more than four decades the syndicated loan market, has developed

into a vital source of foreign capital and the major international banks have

‘syndicated’ to provide billon of dollars worth of foreign capital to finance medium

term requirements of five to eight years for all categories of borrowers comprising

governments, public and private sectors.

39


2.9) INTERNATIONAL FINANCE CORPORATION: -

INTRODUCTION

The International Finance Corporation (IFC) is a member of the World Bank Group,

which also includes the International Bank for Reconstruction and Development

(IBRD), the International Development Association (IDA), and the Multilateral

Investment Guarantee Agency (MIGA). IFC’s business is investment in private

sector projects through loans, equity investment, and other financial instruments. It is

IFC policy that all its operations are carried out in an environmentally and socially

responsible manner. To this end, IFC projects must comply with applicable IFC

environmental, social and disclosure policies. In addition, IFC applies World Bank

Group environmental, health and safety guidelines to all projects. In sectors where no

appropriate IFC policies or guidelines exist, IFC applies relevant internationally

recognized standards. Furthermore, the project sponsor must ensure compliance with

host country requirements.

IFC’s client base and project cycle are different from those of the World Bank. IFC’s

environmental and social policies, while harmonized with World Bank policies, are

adapted to the private sector nature of IFC’s business.

IFC reviews prospective projects for soundness before it invests, focusing on

economic, financial, technical, legal, environmental and social issues during the

project appraisal process. This environmental and social review procedure has been

prepared for IFC staff and project sponsors for the review of a prospective project. A

separate environmental procedure applies to small projects approved under delegated

authority to management (e.g., Africa Enterprise Fund).

IFC’s Environment and Social Development Department is responsible for the

environmental and social review, clearance and supervision of projects in a manner

consistent with the requirements contained in this review procedure. The Director of

the Environment and Social Development Department reports to IFC’s Executive

40


Vice President. In addition, to achieve better integration of environmental and social

considerations within IFC operations and to ensure high performance standards, an

IFC Vice President has corporate oversight for environmental and social issues and

disclosure matters.

The procedure: (a) discusses applicable environmental and social policies; (b)

outlines applicable environmental and other guidelines; (c) describes the project

cycle which IFC uses in evaluating a prospective project and highlights where in the

cycle IFC Environment and Social Development staff are required to provide input;

and (d) details the procedures that IFC staff must follow to ensure that projects meet

IFC’s commitment to environmentally sustainable and socially responsible projects.

Polices Of International Finance Corporation

IFC environmental and social policies are fundamental to the project appraisal,

approval and supervision process. Applicable operational policies are: OP 4.01,

Environmental Assessment; OP 4.04, Natural Habitats; OP 4.09, Pest Management;

OP 4.10, Indigenous Peoples (forthcoming); OP 4.11, Safeguarding Cultural Property

in IFC-Financed Projects (forthcoming); OP 4.12, Involuntary Resettlement

(forthcoming); OP 4.36, Forestry; OP 4.37, Safety of Dams (forthcoming); and OP

7.50, Projects on International Waterways.

Description of Policies of International Finance Corporation

Environmental Assessment: -

IFC policy on environmental assessment (EA) states that all projects proposed for

IFC financing require an EA to ensure that they are environmentally and socially

sound and sustainable. EA is a process whose breadth, depth and type of assessment

varies according to the type of project. Various instruments are used to perform the

EA depending on the complexity of the project. They include: an environmental

impact assessment (EIA), an environmental audit, a hazard or risk assessment, and an

41


environmental action plan (EAP). The policy requires that all IFC projects be

categorized. Categories are: ‘A’, ‘B’, ‘C’, and ‘FI’. Definitions of each of these

categories are described later in the procedure. OP 4.01 also sets forth the minimum

requirements for public consultation and public disclosure for projects.

Natural Habits: -

This policy affirms IFC’s commitment to promote and support natural habitat

conservation and improved land use, and the protection, maintenance, and

rehabilitation of natural habitats and their functions in its project financing. IFC does

not support projects that involve significant conversion or degradation of critical

natural habitats.

Pest Management: -

IFC supports the use of biological or environmental control methods rather than the

use of pesticides where there is a need for pest management. Where pesticides are

required, this policy sets forth the criteria for their use.

Indigenous People: -

[Forthcoming] Pending finalization of this OP, IFC projects must comply with the

World Bank’s OD 4.20, Indigenous Peoples, as appropriate in a private sector

context.

Safeguarding Cultural Property in IFC Financed Projects: -

[Forthcoming] Pending finalization of this OP, IFC projects must comply with the

World Bank’s OPN 11.03, Cultural Property, as appropriate in a private sector

context.

Involuntary Restatements: -

[Forthcoming] This policy is applied wherever land, housing or other resources are

taken involuntarily from people. It sets out the objectives to be met and procedures to

42


be followed for carrying out baseline studies, impact analyses, and mitigation plans

when affected people must move or lose part or all of their livelihoods. An annex to

OP 4.30 presents the outline for a Resettlement Plan, the key document to be

prepared by the project sponsor.

Safety Of Dames: -

This policy sets forth IFC’s requirements for projects where dams are to be

constructed. The owner of a dam has full responsibility for the safety of the dam. IFC

requires that dams be designed and constructed by experienced and competent

professionals. For large dams (over 15 meters high) and dams between 10 and 15

meters that present special design complexities, IFC requires reviews by a panel of

independent experts, preparation of detailed plans, and periodic safety inspections.

The policy covers mine tailings dams and dams containing other material such as ash

from power plants, as well as water storage dams.

