What is external commercial borrowing?

ECB is defined as commercial loans [in the form of bank loans, buyers’ credit, suppliers’ credit, securitized instruments (e.g. floating rate notes and fixed rate bonds, CP)] availed from non-resident lenders with minimum average maturity of 3 years

Regulators:Regulators:The department of Economic Affairs, Ministry of Finance, The department of Economic Affairs, Ministry of Finance, Government of India with support of Reserve Bank of India. Government of India with support of Reserve Bank of India.

Raising funds from other country is cheap Investment and resource availability Expansion of projects Fixed rate of interest Alliances Can not be used for investment in stocks and real

estate sector

Annual cap is maximum amount which can be borrowed during one financial year.

The cap was $8.3 BN in 2000 which is further raised to $40 BN in 2010 in move to make availability of funds for rapidly recovering economy.

Commercial bank loans

Buyer’s and suppliers credit

Securitized instruments such as floating rate notes, govt. bonds

Credit from official export credit agencies

Aid from institutions such as IFC, ADB, AFIC, CDC

Foreign institutional investors invested in debt funds

Loan from foreign equity holder

Lines of credit from foreign banks and institutions

Financial lease

Import loans

FCCB’s

Non convertible, partially convertible and optionally convertible debentures and preference shares

Asset backed securities, Mortgage backed securities.

Automatic Route -Indian companies

(except NBFC’s, Financial institutions, GO)

- SEZ is permitted- Individuals, trusts not

allowed.

Approval Route Financial institutions

dealing with infra or export finance, textile or steel sector restructuring

Multi-state cooperatives engaged in manufacturing activities

NGO in microfinance activities

Corporates in service sector for import of capital goods

International banks, international capital markets, multilateral financial institutions such as IFC, ADB, CDC)

Foreign equity holder can also be lender-person must hold atleast 25% equity capital

-debt-equity ratio shoud not exceed 25%, in case of approval route it may exceed 25% if RBI permits

Individual lender has to acquire certificate of due diligence

For Automatic route Amount upto $20 mn or

equivalent- 3 years

Amount exceeding $20 mn to $500 mn- 5 years

Maximum amount eligible during one financial year- $ 500 MN

For Automatic Route Additional amount of $250

mn with maturity over 10 years

ECB upto $ 100 mn for infrastructure projects and industrial sector

ECB upto $50 mn for rupee capital expenditure

For NGO’s in microfinance activity, amount upto $5 mn

Corporates in service sector - $ 100 mn, per borrower for import of capital goods

Automatic Route Import of capital goods in

real estate sector, industrial sector

For infra sector

Overseas investment in joint ventures and wholly owned subsidies

Payment to govt. for obtaining license

Approval Route Implementation of new

projects, modernization and expansion of projects

Import of capital goods by service sector companies

First stage of acquisition of shares and also in second stage offer to public

Refinancing of existing ECB

Issuance of guarantee, standby letter of credit, letter of undertaking or letter of comfort by banks, financial institutions and NBFCs relating to ECB’s are not permitted.

Issuance of guarantees in case of textiles company for expansion, modernization is permitted under RBI approval route.

FEMA gives guarantees to a person/corporate outside India under certain circumstances.

Choice of security is left with the borrower.

Banks have been delegated powers to NOC certificate.

Transactions are controlled and secured by FEMA act.

Only approved if done through foreign equity inflow On permission of RBI, Govt. it may be undertaken within permitted period with residual maturity upto 1 year. Prepayment of 10% outstanding ECB is permitted during the life of loan once. Permitted with Approval of RBI, Govt and Dept. Of Economic Affairs

It refers to credit extended by for imports directly by overseas supplier, financial institutions for maturity less than 3 years.

Two types: buyers credit and

suppliers credit

AD banks are permitted to approve trade credits upto $20 Mn per transaction with maturity period >1 year and less than < 3 years.

Not permitted above $2o mn.

All in cost ceiling includes:

Up to 1 year: 75 basis points

3<Maturity period>1: 125 basis points

Top sectors or top raisers of ECB were power being the first followed by telecom and financial institutions .

In 2008 the total amount raised to the tune of 2.77$ Bn

Power sector emerged as biggest borrower with $1.82 Bn

The ECB amount raised in all the other sectors were oil ($783 million), shipping $692.71 million), aviation ($585.36 million), infrastructure ($580.58 million), textiles and garments ($575.68 million), metals ($537.67 million).

Orchid chemicals and pharmaceuticals has opted for he ECB route to partly buyback its FCCB

Move helped the company to bring down it s debt-equity ratio

ECB route gave company longer tenure of repayment

The company reduced its outstanding FCCB’s from $194Mn to $154Mn.

with a liberalization stance NBFC are involved in financing of the infra sector are now allowed to raise ECB

With a view to give thrust to infra sector a separate category of NBFC’s were created as IFC, proposals for which will be considered through approval route

All in cost ceilings limits were extended -For 3 to 5 years – 300bps -More than five years- 500bps To augment growth of agriculture definition of infrastructure

was expanded

ECB beyond $ 100 mn in service sectors under approval route