external commercial 003

8/9/2019 External Commercial 003

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PREPARED BY:Nishank Gonsalves 16

Nayantara Gore 17Mansingh Gorkha 18

Krishna Gosavi 19

Mukesh Gupta 20


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What is ECB?

It refers to Commercial Loan

In the form of:

bank loans,

buyers credit,

suppliers credit,

securitised instruments (e.g. floating rate notes

and fixed rate bonds)availed from non-resident lenders with minimumaverage maturity of 3 years.


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Contd

Source of funds for corporate from abroad withadvantage of:

lower rates of interest prevailing in the internationalfinancial markets

longer maturity period

for financing expansion of existing capacity as well asfor fresh investment


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Modes of Raising ECB:

Commercial Bank Loans : in the form of term loansfrom banks outside India

Buyer's Credit

Supplier's Credit

Securitised instruments such as Floating Rate Notes

(FRNs), Fixed Rate Bonds(FRBs),Syndicated Loansetc.Syndicated Loan, CP

Credit from official export credit agencies


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Modes Of Raising ECB:

Commercial borrowings from the private sector window ofmultilateral financial institutions such as InternationalFinance Corporation (Washington), ADB, AFIC, CDC.

Loan from foreign collaborator/equity holder, etc andcorporate/institutions with a good credit rating frominternationally recognised credit rating agency.

Lines of Credit from foreign banks and financial institutions

Financial Leases

Import Loans


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Modes of Raising ECB:

Investment by Foreign Institutional Investors (FIIs) in dedicated debt funds

External assistance, NRI deposits, short-term credit and Rupee debt

Foreign Currency Convertible Bonds

Non convertible or optionally convertible or partially convertible debentures

Redeemable preference shares are considered as part of ECBs

As per Indian corporate law, all preference shares are mandatorily redeemable unless theyare convertible

Hence, convertible preference shares will not be ECB (will be Foreign Direct Investment)

Non convertible, partly convertible or optionally convertible preference shares are treatedas ECBs

Bonds, Credit notes, Asset Backed Securities, Mortgage Backed securities

Not expressly covered but Guidelines refer to securitised notes


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Exclusions from ECB:

Investment made towards core capital of an organization

viz. investment in equity shares,

convertible preference share and

convertible debentures

In June 2007 the Reserve Bank of India has clarified that onlyinstruments which arefully and mandatorily convertible intoequity within a specified time would be reckoned as part of equityunder the FDI Policyand will be eligible to be issued to personsresident outside India under the Foreign Direct Investment

Scheme. Equity capital

Reinvested earnings (retained earnings of FDI companies)

Other direct capital (inter-corporate debt transactions

between related entities)


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Routes of ECB:

There are two Routes of ECB:

1. Automatic Route and

2. Approval Route


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Eligible Borrowers:Automatic Route

Indian Companies except financial intermediaries(such as Banks, Financial Institutions (FIs), Housing

Finance companies and NBFCs).

Units in Special Economic Zones (SEZ) are allowed

to borrow funds through ECBs for their own

requirements.

(Individuals, Trusts and Non-Profit making

organisations are not eligible to raise ECBs).

Approval Route

Financial Institutions dealing exclusively with

infrastructure or export finance

Banks and Financial Institutions which participatedin the textile or steel sector restructuring package

ECBs with minimum average maturity of 5 years by

NBFCs to finance import of infrastructure equipmentfor leasing to infrastructure projects.

FCCBs by housing finance companies satisfying the

prescribed criteria

SPVs,or any other entity notified by RBI, set up to

finance infrastructure companies / projects.

Multi-State Co-operative Societies engaged in

manufacturing activities. Corporates engaged in industrial & infrastructure

sector

NGOs engaged in micro finance activities satisfying

the criteria laiddown

Corporates in service sector for import of capital

goods.


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Recognised Lenders

Automatic Route

Internationally recognized sources

(international banks, capital markets,multilateral financial Institutions, export

credit agencies, equipment suppliers,foreign collaborators)

Foreign equity holders (other than

erstwhile OCBs) if:

-- ECB up to 5 MUSD minimumequity of 25%

--ECB above 5 MUSD minimum

equity of 25% anddebt-equity ratio notexceeding4:1

Approval Route

Internationally recognized sources(international banks, capital markets,multilateral financial Institutions, exportcredit agencies, equipment suppliers,

foreign collaborators)

Foreign equity holders (other thanerstwhileOCBs) if:

--such 'foreign equity holder' directlyholds minimum 25 % of the paid up

equity capital of the borrowing

company.--In such cases the debt-equity ratiomay exceed 4:1, if the RBI permits.

Overseas organisations and individualsmay provide ECBs to NGOs engaged in

micro finance activities subject to the

conditions prescribed


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Amount and Maturity

Automatic Route Approval Route

Corporates - additional amount of USD 250millionwith average maturity of more than 10years, over and above the existing limit of USD500, during a financial year. Prepayment andcall / put options not permitted in respect ofthe aforesaid additional limit upto 10 years.