43


44


Monitoring and Supervision

IFC uses the term "supervision" differently from the Bank, due to differences in

project cycles of the two institutions. Accordingly, the Bank’s OD 13.05 Project

Supervision does not apply to IFC.

IFC monitors the environmental and social performance of projects in its investment

portfolio. Project monitoring usually occurs in one or more of the following ways:

Supervision missions carried out by the Investment Department and the Technical

and Environment Department; and/or Project site visits by staff of the Environment

Division. The frequency of the site visits depend on the environmental and social

complexity of a project.

The investment officer, in cooperation with the technical specialist and after

consultation with the environmental and social development specialists, is

responsible for ensuring that supervision reports include information on the project

company’s compliance with environmental and social requirements. The investment

officer is also responsible for ensuring that annual environmental monitoring reports

are provided to the Environment Division as required in the legal documentation for

the project. The Environment Division is responsible for reviewing such reports and

determining whether the project company’s compliance with environmental and

social requirements is satisfactory. In the case of non-compliance, the Environment

Division discusses an appropriate course of action with the Investment and Legal

Departments and specialists in the Technical and Environment Department. The

investment officer notifies the project company of this action and any necessary

follow-up requirements. The investment officer is responsible for follow-up with

both the project company and the Environment Division until the non-compliance

situation is resolved.

Project Supervision Reports (PSRs), which IFC prepares at least annually, must

include a section on environmental and social compliance with regard to covenants in

the investment agreement. In addition, the PSR must state whether the Environment

45


Division has received the Annual Monitoring Report (as required in the investment

agreement), the date submitted to IFC and the date reviewed by the Environment

Division.

Evaluation

During the course of selected projects an Investment Assessment Report (IAR) is

prepared which summarizes the evaluations of the actual environmental and social

impacts of the project against the impacts anticipated in the EA report, and assesses

the effectiveness of the mitigating measures. The Environment Division provides

input to the IARs and signs off on the relevant draft text and attendant project

performance ratings.

46


2.10) AMERICAN DEPOSITORY RECEIPTS (ADRs) AND

GLOBEL DEPOSITORY RECEIOTS:

INTRODUCTION

American Depository Receipts, more popularly known as ADRs, are US Dollar

denominated equity instruments widely traded in US financial markets. While GDRs

are technically tradable world over, in reality, it is seen mostly traded only on the

Luxembourg Bourse and thus catering to the European markets only. With GDRs

only, it is becoming difficult for the corporates to penetrate the US markets. Fl,

Irther, US markets are too big and specialised to be ignore. However, the ADR route

has a set of procedural formalities to be undertaken.

Issuance of ADRs require strict compliance with the guidelines issued by USD

Security Exchange Regulation Commission, the counterpart of SEBI in India.

Trading on ADRs could be done only by qualified institutional buyers, known as

QIBs, as required under Section 144 A of Security Exchange Regulation

Commission.

Deposit receipts issued by a company in the USA (United States Of America) is

known as American depository receipts (ADRs). Such receipts have to be issued in

accordance with provision stipulated by the securities and exchange commission of

USA (SEC) which are very stringent.

An ADR generally created by the deposit of securities of a non-united states

company with custodian bank in the country of incorporation of the issuing company.

The custodian bank informs the depository in the United States that the ADRs can be

issued. ADRs are United Stated Dollars denominated and the traded in the same way

as are the securities of United States companies. The ADR holder is entitled to the

same rights and advantages as the owners of underlying securities in the home

country. Several variations on ADRs have developed over time to meet more

specialized demands in different markets. One such variations is the GDR which are

47


identical in structure to an ADR, the only difference being that they can be traded in

more than one currency and within as well as outside the United State.

There are two types of ADRs

1. Unsponsored ADRs :

These are issued without any formal agreement between the issuing company and the

depository, although the issuing company must consent to the creation of the ADR

facility. With Unsponsored ADRs, certain costs, including those associated with

disbursement of dividend, are borne by the investor. For the issuing company, they

provide a relatively inexpensive methods of accessing the United States capital

markets (especially because they are also exempt from most reporting requirements

of the securities and Exchange commission).

2. Sponsored ADRs:

These are created by a single depository which is appointed by the issuing company

under rules provided in a deposit agreement. There are two board types of sponsored

ADRs those they are restricted with respect to the type of buyer which is allowed,

and are therefore privately placed. And those that are unrestricted with respect to

buyer and are publicly placed and traded. Restricted ADRs are allowed to be placed

only among selected accredited investors and exempt from reporting requirement of

securities and exchange commission and not even registered with it. Restricted ADR

issues are sometime issued by companies that seek to gain some visibility and

perhaps experience in the United States capital markets before making an

unrestricted issue.

The major advantages and salient features of GDR are as under:

For the issuing company, it does not undertake any foreign exchange risk as the

transaction is reflected in its books only on Rupee terms.

48


Issue of GDR enhances the corporate image of the Company in the international

financial circles as the Company becomes more visible. GDR issues are a step in the

direction of becoming an established global player.

With a view to initially attract the potential investors, the pricing of the GDRs is

done at a discount to the domestic prices. The discount to domestic prices is also on

account of the fact that rupee has been constantly depreciating against the US dollar

over a period of time. However, on account of risk-reward perceptions on the Indian

papers, Fils have been showing an increased appetite for Indian scrips. This

particular phenomenon has resulted in certain GDRissues being quoted at a premium

at the time of issue stage itself.

GDRs are manifestation of the interest in Indian scrips by overseas investor

community. The overseas investors are not normally concerned with the day-to-day

running of the company or acquiring management stake. They are more interested in

securing pest returns on their investments by way of capital appreciation at the time

of redemption.

Since GDR holders do not appear in the books of the company as equity-holders,

they are not subject to the regulatory control span of authorities like SEBI (Security

Exchange Board of India) etc., unlike Plls who make direct investment into Indian

papers and thus beer the currency fluctuation risk as well.

Despite all the upheavals, be it economic or political, India continues to remain a

relatively safe haven in attracting direct/indirect investments.

The liquidity of GDRs is as good as the liquidity of the domestic shares of the

company concerned. Generally, the market has witnessed linear relationship in the

movements of GDR and domestic share prices for a given Company. Of course, any

abnormal behaviour between the two markets will give scope to arbitrage

opportunities.

49


Some of the important guidelines governing GDR issues are

summarized as under:

TRACK RECORD

The issuing Company should have a consistent track record of good performance,

financial or otherwise, for a period of at least the immediately preceding three years.

This condition could be considered for relaxation in case of companies

engaged in infrastructure projects like power, telecom, petroleum exploration, ports,

air-ports, roads etc.

APPROVALS

Euro-Issues [including GDRs and FCCB (Foreign Currency Convertible Bond)] are

regarded as direct foreign investment. Wherever such stakes are in excess of 49%,

then FIPB (Foreign Investment Promotion Board) approval would be necessary

before taking up with the Ministry of Finance.

END-USE

Financing capital goods imports:

Capital expenditure including domestic purchase/ installation of plant,

equipment, building and investments in software development

Pre-payment or scheduled repayment of earlier external borrowings

Investment abroad as approved by the competent authorities

50


Equity investment in JV (Joint Venture)/WOS (Wholly Owned

Subsidiary) .in India

It would be incumbent upon the company to submit duly certified copies of

the quarterly utilisation statements signed by the Auditors.

Foreign Investment through ADRs/GDRs, Foreign Currency Convertible Bonds

(FCCBs) is treated as Foreign Direct Investment. Indian companies are allowed to

raise equity capital in the international market through the issue of

GDR/ADRs/FCCBs. These are not subject to any ceilings on investment. An

applicant company seeking Government's approval in this regard should have a

consistent track record for good performance (financial or otherwise) for a minimum

period of 3 years. This condition can be relaxed for infrastructure projects such as

power generation, telecommunication, petroleum exploration and refining, ports,

airports and roads.

There is no restriction on the number of GDRs/ADRs/FCCBs to be floated by a

company or a group of companies in a financial year. There is no such restriction

because a company engaged in the manufacture of items covered under Automatic

Route is likely to exceed the percentage limits under Automatic Route, whose direct

foreign investment after a proposed GDRs/ADRs/FCCBs is likely to exceed 50 per

cent/51 per cent/74 per cent as the case may be.

There are no end-use restrictions on GDRs/ADRs issue proceeds, except for an

express ban on investment in real estate and stock markets. The FCCB issue proceeds

need to conform to external commercial borrowing end use requirements. In addition,

25 per cent of the FCCB proceeds can be used for general corporate restructuring.

GDR end-uses will include:

Financing capital goods imports;

51


Capital expenditure including domestic purchase/installation of plant,

equipment and buildings and investments in software development;

Prepayment or scheduled repayment of earlier external borrowings;

Investments abroad where these have been approved by competent

authorities;

Equity investment in JVs/WOSs in India. However, investments in stock

markets and real estate will not be permitted. Up to a maximum of 25 per cent

of the total proceeds may be used for general corporate restructuring,

including working capital requirements of the company raising the GDR.

Currently, companies are permitted to access foreign capital market through

Foreign Currency Convertible Bonds for restructuring of external debt that

helps to lengthen maturity and soften terms, and for end-use of funds which

conform to the norms prescribed for the Government for External

Commercial Borrowings (ECB) from time to time. In addition to these, not

more than 25 per cent of FCCB issue proceeds may be used for general

corporate restructuring including working capital requirements.

FCCBs are available and accessible more freely as compared to external debt,

and the expectation of the Government is that FCCBs should have a

substantially finer spread than ECBs. Accordingly, the all-in costs for FCCBs

should be significantly better than the corresponding debt instruments

(ECBs). Companies will not be permitted to issue warrants along with their

Euro-issue. The policy and guidelines for Euro-issues will be subject to

review periodically.

52


Markets of GDRs

GDR’s are sold primarily to institutional investors

Demand is likely to be dominated by emerging market funds

Switching by foreign institutional investors from ordinary shares into GDRs is likely

Major demand is also in UK, USA (Qualified Institutional Buyers) South East Asia

(Hon Kong, Singapore) and to some extent continental Europe (principally France

and Switzerland)

Profile of GDR Investors

The Following parameters have been observed in regard to GDR investors:

Dedicated convertible investors

Equity investors who wish to add holdings on reduced risk or who require income

enhancement.

Fixed income investors who wish to enhance returns.

Retail investors: Retail investment money normally managed by continental

European banks which on an aggregate basis provide a significant base for Euro

convertible issues.

53


Global Depository Receipt with Warrant (GDR with Warrant):

These receipts were more attractive than plains GDRs in view of additional value of

attached warrants. The government of India has however, prohibited Indian company

to issue GDRs with warrant as per the guidelines issued on 28.10.94.

The mechanics of a GDR issue may be described with the help of following diagram.

company issues

ordinary shares

kept with custodian/depository banks

against which GDRs are issued

to foreign investors

Characteristics:

Holders of GDRs participate in economic benefit of being ordinary

shareholders, though they do not have voting rights.

GDRs are settled through CEDEL and Euro-clear international book entry

system.