Corporates in infrastructure sector -ECB up toUSD 100 million and corporates in industrialsector -ECB up to USD 50 million for Rupeecapital expenditure for permissible end useswithin the overall limit of USD 500 million perborrower, per financial year, under Automatic

Route.

NGOs engaged in micro finance activities ECB up to USD 5 millionduring a financial year

Corporates in the services sector -ECB up toUSD 100 million, per borrower, per financial

year, for import of capital goods.

ECB up to$ 20M orEquivalent

3 Years

ECB above$ 20M and up to $500M

5 Years

Max amount ofECB by eligibleborrower

$500M during a FY

ECB up to $ 20Mcan have call/ putOption

If the minimummaturity of 3years is compliedBefore exercising call/put option


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All-In-Cost Ceilings

Automatic Route

All-in-Cost Ceiling includes rate ofinterest, other fees and expenses in foreign

currency except commitment fee, pre-payment fee, withholding tax and fees

payable inIndianRupees.

Approval Route

ECB beyond the permissible All-inCostCeiling can be availedof under the

Approval Route. (to be reviewed afterJune 30, 2009)

Average MaturityPeriod

All-in-cost Ceilingsover 6 month LIBOR*(w.e.f. 22-10-2008)

3 years and up to 5years

300 basis points

More than 5 years 500 basis points


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Permitted End Uses Of ECB Proceeds

Automatic Route

Import of capital goods by new or

existing productionunits in real sector-industrial sector, includingSMEs.

Investment in infrastructure sector,

Overseas direct investment in Joint

Ventures (JV) / Wholly OwnedSubsidiaries (WOS)

Payments to Government by telecom

companies for obtaining license /permit for 3G Spectrum

Approval Route

In addition, the ECB proceeds can also beutilised for the following purposes with the

prior approval of RBI:-

Implementation ofnew projects and

modernisation / expansion of existingproductionunits by the companiesengaged in the industrial sector including

SME.

Import of capital goods by service sectorcompanies

First stage acquisition of shares ofPSUs

in the disinvestment process byGovernment and also in the mandatory

second stage offer to the public.

Refinancingof an existing ECB


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End uses not permitted

Automatic Route

On-lending or investment in

capital market or acquisition ofcompanies or part thereof

Investment in real estate;

Working capital, general corporate

purpose and repayment of RupeeLoans

Approval Route

Same

However, the eligible Financial

Institutions and Banks can utilisethe ECB proceeds for acquisition

of companies inIndia, subject tothe approval of RBI.


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Guarantees

Automatic Route

Guarantee/standby letter of credit or

letter of comfort by banks, financialinstitutions and NBFCs relating to ECB is

not permitted.

Approval Route

Guarantee/standby letter of credit or

letter of comfort by banks, financialinstitutions and NBFCs relating to ECB is

not normally permitted.

Applications for providingguarantee/standby letter of credit or letter of

comfort by banks, financial institutionsrelating to ECB in the case of SME will be

consideredon merit subjectto prudential norms.


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Security

The choice of security to be provided to thelender/supplier is left to the borrower.

However, creation of charge over immovable assetsand financial securities, such as shares, in favour ofoverseas lender is subject to Regulation 8 ofNotification No. FEMA 21/RB-2000 dated May 3,

2000 and Regulation 3 of Notification No. FEMA20/RB-2000, dated May 3, 2000, respectively.


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Parking of ECB proceeds overseas

ECB proceeds should be parked overseas

until actual requirement in India.


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Prepayment

Prepayment of ECB up to USD 100 million ispermitted without prior approval of RBI, subjectto compliance with the stipulated minimum

average maturity period as applicable for theloan.


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Refinancing of existing ECB

Refinancing of outstanding ECB by raising

fresh loans at lower cost is permitted subject

to the condition that the outstanding maturityof the original loan is maintained.


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Debt servicing

The designated AD has the general

permission to make remittances of

instalments of principal, interest and othercharges in conformity with ECB guidelines

issued by Government / RBI from time to

time.


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Recent Developments in ECB: Minimum Average Maturity:

ECB up to $ 500 million per borrower per financial year is permitted for

rupee expenditure and/ or foreign currency expenditure for permissibleend-uses under the automatic route.

Parking of ECB proceeds:

The borrowers have been provided with a flexibility to either keep their

ECB proceeds offshore or keep it with the overseas branches/ subsidiariesof Indian banks abroad or to remit these funds to India to credit to theirRupee accounts with banks in India, pending utilization for permissibleend-uses.

All-in-Cost Ceilings:

ECB beyond the permissible all-in-cost ceiling can be availed of under theApproval Route.

Definition ofInfrastructure expanded to include: power,telecommunication, mining exploration and refining


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Why ECB is attractive?

Investor:

ECB is for specific period, which can be as short as threeyears

Fixed Return, usually the rates of interest are fixed

No owners risk as in case of Equity Investment

Borrower:

No dilution in ownership

Considerably large funds can be raised as per requirements ofborrower

Usually only a fixed rate of interest is to be paid

Easy Availability of funds because ECB is more appealing toInvestors


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THANK YOU

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