GDRs are listed on the Luxemberg stock exchange.

54


Trading takes place between professional market on an OTC (over the

counter) basis.

As for as the case of liquidation of GDRs is concerned, an investor may get the GDR

cancelled any time after a cooling off period of 45 days. A non-resident holder of

GDRs may ask the overseas bank (depository) to redeem (cancel) the GDRs. In that

case overseas depository bank shall request the domestic custodians to cancel the

GDR ant to get corresponding underlying shares released in favour of non-resident

investor. The price of ordinary shares of the issuing company prevailing in the

Bombay stock exchange or the national stock exchange on the date of advice of

redemption shall be taken as the cost of acquisitions of the underlying ordinary

shares

Advantage of FCCBs

The convertible bonds gives the investor the flexibility to convert the bond

into equity at a price or redeem the bond at the end of a specified period,

normally three years if the price of the share has not met his expectation.

Companies prefer a bond as it leads to delayed dilution of equity and allows

company to avoid any current dilution in earnings per share that a further

issuance of equity would cause.

FCCBs are easily marketable as investor enjoys option of conversion into

equity shares of resulting to capital appreciation. Further investor is assured

of a minimum fixed interest earnings.

Disadvantage of FCCBs

Exchange risk is more in FCCBs as interest on bonds would be repayable in

foreign currency. Thus companies with low debt equity ratios, large forex

earnings potential only optional for FCCBs

55


FCCBs mean creation of more debt and a forex outgo in terms of interest

which is in foreign exchange.

In the case of convertible bonds, the interest rate is now, say more than 4%

but there is risk on the interest payment as re-payment if the bonds are not

converted into equity shares. The only major advantage would be that where

the company has a high rate of growth in earnings and the conversion takes

place subsequently the price at which shares can be issued can be higher than

the current market price.

56


2.11) INTERNATIONAL CAPITAL MARKET

International capital market is well known today that modern organizations including

multinationals largely depends upon sizable borrowings in rupees as well as in

foreign currencies to finance their projects involving huge outlays. The taxation

benefits available on borrowings as against the capital often influence this course as

interest payment on borrowed funds in allowable expenditure for tax purposes.

In order to cater to the financial needs of such organization international capital

markets or financial centers have sprung up whenever international trade centers

have developed. Lending and borrowings in foreign currencies to finance the

international trade and industry has led to the development of intentional capital

market.

In domestic capital markets of various countries, international capital transaction also

take place. For instance, USA, Japan, UK, Switzerland and West Germany have

active domestic capital markets. Foreign borrowers raise money in these capital

markets through issue of ‘foreign bonds’. In international market, international bond

is known as “Euro bond”. The issue of Euro-bond is managed by a syndicated of

international banks and placed with investors and lenders world-wide. The issue may

be denominated in any of the currencies for which liquid market exist.

In international capital market, the availability of foreign currency is assured under

the four main systems viz. (1) Euro- currency market; (2) Export Credit Facilities; (3)

bond issue; and (4) financial institution. Euro currency market was originated with

dollar dominated bank deposits and provides loans in Europe particularly, in London.

Euro-dollar deposits form the main ingredient of Euro-currency market. Euro doller

deposits or dollar denominated time deposits available at foreign braches of US

banks and at some foreign banks. These deposits are acquired by these banks from

foreign government and various firms and individuals who want to hold dollars

outside USA. Banks based in Europe accept dollar denominated deposits and make

spread over various parts of the world. In Euro-currency market, funds are made

available as loan through syndicated Euro-credit or instrument know as floating rate

57


notes FRN/FRCDs (certificates of deposits). London has remained as the main center

for euro-currency credit.

The creditors however insist on banks guaranties. Several multinational banks of

Japanese, American, British, German & French origin- operates all over the world,

extending financial assistance of trade & projects. Several multinational banks like

Citi bank, ANZ Grind lays bank, Standard chartered bank, American Express Bank,

Bank of America, etc are aggressive players in India & they issue specific bank

guarantees to facilitate the business transactions between various parties, including

government agencies, commercial borrowings as well as Exim Bank finance. This

however, constitute major cost.

Instruments Of International Finance.

The various financial instrument dealt with in the international market are briefly

described below.

Euro Bonds: Euro Bonds are debt instrument denominated in a currency

issued out side the country of that currency e.g. a yen floated in Germany; a

yen bond issued in France.

Foreign Bonds: These are debt instruments denominated in a currency

which is foreign to the borrower and is sold in a country of that country. A

British firm placing $ denominated bonds in USA is said to be selling foreign

bonds.

Fully Hedged Bonds: In foreign bonds, the risk of currency fluctuation

exists. Fully hedged bonds eliminate that risk by selling in forward market the

entire stream of interest and principal payment.

Floating Rate Notes: These are issued upto 7 years maturity. Interest

rates are adjusted to reflect to prevailing exchange rates. They provide

cheaper money than foreign loans. Currently they are not popular.

58


Euro Commercial Paper: Euro Commercial Paper (ECPs) is short-term

money market instrument. They are for maturity for less than a year. They are

usually designated in US dollars.

Foreign Currency Options: A Foreign Currency Option is the right to

buy or sell, spot, future or forward, a specified foreign currency. It provides a

hedge against financial and economic risk.

Foreign Currency Future: Foreign Currency Future are obligation to

buy or sell a specified currency in the present for settlement at a future date.

The most common period for a futures contract is a week, a month or two

months

59


3. COMPREHENSIVE REQUIREMENTS OF EXTERNAL

COMMERCIAL BORROWINGS.

3.1) Procedure for seeking approval:

Applications may be submitted by the borrowers in the prescribed format to:

The Joint Secretary (ECB),

Department of Economic Affairs,

Ministry of Finance,

North Block,

New Delhi - 110 001.

The application should contain the following information:

1. An Offer Letter (in original) from the lender giving the detailed terms and

conditions

2. Copy of the project appraisal report from a recognized financial

institution/ bank, if applicable

3. Copies of relevant documents and approvals from central/ state

governments, wherever applicable, such as

o FIPB, CCEA and SIA clearances,

o Environmental clearances,

o Techno - economic clearance from Central Electricity Authority,

o Valid licences from Director General of Foreign Trade (Ministry of

Commerce) or

o Department of Telecommunications,

60


o No - objection certificate from Ministry of Surface Transport,

o Evidence of exports from competent authority,

o Registration with RBI in case of NBFCs etc

3.2) Average Maturities for ECB

ECBs should have the following minimum average maturities: -

Minimum average maturity of three years for external commercial

borrowings equal to or less than USD 15 million equivalent;

Minimum average maturity of seven years for external commercial

borrowings greater than USD 15 million equivalent;

100% Export Oriented Units (EOUs) are permitted ECB at a minimum

average maturity of three years even for amounts exceeding USD 15 million

equivalent; and

Indian Development Financial Institutions (DFIs) and corporates engaged in

infrastructure projects in Telecommunications and Oil Exploration and

Development (excluding refining) will be permitted to raise ECB at a

minimum average maturity of five years even for borrowings exceeding USD

15 million equivalent.

Bonds and FRNs can be raised in trenches of different maturities as long as

the average maturity of the different trenches within the same overall

approval taken together satisfies the maturity criteria prescribed in the ECB

guidelines. In such cases, it is expected that longer-term borrowings would

necessarily precede that of the shorter tenors. The longer the initial tenor the

shorter the subsequent trenches can be within the average maturity.

61


3.3) End-Use Requirements

a) External commercial loans are to be utilised for import of capital goods and

services (on FOB or CIF basis). However, in the case of projects in the following

infrastructure areas, ECB can be utilised for rupee expenditure:-

Power

Telecommunications (Licence fee payments would be an approved use of

ECB).

Railways

Roads (including bridges)

Ports

Industrial Parks; and

Urban infrastructure (water supply, sanitation and sewerage projects as

defined in Section 80 IA of Income Tax Act, 1961).

b) Corporate borrowers will be permitted to raise ECB to acquire ships/vessels from

Indian shipyards.

ECB proceeds may also be utilised for project- related rupee expenditure as outlined

in paras 7 to 11 above. However, under no circumstances, ECB proceeds will be

utilised for-

1. Investment in stock market; and

2. Speculation in real estate.

3.4) USD 5 Million Scheme

62


All Corporates and institutions are permitted to raise ECB upto USD 5 million

equivalent at a minimum simple maturity of 3 years. Borrowers may utilise the

proceeds under this window for general corporate objectives without any end-use

restrictions excluding investments in stock-markets or in real estate. The loan amount

may be raised in one or more trenches subject to the caveat that the total outstanding

loan under this scheme at any point of time should not exceed USD 5 million. Each

trench should have a minimum simple maturity of 3 years.

As a measure of simplification and de-regulation for the benefit of corporates and

institutions, Government have delegated the sanctioning powers to Reserve bank of

India(RBI) under this scheme with effect from 15th December, 1996.

Corporates and institution are advised to submit their applications under this scheme

to the Exchange Control Department of RBI, Mumbai.

3.5) Exporters

Exporters, 100% EOUs and EPCG licence-holders are permitted to raise ECB upto

thrice the average amount of annual exports during the previous three years subject to

a maximum of USD 100 Million equivalent without end-use restrictions as long as

they conform to the general corporate objectives.

3.6) Exporters/Foreign Exchange Earners

Corporate who have foreign exchange earnings are permitted to raise ECB upto twice

the average amount of annual exports during the previous three years subject to a

maximum of USD 100 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 upto USD 15 million equivalent and seven years

for ECBs exceeding USD15 million. The maximum level of entitlement in any one

year is a cumulative limit and debt outstanding under the existing USD 15 million

exporters scheme will be netted out to determine annual.

63


3.7) Infrastructure Projects

Holding Companies/promoters will be permitted to raise ECB upto a maximum of

USD 50 million equivalent to finance equity investment in a subsidiary/joint venture

company implementing infrastructure projects. This flexibility is being given in order

to enable domestic investors in infrastructure projects to meet the minimum domestic

equity requirements.

In case the debt is to be raised by more than one promoter for a single project then

the total quantum of loan by all promoters put together should not exceed USD 50

million.

3.8) Long-Term Borrowers

a) These amounts will be available for general corporate objectives excluding

investments in stock markets or in real a) ECB of ten years average maturity and

above will outside the ECB ceiling, though MOF's prior approval for such

borrowings would continue to be applicable. The extent of debt under this window

will be reviewed by the Government periodically.

b) Corporate borrowers able to raise long-term resources with an average maturity of

10 years and 20 years will be allowed to use ECB proceeds without the normal end-

use restrictions upto USD 100 million for issue of 10 years and above upto 20 years

and USD 200 million for issue of 20 years and above estate.

c) To be eligible for this purpose, the debt instrument should not include any "put" or

"call" options potentially reducing the stated maturities

3.9) External Commercial Borrowings (Proceeds From Bonds FRNs &

Syndicated Loan)

64


Corporate borrowers who have raised ECB for import of capital goods and services

through Bonds/FRN/Syndicated loans are permitted to remit funds into India. The

funds can be utilised for activities as per their business judgement except investment

in stock market or in real estate, for upto one year or till the actual import of capital

goods and services takes place, whichever is less. In case borrowers decide to deploy

the funds abroad till the approved end-use requirement arises, they can do so as per

the RBI's extant guidelines.

Sanction of additional ECB to the Company would be considered only after the

Company has certified, through its statutory auditor, that it has fully utilised the

amount for import of the capital equipments and services.

3.10) ECB Entitlement for New Projects

All Infrastructure and Greenfield projects will be permitted to avail ECB to an extent

of 35% of the total project cost, as appraised by a recognised Financial

Institution/Bank, subject to the fulfillment of other ECB guidelines. However, ECB

intended for telecom projects are more flexible and an increase from the present 35%

to 50% of the project cost (including the licence fee) will be allowed as a matter of

course. Greater flexibility may also be allowed in case of power projects and other

infrastructure projects based on merits.

3.11) Interest Rate for Project Financing

At present, interest rate limits on ECB for project financing (i.e. to say non-

recourse financing) allow interest spreads above LIBOR/US Treasury to be

higher than for normal ECB. Ordinarily a spread upto 350 basis points may

be allowed. However, keeping market conditions in mind, some flexibility will

be permitted in determining the spread on merits. In order to give borrowers

greater flexibility in designing a debt strategy, upto 50% of the permissible

debt may be allowed in the form of sub-ordinated debt at a higher interest

65


rate, provided the composite spread for senior and sub-ordinated debt taken

together comes within the overall project financing limit

3.12) Other Terms and Conditions:

Apart from the maturity and end-use requirements as per paras above, the financial

terms and conditions of each ECB proposal are required to be reasonable and market-

related. The choice of the sourcing of ECB, currency of the loan, and the interest rate

basis (i.e. floating or fixed), will be left to the borrowers.

3.13) SECURITY

The choice of security to be provided to the lenders/suppliers will also be left to the

borrowers. However, where the security is in the form of a guarantee from an Indian

Financial Institution or from an Indian Scheduled Commercial Bank, counter-

guarantee or confirmation of the guarantee by a Foreign Bank/Foreign Institution will

not be permitted.

3.14) Approval Under FEMA:

After receiving the approval from ECB Division, Department of Economic Affairs,

Ministry of Finance, the applicant is required to obtain approval from the Reserve

Bank of India under the Foreign Exchange Management Act, and to submit an

executed copy of the Loan Agreement to this Department for taking the same on

record, before obtaining the clearance from RBI for drawing the loan. Monitoring of

end-use of ECB will continue to be done by RBI.

At present, ECB approvals under US $ 3 million scheme (enhanced to US $ 5

million) is given by RBI and all other ECB proposals are processed in DEA. As a

measure of further simplification and rationalisation, Government has decided to

delegate the ECB sanctioning power to RBI up to US $ 10 million under all the ECB

schemes except structured obligation which is at present being administered by DEA.

66


Accordingly, applications for approval upto US $ 10 million will be considered by

the Exchange Control Department of RBI, Mumbai. Accordingly, corporate seeking

ECBs utpo US $ 10 million may approach RBI.

3.15) Validity of Approval

Approvals are valid for a period of six month. i.e. the executed copy of the loan

agreement is required to be submitted within this period. In the case of FRNs, Bonds

etc., the same are required to be launched within this period. In case of power

projects, the validity of the approval will be for a period of one year. Extension will

not be granted beyond the validity period. However, borrowers are free to submit

fresh application, after a gap of six month, which will be evaluated in the light of the

ECB guidelines applicable at that time.

In case of infrastructure projects, however, because financial closure may get delayed

for reasons beyond the investor's control, extension of validity may be considered on

merits.

3.16) Structured Obligations

In order to enable corporates to hedge exchange rate risks and raise resources

domestically, Domestic Rupee Denominated Structured obligations would be

permitted to be Credit enhanced by International Banks/International Financial

Institutions/Joint Venture Partners subject to following conditions: -

In the event of default, foreign banks giving guarantee will make payment of

defaulted amount of principal and interest after bringing in the equivalent

amount of foreign exchange into the country.

FEMA clearance should be obtained from RBI in advance of issuance.

Prior clearance for rupee bonds/debenture issue from RBI/SEBI should be

obtained.

67


In the event of default, the default should be foreign exchange equivalent

amount equal to the principal and interest outstanding calculated in rupee

terms.

The liability of Indian company will always be rupee denominated and the

debt servicing may be done in equivalent foreign exchange funds.

The guarantee fee/commission/charges and other incidental expenses to the

Indian company should be in rupee terms only. All in cost on this account

should not exceed 3% p.a. in rupee terms.

In case of the proposals relating to sectors where conditions apply clearances

e.g. relating to the assignability licenses etc., these should be obtained in

advance.

In case of default, the interest rate could be coupon on the Bond/or 250 bps

over prevailing secondary market yield of 5-year GOI security, whichever is

higher.

3.17) Guidelines for Accessing ECBs through Automatic Route

ECB for investment in real sector -industrial sector, especially infrastructure sector-in

India, will be under Automatic Route, i.e. will not require RBI/Government approval.

In case of doubt as regards eligibility to access Automatic Route, applicants may take

recourse to the Approval Route.

Eligible borrowers:

68


Corporates registered under the Companies Act except financial intermediaries (such

as banks, financial institutions (FIIs), housing finance companies and NBFCs) are

eligible

Recognised Lenders:

Borrowers can raise ECB from internationally recognised sources such as-

International banks, international capital markets, multilateral financial

institutions (such as IFC, ADB, CDC etc.,),

Export credit agencies and

Suppliers of equipment, foreign collaborators and foreign equity holders.

3.18) End-use:

ECB can be raised only for investment (such as import of capital goods, new

projects, modernization/expansion of existing production units) in real sector -

industrial sector including small and medium enterprises

3.19) Amount and Maturity:

ECB up to USD 20 million or equivalent with minimum average maturity of

three years.

ECB above USD 20 million and up to USD 500 million or equivalent with

minimum average maturity of five years

ECB up to USD 20 million can have call/put option provided the minimum

average maturity of 3 years is complied before exercising call/put option.

The all-in-cost ceilings for ECB will be indicated from time to time. The

following ceilings will have immediate effect and will be valid till reviewed.

69


3.20) Minimum Average Maturity Period:

All-in-cost Ceilings over six month LIBOR*

Three years and up to five years: 200 basis points

More than five years: 350 basis points

3.21 Credit Encashment.

Following guidelines shall be applicable to rupee denominated structured obligations

credit enhanced by international banks/international financial institutions/joint-

venture partner.

In the event of default, foreign banks giving guarantee will make payment of

defaulted amount of principal and interest after bringing in the equivalent

amount of foreign exchange into the country.

FERA clearance should be obtained from RBI in advance of issuance.

Prior clearance for rupee bonds/debenture issue from RBI/SEBI should be

obtained.

In the event of default, the default should be foreign exchange equivalent

amount equal to the principal and interest outstanding calculated in rupee

terms.

The liability of Indian company will always be rupee denominated and the

debt servicing may be done in equivalent foreign exchange funds.

70


The guarantee fee/commission/charges and other incidental expenses to the

Indian company should be in rupee terms only. All-in-cost on this account

should not exceed 3% p.a. in rupee terms.

In case of the proposals relating to sectors where conditions apply clearances

e.g. relating to the assignability of licenses etc., these should be obtained in

advance.

In case of default, the interest rate could be coupon on the Bond/or 250 bps

over prevailing secondary market yield of 5-year GOI security, whichever is

higher.

3.22) Prepayment of External Commercial Borrowings:

Reserve Bank of India has been delegated powers to grant all approvals for pre-

payments as per the prevailing guidelines, even in the cases where ECBs had been

approved earlier by the Ministry of Finance.

Provisions of pre-payments under ECB guidelines read that (a) pre-payment facility

would be permitted if these are met out of inflow of foreign equity (b) in addition to

ECB being pre-paidout of foreign equity, corporate can avail either of the following

two options for pre-payment of their ECBs:

On permission by the government, pre-payment may be undertaken within the

permitted period of all ECBs with residual maturity upto one year.

Pre-payment upto 10 per cent of outstanding ECB to be permitted once

during the life of the loan, subject to company complying with the ECB

approval terms. Those companies who had already availed pre-payment

facility of 20% earlier would not be eligible.

71


At present, pre-payment of ECBs upto 100 per cent is permissible where the source

of funds is from exchange earners’ foreign currency amount or pre-payment is

effected from foreign equity inflow or when the residual maturity of such debt is upto

one year.

3.23) Policy on External Commercial Borrowings (ECB)

Currently1, ECB can be accessed under two routes (i) the Automatic

Route - No approval of Reserve Bank of India (RBI)/Government

required and (ii) the Approval Route - Approval to be obtained from

the Empowered Committee of RBI.

1) The salient features of the revisions/amendments now made to the ECB policy are:

a) Non Banking Financial Companies (NBFCs) - permitted to raise ECB from

multilateral Financial institutions, reputed regional financial institutions, official

export agencies and International banks towards import of infrastructure equipment

for leasing to Infrastructure projects with a minimum average maturity of 5 years.

b) Housing Finance Companies with strong financials satisfying certain criteria2 –

permitted to issue Foreign Currency Convertible Bonds (FCCBs).

c) Individuals, Trusts and non-profit making organisations (except Non-

Governmental Organisations (NGOs) engaged in micro-finance) will not be eligible

to raise ECB.

3.24) Eligibility of Borrowers

The Eligible class Borrowers under the Approval Route has been expanded to

include –

72


a) Non Banking Financial Companies (NBFCs) - permitted to raise ECB from

multilateral financial institutions, reputed regional financial institutions, official

export agencies and international banks towards import of infrastructure equipment

for leasing to infrastructure projects with a minimum average maturity of 5 years.

b) Housing Finance Companies with strong financials satisfying certain criteria2 –

permitted to issue Foreign Currency Convertible Bonds (FCCBs).

Individuals, Trusts and non-profit making organisations (except Non-Governmental

Organisations (NGOs) engaged in micro-finance) will not be eligible to raise ECB.

73


REFERENCES

I had visited Bank of India’s, Mumbai (Main) Branch, Foreign

Exchange Department, located at 70-80, M.G. Road, Mumbai 400 023

and met the Officials who were kind enough to provide the necessary

information to the under-mentioned questions put to them :

1. What is the ECB ?

ECBs are made available to Govt. bodies and very large borrowers in

consortium with the Indian nationalized Banks.

2. What are the purposes of ECB ?

The purpose of ECB is to finance and medernise the gigantic

projects undertaken for the socio-economic development of the

developing nations.

3. Which financial institutions provide ECB facilities ?

International Financial Institutions viz., International Monetary

Fund, World Bank, Asian Development Bank etc., are some of the

major global financial institutions which provide ECB facilities.

4. Which sectors are financed by the ECB ?

ECB is usually made available for major infrastructural projects like

constructions of bridges, roads and transportation, electricity,

irrigation facilities etc.

5. Is there any concession offered in the rate of interest and what is the

74


repayment period ?

Yes, ECB finance is provided at a very concessional rate of interest

and the repayment period varies in accordance with the requirements

of the borrowing countries.

7. Whether your Bank also assists your borrowers by providing them

ECB?

Yes. Bank of India has got network of foreign Branches spread over

in several nations and hence is in a better position to assist its

clientele by way of ECBs.

75


BIBLIOGRAPHY

PRIMARY DATA:

1. INTRVIEWS FROM BANKERS, LIKE BANK OF INDIA

2. OTHER INTERVEIWS FROM non-Banking financial INSTITUTION

SECONDARY DATA:

1. BOOKS LIKE MANAGEMENT ACCOUNTING AND FINANCIAL

SERVECES BY:( PUBLISHED BY THE INSTITUTE OF CHARTWERED

ACCOUNTANTS OF INDIA)

2. FINANCIAL MANAGEMENT BY (RAVI KISHORE)

3. NEWSPAPERS, PERIODICALS, MAZAJINES AND JOURNALS

WEB SITES

WWW.MINISTRYOF FINANCE.COM

WWW.RBI.ORG.IN

76

http://WWW.MINISTRYOF/


APPENDEX 1 (ECONOMICS TIMES DATED: 20/03/2005)

Yes bank promoters borrow from Robobank to fund equity

contribution

THE promoters of YES Bank have borrowed from Rabobank International Holding

to chip in a part of their equity contribution in the newly formed private bank. The

borrowings were in foreign currency by investment companies owned by the

promoters Ashok Kapur and Rana Kapoor and their family members.

In the event of a default, Rabobank International will get control over the shares.

This was disclosed in the draft red herring prospectus filed by YES Bank for its

forthcoming IPO.

Rabo — the Dutch financial services group — which owns a non-banking finance

company in India, is also a 20% equity partner in YES Bank.

Rabo is likely to increase its shareholding in the bank by purchasing shares during

the IPO or post-IPO from the market so as to maintain its current holding of 20%.

The private equity investors in the bank—Citicorp, ChrysCapital and AIF Capital—

can increase their stake in the bank if there is any fresh issuance of shares other than

through an IPO. Initially, the RBI had given an "in-principle" approval for the bank

to Ashok Kapur and two other banking professionals — Rana Kapoor and Harikirat

Singh. Subsequently, Mr Singh had walked out of the project due to difference of

views. This caused a shortfall in the initial paid-up capital of the bank. Rabobank

International Holdings agreed to provide a loan to the promoters to bridge the gap in

the paid-up capital, the draft prospectus stated.

77


(Companies of Ashok Kapur and Rana Kapoor) was financed through a loan of Rs 17

crore each from Rabobank International Holdings. The loan has to be repaid within

three years of the disbursement. These loans were disbursed on March 10, '04. Mags

and Morgan have a 8.55% stake each in the bank.

According to the agreement, the promoters cannot dispose of their shareholding in

Mags and Morgan during the tenure of the loan. Also in the event of a default,

Rabobank "has a right to purchase such number of shares that are obtained by divid-

ing the outstanding amount under the agreement by the fair market value of the

shares as on date of such breach that are held by Ashok Kapur in Mags and Rana

Kapoor in Morgan, respectively, at nil considerations," stated the prospectus.

According to the terms of licence, 49% of the pre-issue share capital held by

promoters has a 5-year lock-in from May 24, '04. This stake includes 29% equity

owned by Ashok Kapur and Rana Kapoor, and 20% by Rabo. Rabo's post-issue stake

in the bank will fall to 14.8%. However, Rabo has indicated its intention to the bank

to maintain the shareholding at 20% subject to regulatory approval and consent of the

YES Bank. Rabo can increase its stake through market purchases.

78


APPENDEX 2 (ECONOMICS TIMES DATED: 4/09/2005

Asian development bank upgraded India’s economic growth forecast for 2006 by .7

percent to 6.8 percent while that of china by merely 01 percent to 8.8 percent report

AFP.

The bank Asian development outlook report released today however, kept India’s

earlier growth forecast of 6.9% for 2005 unchanged.

But it is upgraded the growth forecast for china by .7 percent to 9.2 percent for this

year. The Philippines-based ADB said china and India will carry the region over the

next two years with international trade and financial conditions expected to remain

favorable for Asian exports as well as investments into the region.

For development Asia as a whole the report upgraded its 2005 GDP forecast this

year, while maintaining its 6.6 forecast for 2006. The report, an update of an edition

released in April, kept its GDP growth forecast for the major industrialized

economics unchanged at 2.5 percent, a full percentage point below last year’s pace

but slightly better than the five-year average of 2.4 percent.

However, “the overall outlook for developing Asia is more uncertain than earlier in

the year:. It said, citing the “more accentured” risk the rising oil prices and US

interest rates.

Meanwhile the Reserve Bank of India said its assessment on inflation made during

the review of annually policy has not changed on account of increase in international

crude oil prices, report PTI.

“ Our expectations during the review were made after taking into account the

increase in international crude oil prices and pass through of it to domestic market”.

79


RBI deputy Rakesh Mohan told reporters, here Mohan, who did not make any

comments on the stock market rally, said that the stock market and the valuations of

companies were doing well since past 18 months.

80


81

ecb project

Documents

bank overdraft

outside borrowings

bank advances

countries bank

bank issue overdraft

working capital financing

working capital finance

clearing banks